Independence or subservience? The role of independent co-opted directors in corporate tax avoidance

Corporate governance, incentives, and tax avoidance

We examine the link between corporate governance, managerial incentives, and corporate tax avoidance. Similar to other investment opportunities that involve risky expected cash flows, unresolved agency problems may lead managers to engage in more or less corporate tax avoidance than shareholders would otherwise prefer. Consistent with the mixed results reported in prior studies, we find no relation between various corporate governance mechanisms and tax avoidance at the conditional mean and median of the tax avoidance distribution. However, using quantile regression, we find a positive relation between board independence and financial sophistication for low levels of tax avoidance, but a negative relation for high levels of tax avoidance. These results indicate that these governance attributes have a stronger relation with more extreme levels of tax avoidance, which are more likely to be symptomatic of over- and under-investment by managers.

The present study was designed to determine the relationship between corporate governance and tax avoidance in an international setting. Financial and governance data sourced from the Datastream database for a sample of Japanese and UK firms between 2012 and 2017 are used. First, we examine the direct effect of several corporate governance mechanisms on tax avoidance. Second, we divide the full sample into two groups (common law and code law legal system) to explore the relationship between law, corporate governance, and tax avoidance. We use both univariate and feasible generalized least square (FGLS) regression methods to examine our hypotheses. This study finds that the board size, independent directors, and the presence of women on boards of directors reduce the likelihood of tax avoidance. However, we find an insignificant association between ownership concentration and tax avoidance. Second, it also finds that firms in countries with higher country-level governance engage in less tax avoidance. The results also suggest that the role of corporate governance is more pronounced for firms operating in common law countries than those in code law countries. This manuscript is one of the few studies that examine the relationship between corporate governance and tax avoidance in an international setting with different legal and institutional environment. This relationship differs across the two countries. This paper clearly identifies implications for research, practice, and society. It documents that when a country implements a good system of governance, which targets improving transparency and accountability, it will lead to less corporate tax avoidance.

The participation of Communist Party of China （thereafter CPC） in corporate governance is an important feature of corporate governance structure in China. CPC organizations play a political core or political leading role in both state-owned and non-state-owned companies. The institution “two-way entry and cross-appointment” combines CPC organizations with governance mechanisms such as the board of directors and the board of supervisors organically and enables CPC organizations to play significant roles in companies’ major production and operation activities. Tax avoidance not only means that more wealth can be left in companies, but also relates higher legal/regulatory risks, reputational risks, agency problems （especially “rent diversion”） and increased opacity. As an important strategic activity of a company, tax avoidance is inevitably affected by corporate governance. Although there is plenty of literature about the relationship between corporate governance and tax avoidance, it is not clear whether CPC’s participation in corporate governance through “two-way entry and cross-appointment” has a significant impact on tax avoidance activities. Using the data of A-share non-financial listed companies from 2009 to 2016, this paper examines the impact of CPC’s participation in corporate governance through “two-way entry and cross-appointment” on corporate tax avoidance. The results show that “two-way entry” has little impact on tax aggressiveness, while “cross-appointment” has a significantly negative effect on tax aggressiveness. Further tests show that “cross-representation” can decrease the likelihood that the degree of tax aggressiveness is extremely high, but it could not lead to extremely low tax aggressiveness. The results also show that “cross-appointment” can decrease tax aggressiveness significantly when it is at a high level, while the effect is not significant when it is at a low level. In summary, CPS’s participation in corporate governance has a negative effect on tax aggressiveness only when tax aggressiveness is at a high level. In addition, there is no significant difference in the impact of “cross-appointment” between state-owned and non-state-owned companies, although the authors only find weak evidence to support the negative effect of “cross-appointment” on tax avoidance in non-state-owned companies. There is no significant difference in the effect of “cross-appointment” on tax avoidance before and after 2013 either. This paper makes three contributions to the literature: First, it provides empirical evidence on the economic consequences of CPC’s participation in governance from the perspective of corporate tax avoidance behaviors. It is helpful to understand the role of CPC’s participation in governance in suppressing corporate misconduct and promoting better fulfillment of corporate tax obligations. Second, it explores and finds the asymmetric effect of CPC’s participation in governance on tax avoidance. It implies that the participation of CPC in governance will not prevent companies from normal and low risk-related tax avoidance activities. Such results extend the research of Armstrong, et al. （2015） and Li, et al. （2016）, and help to evaluate the consequences of party organizations’ participation in governance more comprehensively and objectively. Third, it enriches the literature on the relationship between corporate governance mechanisms and tax avoidance activities from the perspective of political governance.

Corporate social responsibility and tax avoidance: A comment and reflection

Corporate environmental information disclosure and tax avoidance: Evidence from China

Corporate Ownership, Governance and Tax Avoidance: An Interactive Effects

The literature provides various theories relating to the relationship between corporate social responsibility (CSR) and tax avoidance. If firms view both CSR activities and tax payments as paths toward contributing to society, CSR and tax avoidance activities exhibit a negative relationship. Conversely, the two activities exhibit a positive relationship if firms engage in CSR for the purpose of risk management. This study examines the effect of CSR on corporate tax avoidance using a matching approach. Three matching algorithms, namely nearest neighbor, radius, and kernel algorithms, are used to match the two groups of firms (CSR and non-CSR firms) in order to correct for sample selection bias. This study adopts Chinese listed firms during 2009–2016 as a research sample. Most empirical results show that CSR firms have higher book-tax differences and lower effective tax rates. This indicates that CSR firms are more aggressive in their tax avoidance. These findings imply that firms engage in CSR activities as a risk management strategy.

This paper explores the complexities of corporate tax policy and (legal) tax avoidance by businesses. It first examines justifications for the existence of a corporate tax and shows that different theoretical conceptualizations of the corporate entity surface in the major rationales used to justify treating corporations as taxable subjects. Next, the paper discusses the problem of aggressive tax planning, including its mechanics, effects, the role of governments, and regulatory frameworks and initiatives in this area. Finally, the paper answers the question whether there is a corporate (fiduciary) duty not to engage in aggressive tax planning. It concludes that while there is normally no legal duty to this effect, there is an extra-legal obligation not to utilize aggressive tax planning techniques based on the benefit principle and corporations’ status as consumers of public goods and services. From this perspective, tax avoidance contributes to corporate free riding on publicly financed infrastructure.

Securities litigation and corporate tax avoidance

Discussion of Dhaliwal, Goodman, Hoffman, and Schwab (2019): Revisiting Tax-Related Reputational Costs

This study examines the effect of legal environment on corporate state income tax avoidance. We find that the extent of penalties on corporate officers reduces state tax avoidance. However, we find no evidence that the extent of penalties on shareholders reduces state tax avoidance. Thus, the legal environment faced by managers has a greater deterrent effect on tax avoidance than does the legal environment faced by shareholders. Only when managerial ownership is high do we find evidence that shareholder penalties affect corporate tax avoidance behavior. Our study contributes to the literature on agency problems related to corporate tax reporting.

This study examines the effect of legal environment on corporate state income tax avoidance. We find that the extent of penalties on corporate officers reduces state tax avoidance. However, we find no evidence that the extent of penalties on shareholders reduces state tax avoidance. Thus, the legal environment faced by managers has a greater deterrent effect on tax avoidance than does the legal environment faced by shareholders. Only when managerial ownership is high do we find evidence that shareholder penalties affect corporate tax avoidance behavior. Our study contributes to the literature on agency problems related to corporate tax reporting. JEL Classifications: H25; H26; H71; K34.

SynopsisThe research problemThis paper explores the association between postmaterialistic culture and corporate tax-avoidance behavior.MotivationAlthough corporate tax avoidance is prevalent, the degree of tax avoidance varies across countries. Previous studies have suggested that national culture is associated with the level of tax avoidance (e.g., corruption culture in [DeBacker, J., Heim, B. T., & Tran, A. (2015). Importing corruption culture from overseas: Evidence from corporate tax evasion in the United States. Journal of Financial Economics, 117(1), 122–138. https://doi.org/10.1016/j.jfineco.2012.11.009 ], and societal trust in [Kanagaretnam, K., Lee, J., Lim, C. Y., & Lobo, G. J. (2018). Societal trust and corporate tax avoidance. Review of Accounting Studies, 23(4), 1588–1628. https://doi.org/10.1007/s11142-018-9466-y ], among others). Unlike prior studies focusing on longstanding cultural factors, this paper examined the association between corporate tax avoidance and an important current culture trend, i.e., postmaterialistic culture.The test hypothesesThere is no association between postmaterialistic culture and corporate tax avoidance.Target populationVarious stakeholders that care about corporate tax avoidance including the government, policymakers, investors, auditors, and firm managers.Adopted methodologyLinear Probability Model and Ordinary Least Squares regressions.AnalysesWe examined the association between postmaterialistic culture and corporate tax-avoidance behavior. We used a proprietary dataset of China tax audits spanning the 2011–2014 period and tested the moderating effect of tax enforcement. We also examined the external validity of our results using a cross-country sample from 21 countries over the 1993–2014 period.FindingsUsing a proprietary dataset of China tax audits, we found that firms owned by investors from countries with higher postmaterialism values were less likely to engage in tax-avoidance behavior in China. In addition, we found some evidence that the negative association between postmaterialism and tax avoidance is more pronounced when tax enforcement is stronger, indicating that national culture and formal institutions act as complements. To check the external validity of our main results, we further used a cross-country sample from 21 countries over 22 years. The evidence from the cross-country sample was consistent with the findings obtained from the China tax audits setting.

This study shows that the phenomenon arising from low governance practices is identified as one of the causes of the global financial crisis and corporate financial scandals that have an effect on the increase of tax avoidance. In addition, research in Indonesia that examines tax avoidance information by taking into account corporate governance mechanisms is still less consistent and is such a new perspective that it becomes a main consideration for this study. Likewise, the calculation using the Avoidance Tax Rate proxy developed in this study was conducted to test how much tax avoidance has been done by companies. The population for this study was taken from the manufacturing industries listed on the Indonesia Stock Exchange from 2015-2019 assumed to have conducted tax avoidance. The total samples of 87 companies were selected by following a purposive sampling procedure. The statistical analysis using multiple regression shows that the board of commissioners had a significant negative effect on tax avoidance; while, Independent commissioners had a significantly negative effect on tax avoidance and institutional ownership on tax avoidance. This study indicates that the interactive effect of corporate governance and tax avoidance is the better and optimal corporate governance as a control mechanism and the balancing power. The lower the company does tax avoidance, the lower corporate governance mechanism will make it easier for companies to take tax avoidance actions. DOI: https://doi.org/10.26905/jkdp.v25i1.5043