Why are Pyramid-Affiliated Firms More Tax Aggressive?

Abstract

This paper examines why pyramid-affiliated firms are more tax aggressive than other firms. While firms in the US are generally widely held by small shareholders, many large firms in Canada belong to business groups, which are typically organized as pyramids. This study, using Canadian listed companies for the time periods of 2010-2013, finds that firms affiliated with pyramid structures are more tax aggressive because: (1) pyramidal groups are likely to have intra-group transactions, which enable the affiliated firms to be more tax aggressive; (2) internal financing in pyramidal groups enables the affiliated firms to be more tax aggressive; and (3) pyramidal groups are likely to occupy political connections, which enable the affiliated firms to be more tax aggressive.