Academic journal article Journal of Management Research

Allowance for Corporate Equity and Tax Aggressiveness: Do Family Firms Differ from Non-Family Firms?

Academic journal article Journal of Management Research

Allowance for Corporate Equity and Tax Aggressiveness: Do Family Firms Differ from Non-Family Firms?

Article excerpt


The purpose of this paper is to analyse the relationship between family ownership and tax aggressiveness in private companies by taking into account a regulatory framework including an "allowance for corporate equity" system. The results, obtained from a sample of 215 private Belgian firms, suggest a positive relationship between family involvement in business and tax aggressiveness. Moreover, the introduction of the notional interests system in 2006 induces a significant raise in the corrected equity, used as a specific tax aggressiveness indicator, without distinction between Belgian private family and non-family firms. The results indicate that the origins of the family firms' tax activism must still be analysed in depth.

Keywords: Tax aggressiveness, Family firms, Corporate tax, Allowance for Corporate Equity

JEL Classification: G30, G38, K34.

1. Introduction

Taxes represent a comprehensive cost for each company and the temptation is high to engage in aggressive tax plans in order to maximise shareholder value and to have enough resource at disposal for investment projects. Nevertheless, non-financial costs may arise from tax aggressiveness so that the implementation of such practices leads to a new trade-off between tax savings and these costs. Non-fiscal costs vary according to the kind of organization. Family firms, whose objectives also integrate a socio-emotional dimension (Gomez-Mejia et al., 2007), are more concerned with their reputation and their image that can be eroded by a pronounced tax activism (Chen et al., 2010).

The purpose of this paper is to carry out a comparative analysis between private family and non-family firms regarding tax aggressiveness. Moreover the effects of changes in tax law (Laporta et al., 1999) as well as the financial crisis are taken into account. Indeed, the introduction of an allowance for corporate equity in 2006, called "notional interests" in Belgium, and the bad economic situation can affect tax practices. Hence, tax aggressiveness is investigated in an innovative way since our research is built on a comparison between private firms and tries to draw attention to the origins of aggressive tax practices by focusing on the effect of an allowance for corporate equity.

The analysis is based on a sample of 215 private family and non-family firms, that kind of organization being underinvestigated in the literature (Astrachan, 2010). Three models based on panel data collected for the period 2002-2010 are built up by using Generalized and Ordinary Least Squared methods. Firstly, we show whether family firms are more or less tax aggressive than non-family firms. Secondly, we try to see the effect of the introduction of an allowance for corporate equity as well as the financial crisis after subsampling for family and non-family firms. Finally, our last regression uses a specific tax aggressiveness indicator created by taking into account the calculation of the notional interests so that we can assess whether the new tax regulation has a causal effect on tax aggressiveness.

This paper is organised in several sections. Our first section is a literature review regarding the nexus between tax aggressiveness and family firms. Sections 2 to 4 describe the sampling process and the methodological aspects of our analysis. Finally, conclusions, limits and future developments are highlighted in a last section.

2. Literature review

Free cash-flow is significantly reduced by corporate tax. Aggressive tax practices are therefore full of meaning. Tax aggressiveness is defined by Frank et al. (2009) as downward management of taxable income through tax planning activities which can be legal or illegal or may lie in between. According to this definition, the extent a firm is involved in tax aggressive practices has to be decided by the management. In that regard, Dyreng et al. (2010) emphasize the role of the CEO regarding the fiscal choices made by the firms. …

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