Aggressive Tax Strategies and Corporate Tax Governance: An Institutional Approach

Abstract

This paper deals with the impact of tax-aggressive strategies on corporate governance by adopting an agency perspective of the firm and discusses how certain corporate tax governance measures may limit these kinds of managerial actions. We first clarify a few basic concepts such as tax minimization, effective tax planning, tax avoidance, and tax evasion, which are important to understand in the discussion about aggressive tax behaviour. We further define the regulative concept of effective tax planning as a tax strategy that minimizes not only explicit taxes, but also implicit taxes and non-tax costs, focusing on the agency problems emerging between shareholders and tax managers and we use this key concept as a benchmark to identify what kind of tax-aggressive strategies pose relevant policy issues. By using the agency perspective we also highlight a series of important issues, such as: why and to what extent do managers pursue aggressive tax strategies, why are these strategies used in large companies, do these strategies advance shareholder value, and how can tax savings obtained through these strategies be measured? We conclude that aggressive managerial tax behaviour requires counterbalancing policies which are not limited to the traditional anti-avoidance rules but also include the tools of corporate tax governance; we also suggest that these tools can be divided in two groups: measures aimed at improving corporate governance and measures aimed at dealing with the ‘book-tax gap’. The former type of corporate tax governance measures include risk and meta-risk management, disclosure rules, regulation of tax advisors, reporting by stakeholders, and penalties connected with tax avoidance. The latter type of corporate tax governance measures include reconciliation reports and publication of tax returns.