Tax Avoidance versus Aggressiveness: The Influence of a Firm’s Business Strategy

Abstract:     
We examine the relation between a firm’s business and tax planning strategies. To identify firms’ business strategies we use a comprehensive measure of business strategy based on the theoretical framework of Miles and Snow (1978, 2003). Specifically, we first investigate whether a firm’s business strategy is associated with its level of tax avoidance. Next, conditional on its tax avoidance level, we investigate the association between the firm’s business strategy and the extent to which it avoids tax in an aggressive manner. We find that firms following Miles and Snows’ Defender (cost leadership and risk aversion) and Prospector (innovation and risk seeking) strategies avoid more taxes than firms following a more general (Analyzer) strategy. We find that Prospectors appear to undertake more aggressive and less sustainable tax positions than Defenders. Thus, our business strategy measure appears not only to capture Prospectors’ taking advantage of tax planning opportunities that result from their innovation strategy, but also reflects their willingness to undertake risk and adapt to uncertainty.

Number of Pages in PDF File: 50

Keywords: tax avoidance, tax aggressiveness, business strategy, effective tax rates

JEL Classification: H25, L21, L22, M19, M41

working papers series