Tax Function and Investment Decisions

Abstract

Tax integration in firms’ investment decisions is typically considered a ‘black box’. Using novel survey data from 197 large and medium-sized firms, I examine two dimensions of tax integration: (a) the timing at which a tax function enters the decision-making process (temporal tax integration); and (b) the organizational structures which embed a tax function in the decision-making process (organizational tax integration). I find that temporal tax integration on average occurs at later stages of the decision-making process compared to the desired timing of tax integration. This desire towards earlier tax integration is consistent with the notion of a tax function enhancing a firm’s internal information environment prior to the final decision. The index for organizational tax integration, on the other hand, is rather low on average, indicating potential room for improvement in organizational structures. I find that firms with stronger organizational tax integration are associated with earlier tax integration and a smaller difference between the status quo and desired timing of tax integration. In further analyses, I distinguish between tax planning and tax compliant firms and find earlier tax integration for tax planning firms, indicating that tax planning requires timely tax integration. Finally, I provide evidence that earlier temporal tax integration is associated with a higher degree of satisfaction with the decision-making process. Overall, this study contributes to opening the ‘black box’ of tax integration in firms’ investment decisions.

Keywords: tax function, tax integration, investment decisions, decision-making, tax planning

JEL Classification: H25, L21, M41