The Determinants of Tax Aggressiveness in Family Firms: An Investigation of Italian Private Family Firms

Abstract

A recent stream of research has focused on tax aggressiveness, the downward management of taxable income through tax planning activities, and has analyzed its antecedents and consequences, mainly on public companies. Only very few studies, however, have been carried out in the context of private family business and have investigated whether some family firms are more tax aggressive than others, considering some specific features of family firms, such as their distinctive agency conflicts and socioemotional wealth. In this paper, we investigate the antecedents of tax aggressiveness in a sample of private Italian family firms. Our research findings show that tax aggressiveness is positively associated with ownership concentration, the presence of independent members in the board, and the adoption of reporting mechanisms. Instead, we found a negative relation between tax aggressiveness and the use of both strategic planning and a combination of managerial control systems (both planning and reporting mechanisms). We did not find any relation between family CEO and tax aggressiveness. In summary, overall, our findings show that family involvement in ownership, an independent board. and managerialization (the use of managerial mechanisms) are relevant antecedents of tax aggressiveness in private family businesses.

Family involvement and proactive tax management behaviour in private family SMEs

“…S anchez-Mar ın et al (2016), Brune et al (2019b) and Bauweraerts et al (2020) show that, depending on the percentage stake owned by the family, closely-held family firms are less tax aggressive. However, Kovermann and Wendt (2019) and Flamini et al (2021) showed, on the contrary, that the higher the family's ownership percentage, the higher the tax aggressiveness behaviour.…”

“…The first is agency theory, which has been used to explain the behaviour of listed family firms (Chen et al, 2010;Mafrolla and D'Amico, 2016;Brune et al, 2019a, b), which engage in less tax aggressive behaviour in order to send clear signals to financial markets and avoid such undesirable consequences as a potential share price discount. Agency theory also explains how private family businesses, especially closely-held ones, manage principal-toprincipal conflicts (L opez-Gonz alez et al, 2019;Flamini et al, 2021). The second theory in the specialised literature invokes Socioemotional Wealth (SEW) to explain how the involvement of the family in ownership and management leads to less tax aggressive behaviours (Steijvers and Niskanen, 2014;L opez-Gonz alez et al, 2019).…”

“…Finally, Flamini et al (2021) presented research on a sample of private Italian firms of all sizes. Although it includes large firms, we consider it because of the number of SMEs included.…”

“…Therefore, the independence and professionalisation of non-family board members give the board greater capacity to allocate resources to tax avoidance (Minnick and Noga, 2010). Thus, the board of directors may display more tax aggressive behaviour when the proportion of non-family members increases (Bauweraerts et al, 2020;Cuadrado-Ballesteros et al, 2015;Flamini et al, 2021;Roffia et al, 2022).…”

“…A second set of academic contributions analyse tax management behaviour with regard to private family firms, both large (Bauweraerts and Vandernoot, 2013;Steijvers and Niskanen, 2014;Brune et al, 2019a, b;Kovermann and Wendt, 2019;L opez-Gonz alez et al, 2019) and SMEs (S anchez-Mar ın et al, 2016;Bauweraerts et al, 2020;Eddleston and Mulki, 2021;Flamini et al, 2021). This research stream incorporates some specific family firm features that are likely to influence their behaviour in several ways (Westhead and Howorth, 2007).…”