Are Family Firms More Tax Aggressive Than Non-Family Firms? Empirical Evidence from Belgium

Corporate tax represents a considerable cost to all kinds of businesses. Therefore, it is generally accepted that shareholders prefer to avoid paying tax and tend to use tax aggressive strategies. Nevertheless, this assumption does not distinguish between family business and non-family business. The main purpose of this article is therefore to investigate the effect of the family nature of a firm on the level of tax aggressiveness. Two regressions, with panel and cross-section data collected between 2002 and 2010, have been calculated using two indicators of tax aggressiveness, namely tax expense/earnings before taxes and average tax expense/earnings before taxes. The results, obtained from a sample of 210 unquoted Belgian firms, suggest a positive relationship between family involvement in business and tax aggressiveness.IntroductionCorporate tax substantially reduces the net income of companies. In order to maximize the firm's value and to have enough resources for investment projects, each firm wants to reduce its tax expenses by using tax-aggressive activities. However, this reasoning does not take into account non-tax expenses linked with these activities whose importance varies according to the type of firm.The purpose of this paper is thus to analyse the tax-aggressive policy of family firms in comparison with non-family firms, these two kinds of organization suffering different consequences from such behaviour. Indeed, the disadvantages of tax aggressiveness are exacerbated in family firms. The impact on the image of the firm as well as the reduction of market capitalisation caused by minority shareholders who wish to preserve their interest affect family firms more than non-family firms. Nonetheless, benefits from tax aggressiveness are also exacerbated for family businesses. Founder family ownership is indeed more important than CEO ownership in non-family businesses so that it enables family members to benefit more from rent extraction when it occurs. Both disadvantages and benefits from tax-aggressive strategies are therefore greater in family firms. However, family businesses can not be considered as a particularly tax aggressive kind of organisation.In this research, a comparative analysis is carried out on a sample of 210 unquoted family and non-family firms. Indeed unquoted firms have received little attention in this field. Two regressions, with panel and cross-section data collected between 2002 and 2010, have been calculated using two indicators of tax aggressiveness, namely tax expense/ earnings before taxes and average tax expense/earnings before taxes in order to observe if family involvement has an effect on tax aggressiveness.Literature reviewCorporate tax represents a considerable cost as well as a reduction of free cash-flow for the firms and its shareholders. Incentives to tax aggressive behaviour may thus take different forms. Frank et al. (2009) define tax aggressiveness as management of taxable income through tax planning activities which can be legal or illegal or may lie in between in order to reduce tax expense.Decision making in tax-aggressive policy is a prerogative of management authority. Dyreng et al. (2010) insist that the CEO plays a significant role in defining the tax avoidance mechanisms used by the firm. This role allocated to the decision makers assumes the existence of several opaque and obscure methods enabling the firm to avoid totally or partially paying tax. Such mechanisms require high technical skills and their implementation gives the decision makers, the managers or in some cases the shareholders, the opportunity to hide rent extraction activities.Several examples are identified in the literature. Graham and Tucker (2006) mention various tax loopholes such as offshore intellectual property havens, contested liability acceleration strategies, transfer pricing and cross-border dividend capture. The Belgian tax legislation also creates stimuli to develop tax engineering. …