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Exploring tax aggressiveness: measurement and analysis
Sat, November 8, 8:30 to 10:00am, The Westin Copley Place, Floor: 7, ParliamentAbstract
Corporate tax aggressiveness has been a subject of research for over two decades, with substantial studies investigating its determinants, measurements, and consequences. Still, there are several issues that have yet to be examined, and some issues have been examined, but the results are inconclusive. One key issue is the measurement of tax aggressiveness.
Tax aggressiveness can be categorized into two types: conforming (i.e., activities that reduce both taxable income and book income) and non-conforming (i.e., activities that lower taxable income without affecting book income). In the tax aggressiveness literature, many proxies mainly measure non-conforming activities, despite the significant role that conforming tax aggressiveness plays in tax planning strategies. This study introduces a method to measure conforming tax aggressiveness and applies it to explore two important research questions: (1) the association between firm characteristics and both types of tax aggressiveness and (2) the impact of COVID-19 on both tax aggressiveness types.
Using data from Canadian publicly traded firms over the period 2012–2022, this study finds that first, firm characteristics, including firm size and profitability, exhibit a non-linear relationship with non-conforming tax aggressiveness; second, firm characteristics, including leverage and profitability, exhibit a non-linear relationship with conforming tax aggressiveness; and third, during the pandemic, firms in the mining, services, sales, and transportation sectors engaged in a higher level of non-conforming tax aggressiveness but did not show similar behavior in conforming tax aggressiveness. Further analysis reveals that firms in these sectors were more likely to incur financial constraints during the pandemic, and firms facing financial constraints were motivated to engage in non-conforming tax aggressiveness.