Abstract
This paper examines whether Italy’s family firms are more or less tax aggressive than their counterparts. To this end we exploit several data sources combining firm survey data, accounts data, and tax returns available for the years 1999–2006. Results indicate that family firms are more prone to engage in aggressive tax practices than their peers. Furthermore, from an agency perspective we find that when family owners increase their degree of ownership, the majority shareholder can use his or her controlling power to extract private benefits at the expense of minority shareholders, strengthening incentives for tax avoidance. Our results are robust after controlling for several firm characteristics, tax variables reflecting adjustments of book income due to differences between financial and tax accounting, and for different metrics of tax aggressiveness.
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Notes
The same dataset is used by Minnetti et al. (2015) to analyze family firms’ export propensity.
Capitalia survey data and company accounts were provided by the Unicredit group bank. Tax returns data were made available within the EU-funded project Diecofis (Development of a system of indicators on competitiveness and fiscal impact on enterprise performance) in which one of the authors of this paper participated.
This variable is available only for the last two waves of the survey, and therefore data refer to 2000–2006.
We consider the two-digit NACE classification.
We consider five areas: North-East, North-West, Centre, South, Islands.
Tax adjustments apply to various items of the balance sheets, the main ones being capital gains/capital losses, depreciation, income from non-instrumental properties, interest costs, write-offs, windfall profits, executive compensation, and equity income. Negative adjustments also reflect exemption of specific income items provided by the tax law.
The effective tax rate (ETR) represents the most immediate measure of firm tax avoidance and it is employed in most studies based on financial data (Hanlon and Heitzman 2010). It is calculated as the ratio of a firm tax liability to corporate profits before income taxes, usually pre-tax income or operating surplus. The ETR is basically the average tax rate a corporation pays on its pretax profits and can be compared with the statutory tax rate; if the ETR of a firm is lower than the statutory rate, it could imply tax aggressiveness. Tax liability can be expressed by considering either total tax payment, which includes deferred taxes, or tax expenses on the current year’s income. In the first case the literature usually refers to the generally accepted accounting principles (GAAP) ETR, and in the second case to the current or annual ETR. These measures have different properties. Dyreng et al. (2008) argue that tax deferral strategies (for example, an increase in accelerated depreciation for tax purposes) that reduce current tax expenses and at the same time increase deferred tax payments will not be captured by the GAAP ETR. Moreover, the GAAP ETR does not distinguish between tax planning activities and temporary variations such as changes in the valuation allowance or in the tax contingency reserve that are clearly not associated with tax avoidance (Hanlon and Heitzman 2010). By contrast, the cash ETR is affected by tax deferral activities but does not consider changes due to accounting accruals. Furthermore, the current ETR could lead to a mismatch of numerator and denominator if cash taxes include tax payments for earnings that relate to former periods, while pretax income refers to the current year. For these reasons in our analysis we include both indicators.
Current/previous losses can be used up to the taxable income threshold. Unused losses are then carried over up to five years.
All variables indicate values well below 10, the standard cut-off threshold to check on the degree of multicollinearity.
Prior to 2004, the exemption system was applied only to profits distributed by subsidiaries residing in the EU while a full imputation scheme was provided to dividends distributed by resident firms.
The ownership structure is a persistent firm characteristic, and in Italy its persistence is very pronounced.
Minnetti et al. (2015) use a similar approach to address endogeneity concerns to study the export propensity of Italy’s family firms. The number of savings banks existing in 1936 is available from the Bank of Italy. In the regression we also include GDP growth at the provincial level to control for socio-economic conditions.
As a robustness test we also perform a 2SLS estimation for model 3 and 4. Results of the endogeneity test, which are available upon request, lead to the same conclusions discussed above.
This may occur in the early stages of a firm’s growth, as in the case of young family firms.
As a robustness check we also replicate our regressions with \(CETR\)as dependent variable and adding \(Tax\_cred\)among the regressors. Untabulated results (sign and statistical significance of the coefficients) are in line with the results presented below.
A higher share of small-medium sized enterprises compared to other EU countries where exporting is the preferred form of internationalization.
Corresponding to just 263 firm-year observations in our dataset (8% of the total), of which 157 classify as family-firms.
It is needless to add that the definition of groups for tax purposes may differ from the definition of corporate groups available in the survey data.
To focus merely on accounting differences, the BTG for the years 2004, 2005, 2006 is calculated before any income pooling for companies of a group.
This is confirmed by our data. Overall, there are 1,714 (52% of the total) firm-year observations that benefit from the ACE regime 805 (47%) of which have less than 100 employees. Of the firms-year observations qualifying for the ACE, 1,079 (63%) are family firms.
As a robustness check we run the regressions on the 2004–2006 data when the regime for tax consolidation was in force and with the dummy variable \(Group\) taking the value 1 if firms benefit from this regime, and 0 otherwise. Results do not change.
The authors’ interpretation of this results is that the major source of book-tax differences in Germany are mainly the legal differences between the two aggregates rather than incentives to manage income, which is also the case for group taxation (Zinn and Spengel 2012).
The U-shaped trend of the percentage of firms reporting zero taxable income across percentiles of the BTG can be attributed to the fact that the first percentile includes firms reporting negative book profits and zero taxable income, thus firms with a negative and high BTG. Then, as we move to upper deciles, the percentage of firms reporting zero taxable income is likely to decrease; however, it increases again in the top percentile which ranks firms with positive book profits and zero taxable income, thus firms with a high and positive BTG.
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Acknowledgements
An earlier version of this paper was written while Valentino Parisi was visiting the Department of Accounting and Taxation of Fordham University (New York, USA) under the Honors Center of Italian Universities (H2CU) program, where the author benefited from discussions with various colleagues of the Department. In particular, Valentino Parisi wishes to thank Yuan Xie and Haim Mozes. The authors also thank two anonymous referees for insightful suggestions and comments which improved the final version of the paper.
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Appendix: Variables Description
Appendix: Variables Description
Variable (abbreviation) | Description | Source of data |
|---|---|---|
Measures of tax aggressiveness | ||
ETR | Total tax payments/Pre-tax profits | Accounts data |
CETR | Tax payments on current income/ Pre-tax profits | Tax data |
BTG | (Book income – Taxable income)/Total assets | Tax data |
Family involvement variables | ||
Family | Indicator variable that equals 1 if the main shareholder is an individual/family, and 0 otherwise | Survey data (Capitalia) |
Family_cont | Indicator variable that equals 1 if the main shareholder is an individual/family and claims to have control over the firm, 0 and otherwise | Survey data (Capitalia) |
Controls | ||
Log size | Log of total assets | Accounts data |
Log age | Log of firm’s age | |
Prof | ROA = EBIT/Total assets | |
Cap_assets | Fixed assets (Land, buildings, plant, equipment)/Total assets | Accounts data |
Int_assets | Intangible assets/Total assets | Accounts data |
Debt_ratio | Financial debts/Total assets | Accounts data |
Liq | Cash holdings/Total assets | Accounts data |
Equity_inc | Equity income/Total assets | Accounts data |
Prov | Provisions/Total assets | Accounts data |
Loss | Dummy that equals 1 if the firm reports existing loss carry-forwards, and 0 otherwise. | Tax data |
Tax_adj | (Positive – Negative tax adjustments of book income)/Total assets | Tax data |
Tax_cred | Tax credits/Total assets | Tax data |
Ext_directors | Dummy that equals 1 if outside directors are in the board, 0 otherwise | Survey data (Capitalia) |
Foreign | Dummy that equals 1 if the company carries out FDI or delocalize its business activity | Survey data (Capitalia) |
Group | Dummy that equals 1 if the company is part of a corporate group, and 0 otherwise | Survey data (Capitalia) |
ACE | Dummy that equals 1 if the company benefits from the ACE, and 0 otherwise | Tax data |
Equity share | Percentage of equity capital in the hands of the main shareholder | Survey data (Capitalia) |
Instrumental variable in IV regression | ||
Savings banks in 1936 | Number of savings banks in 1936 (per 100,000 inhabitants) | Bank of Italy |
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Parisi, V., Federici, D. Family Firms’ Aggressive Tax Planning: An Empirical Evaluation for Italy. Ital Econ J 9, 1299–1327 (2023). https://doi.org/10.1007/s40797-022-00207-1
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DOI: https://doi.org/10.1007/s40797-022-00207-1