External control mechanisms and corporate tax avoidance: evidence from firms in Brazil
Keywords:
External control mechanisms; Tax avoidance; Fiscal aggressiveness.
Abstract
Objective: The purpose of this study was to evaluate the association between external management control mechanisms and the level of tax avoidance in Brazilian public firms.
Methods: The sample included 70 firms traded on B3 in the years 2015-2019. Tax avoidance was quantified using the models proposed by Tang (2014) and Atwood et al. (2012), while external control mechanisms were proxied by governance quality, audit committee size and independence, audit quality, and financial analyst following. Descriptive and multivariate statistics were employed.
Originality/relevance: Many executives view the Brazilian setting as opportune for the adoption of tax avoidance practices due to the complexity of the tax system and the fragility of Brazilian institutions. It is therefore relevant to investigate to what extent external control mechanisms affect the level of fiscal aggressiveness and inhibit opportunistic tax avoidance practices.
Results: Brazilian public firms displayed a high level of tax avoidance. The presence of an audit committee favored the adoption of tax avoidance strategies, but the larger and more independent the committee, the lower the risk of fiscal aggressiveness. The study also revealed that the more a firm engages in tax avoidance, the lower the accuracy of its earnings forecasts.
Theoretical/methodological/practical contributions: Our study enriches the literature on taxation by documenting how external control mechanisms inhibit aggressive tax avoidance practices, with repercussions on the agency costs associated with the monitoring of managers’ fiscal behavior. The study may also help government agencies develop public policies for the prevention of tax revenue loss.
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References
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Araújo, C. E. B., Cabral, A. C. A., Santos, S. M., Pessoa, M. N. M., & Roldan, V. P. S. (2013). Grau de adesão de empresas familiares às boas práticas de governança corporativa: proposição e teste de um instrumento-diagnóstico. Revista Alcance – Eletrônica, 20(1), 117-138.
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Austin, C. R., & Wilson, R. J. (2017). An examination of reputational costs and tax avoidance: evidence from firms with valuable consumer brands. The Journal of the American Taxation Association, 39(1), 67-93.
Ayers, B. C., Call, A. C., & Schwab, C. M. (2018). Do analysts’ cash flow forecasts encourage managers to improve the firm’s cash flows? Evidence from tax planning. Contemporary Accounting Research, 35(2), 767-793.
Balakrishnan, K., Blouin, J., & Guay, W. (2018). Tax aggressiveness and corporate transparency. The Accounting Review, 94(1), 45-69.
Bauer, A. M. (2016). Tax avoidance and the implications of weak internal controls. Contemporary Accounting Research, 33, 449-486.
Bayar, O., Huseynov, F., & Sardarli, S. (2018). Corporate governance, tax avoidance, and financial constraints. Financial Management, 47(3), 651-677.
Braga, R. N. (2017). Efeitos da adoção das IFRS sobre o tax avoidance. Revista Contabilidade & Finanças – USP, 28(75), 407-424.
Bratten, B., Gleason, C. A., Larocque, S. A., Mills, L. F. (2017). Forecasting Taxes: New Evidence from Analysts. The Accounting Review, 92(3), 1-29.
Bulutoding, L. (2016). Analysis of aggressive tax in terms of good corporate governance company listed on the Indonesia stock exchange (IDX). Man in India, 96(11), 4455-4466.
Cao, Y., Hu, X., Lu, Y., & Su, J. (2019). Customer concentration, tax collection intensity, and corporate tax avoidance. Emerging Markets Finance & Trade, 56(11), 2563-2593.
Chen, N. X., Chiu, P. C., & Shevlin, T. (2018). Do analysts matter for corporate tax planning? Evidence from a natural experiment. Contemporary Accounting Research, 35(2), 794-829.
Chen, S., Chen, X., Cheng, Q., & Shevlin, T. (2010). Are family firms more tax aggressive than non-family firms? Journal of Financial Economics, 95(1), 41-61.
Chen, X., Hu, N., Wang, X., & Tang, X. (2014). Tax avoidance and firm value: evidence from China. Nankai Business Review International, 5(1), 25-42.
Coffee, J. C. (2006). Gatekeepers: the professions and corporate governance. Oxford: Oxford University Press.
Conyon, M. J., & He, L. (2017). Firm performance and boardroom gender diversity: a quantile regression approach. Journal of Business Research, 79, 198-211.
Desai, M. A., & Dharmapala, D. (2006). Corporate tax avoidance and high-powered incentives. Journal of Financial Economics, 79(1), 145-179.
Desai, M. A., & Dharmapala, D. (2009). Corporate tax avoidance and firm value. The Review of Economics and Statistics, 91(3), 537-546.
Desai, M. A., Dyck, A., & Zingales, L. (2007). Theft and taxes. Journal of Financial Economics, 84(3), 591-623.
Deslandes, M., Fortin, A., & Landry, S. (2019). Audit committee characteristics and tax aggressiveness. Managerial Auditing Journal, 35(2), 272-293.
Druda Filho, S., & Pimentel, R. C. (2022). Incertezas macroeconômicas e viés dos analistas sell-side no mercado brasileiro. Enfoque Reflexão Contábil, 41(1), 39-57.
Eisenhardt, K. M. (1989). Agency theory: an assessment and review. Academy of Management Review, 14(1), 57-74.
Ernst & Young. (2019). Worldwide corporate tax guide. Retrieved June 20, 2020, from https://www.ey.com/en_gl/tax-guides/worldwide-corporate-tax-guide-2019
Fernandes, V. L., Martinez, A. L., & Nossa, V. (2013). The influence of the best corporate governance practices on the allocation of value added to taxes. A Brazilian case. Contabilidade, Gestão e Governança, 16(3), 58-69.
Firmansyah, D. S. A. (2020). The role of corporate governance on earnings quality from positive accounting theory framework. International Journal of Scientific & Technology Research, 9(1), 808-820.
Furuta, F., & Santos, A. D. (2010). Comitê de auditoria versus conselho fiscal adaptado: a visão dos analistas de mercado e dos executivos das empresas que possuem ADRs. Revista Contabilidade & Finanças – USP, 21(53), 1-23.
Gaaya, S., Lakhal, N., & Lakhal, F. (2017). Does family ownership reduce corporate tax avoidance? The moderating effect of audit quality. Managerial Auditing Journal, 32(7), 731-744.
Goh, B. W., Lee, J., Lim, C. Y., & Shevlin, T. (2016). The effect of corporate tax avoidance on the cost of equity. The Accounting Review, 91(6), 1647-1670.
Gomes, A. P. M. (2016). Características da governança corporativa como estímulo à gestão fiscal. Revista Contabilidade & Finanças – USP, 27(71), 149-168.
Guizani, M., & Abdalkrim, G. (2021). Ownership structure and audit quality: the mediating effect of board independence. Corporate Governance, 21(5), 754-774.
Hanlon, M., & Heitzman, S. (2010). A review of tax research. Journal of Accounting and Economics, 50(2-3), 127-178.
Hanlon, M., & Slemrod, J. (2009). What does tax aggressiveness signal? Evidence from stock price reactions to news about tax shelter involvement. Journal of Public Economics, 93(1–2), 126-141.
He, G., Ren, H. M., & Taffler, R. (2020). The impact of corporate tax avoidance on analyst coverage and forecasts. Review of Quantitative Finance and Accounting, 54(2), 447-477.
Hoseini, M., Gerayli, M. S., & Valiyan, H. (2019). Demographic characteristics of the board of directors’ structure and tax avoidance. International Journal of Social Economics, 46(2), 199-212.
Hsu, P. H., Moore, J. A., & Neubaum, D. O. (2018). Tax avoidance, financial experts on the audit committee, and business strategy. Journal of Business Finance & Accounting, 45(9/10), 1293-1321.
Instituto Brasileiro de Governança Corporativa. (2015). Código das melhores práticas de governança corporativa. São Paulo, SP: IBGC.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360.
Kanagaretnam, K., Lee, J., Lim, C. Y., & Lobo, G. J. (2016). Relation between auditor quality and tax aggressiveness: implications of cross-country institutional differences. Auditing, 35(4), 105-135.
Katz, S., Khan, U., & Schmidt, A. (2013). Tax avoidance and future profitability. Columbia Business School Research Paper Nº 13-10.
Kiswanto, A. P., Suryarini, T., Apriliyana, N., & Kadir, A. (2020). Tax avoidance in Indonesia: context of good corporate governance and corporate social responsibility. Humanities & Social Sciences Reviews, 8(2), 270-279.
Kleinert, V. C., Lana, J., & Floriani, D. (2019). Governança corporativa ilimitada para empresas limitadas. Revista de Administração Contemporânea, 23(6), 807-811.
Kovermann, J., & Velte, P. (2019). The impact of corporate governance on corporate tax avoidance – a literature review. Journal of International Accounting, Auditing and Taxation, 36(1), 1-29.
Lee, N. (2018). Tax avoidance, near-future earnings, and resource availability. International Review of Finance, 20, 1-12.
Lee, Y. J. (2021). The effects of analysts’ tax expense forecast accuracy on corporate tax avoidance: An international analysis. Journal of Contemporary Accounting & Economics, 17(2). https://doi.org/10.1016/j.jcae.2021.100243.
Lima, G. A. S. F., & Luca, M. M. M. (2016). A relação entre o monitoramento dos analistas de mercado e as características de valuation das companhias brasileiras. Revista Universo Contábil, 12(4), 129-151.
Luca, M. M. M., Martins, L. C., Maia, A. B. G. R., & Coelho, A. C. D. (2010). Os mecanismos de auditoria evidenciados pelas empresas listadas nos níveis diferenciados de governança corporativa e no Novo Mercado da Bovespa. Revista Contabilidade Vista & Revista, 21(1), 101-130.
Martinez, A. L., Ribeiro, A. C., & Funchal, B. (2019). Sarbanes Oxley Act and taxation: a study of the effects on the tax aggressiveness of Brazilian firms. Contabilidade Vista & Revista, 30(1), 27-42.
Medeiros, J. T., Paulo, E., Melo, C. L. L., & Mota, R. H. G. (2019). Previsão de analistas e as estratégias de gerenciamento de resultados utilizadas para evitar surpresa nos lucros. Revista Universo Contábil, 15(1), 49-64.
Mendonça, F., Martins, H. C., & Terra, P. (2019). Estrutura de capital e mecanismos de governança externos à firma: uma análise multipaís. Revista de Administração Contemporânea, 23(6), 765-785.
Novaes, P. V. G., Borges Júnior, P., Almeida, J. E. F., & Bortolon, P. M. (2018). Accruals discricionários e previsões otimistas dos analistas: incentivos e consequências. Revista Contabilidade Vista & Revista, 29(1), 28-47.
Ocak, M., & Can, G. (2019). Do government-experienced auditors reduce audit quality? Managerial Auditing Journal, 34(6), 722-748.
Ouyang, C., Xiong, J., & Huang, K. (2019). Do multiple large shareholders affect tax avoidance? Evidence from China. Internacional Review of Economics and Finance, 67, 207-224.
Potin, S., Silva, V. C., Reina, D., & Sarlo Neto, A. (2016). Análise da relação de dependência entre proxies de governança corporativa, planejamento tributário e retorno sobre ativos das empresas da BM&FBovespa. Revista Organizações em Contexto, 12(23), 455-478.
Putra, W. E., Yuliusman, & Wisra, R. F. (2020). The relations among firm characteristic, capital intensity, institutional ownership, and tax avoidance: some evidence from Indonesia. Humanities & Social Sciences Reviews, 8(1), 315-322.
Qu, W., Kang, S., & Wang, L. (2020). Saving or tunnelling: value effects of tax avoidance in Chinese listed local government‐controlled firms. Accounting & Finance, 1-45.
Rego, S. O., & R. Wilson. (2012). Equity risk incentives and corporate tax aggressiveness. Journal of Accounting Research, 50(3), 775-810.
Rhee, C. S., Woo, S., & Kim, D. H. (2020). The effect of female employment on corporate sustainability in terms of tax avoidance. Sustainability, 12(140), 1-15.
Richardson, G., Taylor, G., & Lanis, R. (2013). The impact of board of director oversight characteristics on corporate tax aggressiveness: an empirical analysis. Journal of Accounting and Public Policy, 32(3), 68-88.
Riguen, R., Salhi, B., & Jarboui, A. (2020). Do women in board represent less corporate tax avoidance? A moderation analysis. International Journal of Sociology and Social Policy, 40(1/2), 114-132.
Rogers, P., & Ribeiro, K. C. S. (2006). Mecanismos de governança corporativa no Brasil: evidências do controle pelo mercado de capitais. Contextus – Revista Contemporânea de Economia e Gestão, 4(2), 17-28.
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Published
2025-01-15
How to Cite
Teodósio, I. R. M., Sobreira, K. R., Medeiros, J. T., & De Luca, M. M. M. (2025). External control mechanisms and corporate tax avoidance: evidence from firms in Brazil. Enfoque: Reflexão Contábil, 44(1), 20-38. https://doi.org/10.4025/enfoque.v44i1.65388
Section
Original Articles
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