The impact of corporate governance on tax planning: an institutional theory perspective

Purpose – This paper aims to examine the impact of corporate governance on tax planning for UK firms in an institutional theory framework. The paper categorizes governance into coercive, normative and mimetic forces and investigates how these forces influence tax planning activities. The paper further explores the interaction between these forces and the strength of internal governance in their relation to tax planning. Design/methodology/approach – The paper uses a manually collected data set comprising 1,236 firm- year observations from UK firms. Governance factors are classified according to institutional theory, with coercive forces represented by auditor-provided tax services and institutional ownership, normative forces by the professional accountancy qualifications of the board and mimetic forces by tax affiliations and the tax experience of the board. For the main analysis, the authors use ordinary least squares (OLS) regression with robust standard errors to examine the impact of governance factors on tax planning. In further analysis, the authors conduct a two-stage least squares (2SLS) to address potential endogeneity concerns and validate the robustness of the findings. Findings – The paper finds that while coercive forces are negatively associated with tax planning, the mimetic forces have a positive impact. In a further analysis, the authors find that auditor-provided tax services reduce tax planning only in firms with weak internal governance, suggesting these services help in mitigating weak governance. Inversely, professional accountancy qualifications reduce tax planning in firms with strong internal governance, indicating a complementary effect. Tax affiliations significantly influence tax planning in strongly governed firms, whereas tax experience is more relevant in weakly governed firms. Originality/value – The findings enrich the applicability of institutional theory within the context of tax planning, demonstrating how the impact of governance forces varies based on the strength of internal governance within firms. The paper makes regulatory recommendations for the involvement of auditors in tax planning services to supplement weak internal governance and use of the board tax characteristics to shortlist firms for further tax audits; and a recommendation for management to have tax affiliates (tax experience) on the board, which may bring tax savings in a strongly (weakly) governed environment.