Monitoring and Tax Planning – Evidence from State-Owned Enterprises

In this paper, we provide new evidence on the association of state ownership and tax planning and show that shareholders’ monitoring incentives affect a firm’s tax planning. Using the unique setting of the German corporate tax system, we distinguish between state owners that directly benefit from state-owned enterprises’ (SOEs’) income tax payments and those that do not. Our results indicate that the negative association between state ownership and tax planning is concentrated in SOEs where the state owner directly benefits from the tax payments. These results are robust to various specifications and suggest that shareholders’ monitoring incentives are a determinant of firms’ tax planning activities.