Firm Age, Sales Growth, and Tax Aggressiveness: Focus on SMEs

This study investigates the changes in tax aggressiveness as a firm ages and sales growth increases. Generally, firm size, which is represented by sales or amount of asset, grows as the listed firm ages and along with the listed company’s financial income increases. This condition implies that the absolute level of tax cost of a firm grows as it ages. The firm may opt for aggressive tax strategies to mitigate its tax burden as it ages, but needs to make business decisions regarding both tax and non-tax costs (Scholes et al., 2009). A firm with a long history possibly enjoys stability. Thus, we anticipate that older corporations will not adapt a strategy for avoiding tax cost. In this paper, we investigate the degree of tax aggressiveness according to changes in firm age and growth and examine companies listed with the KOSDAQ (Korean Securities Dealers Automated Quotations) companies from 1999 to 2011. Most of these companies are small and medium enterprises (SMEs). The result shows a significantly negative (-) relationship between the ages and tax aggressiveness of SMEs. This result implies that companies with long history and stable business situation tend to consider its image or reputation to be more important than tax decrease because the manager considers both tax and non-tax costs in business decisions. The results also indicate that SMEs growth has a significantly positive (+) relationship with tax aggressiveness. As a company ages, the relative tax cost decreases. As a company matures, its growth slows down, resulting in the rate of sales and profit to diminish. Thus, if a firm’s tax burden is relatively low for its size, the company will tend to forego pursuing an aggressive tax strategy. On the contrary, as the growth rate increases, the tax cost of SMEs might also increase. Given the relatively unstable financial situation of SMEs, they might pursue aggressive tax strategies because of higher sales growth.