Subsidiary Governance and Corporate Tax Planning: The Effect of Parent-Subsidiary Common Directors and Officers

Top executives of the parent company often take positions as the directors and officers (D&Os) of subsidiaries. These parent-subsidiary common D&Os have better access to subsidiary information and can exert more influence over subsidiary operations. Therefore they can better identify tax planning opportunities and coordinate tax arrangements. Using the mandatory disclosure of top executives’ subsidiary positions for Chinese listed firms, we find that effective income tax rate is lower for firms with common D&Os. The tax-saving effect is stronger for firms with more intangible assets and with related-party transactions involving subsidiaries. The effect is also stronger when common D&Os have positions in economically significant subsidiaries and the subsidiaries entitled to preferential tax treatment and when common D&Os are involved in daily subsidiary operations. To our knowledge, this paper is the first to study the role of subsidiary governance in general and common D&Os in particular in corporate tax-planning.