The Determinants of Effective Tax Rates: Firms’ Characteristics and Corporate Governance

Investors, managers and shareholders benefit from the study of what influences and determines corporate effective tax rates (ETRs) as this analysis may contribute to potential tax savings. Moreover, standard setters, regulators and policy makers have a crucial interest in identifying the main factors driving corporate taxes. Therefore, the purpose of our investigation and contribution is twofold. Firstly, we provide evidence of how ETRs are determined by firms’ financial and operational characteristics. Secondly, our objective is to show the role of Corporate Governance attributes in explaining ETRs. As the literature about this topic using non-US firms is not abundant, to address these questions we select a sample of 704 non-financial firms listed on the London Stock Exchange between 2010 and 2013. We estimate our econometric model by using GLS cross-section weights. Our results show that larger and more profitable firms have higher ETRs. On the contrary, capital intensity, leverage and R&D expenses have a negative impact on ETRs. Regarding ownership structure and board composition, our findings reveal that managerial ownership contributes to lower ETRs. On the other hand, more independent firms from controlling shareholders exhibit higher ETRs. Moreover, a larger number of board members and non-executive directors results in higher ETRs