Although tax directors are responsible for one of the firm’s largest outflows of cash and one of the largest expenses on the
income statement, little is known about how these executives are compensated. Since tax directors are rarely among the top five
highest paid executives, information about their annual compensation and equity holdings is not available in annual proxy (Form
DEF 14A) filings. Therefore, researchers are typically unable to directly observe the parameters of tax director incentive pay.
The tax director fills at least three roles. First, the tax director is responsible for compliance. Since multinational firms are
typically required to file thousands of tax forms annually, it is not unreasonable to infer that compliance is the tax director’s
primary duty. Second, the tax director may serve as an advisor to the firm’s senior executives by providing expertise in
minimizing the tax cost of the firm’s operating, financing, and investing activities. As an advisor, the tax director would be present
when strategic investment decisions are made but may not be responsible for selecting the investments. Third, the tax director
can be charged with actively pursuing tax planning opportunities by generating investment opportunities where the net present
value of the project derives solely from tax benefits. We view this third role, termed the ‘‘active planning’’ role, as relatively more
tax aggressive than the other two advisory roles.2 It is difficult to empirically distinguish the advisor from the active planner, as
both roles could yield lower tax obligations, and there can easily be an overlap in duties.
Although tax directors are responsible for one of the firm’s largest outflows of cash and one of the largest expenses on the
income statement, little is known about how these executives are compensated. Since tax directors are rarely among the top five
highest paid executives, information about their annual compensation and equity holdings is not available in annual proxy (Form
DEF 14A) filings. Therefore, researchers are typically unable to directly observe the parameters of tax director incentive pay.
The tax director fills at least three roles. First, the tax director is responsible for compliance. Since multinational firms are
typically required to file thousands of tax forms annually, it is not unreasonable to infer that compliance is the tax director’s
primary duty. Second, the tax director may serve as an advisor to the firm’s senior executives by providing expertise in
minimizing the tax cost of the firm’s operating, financing, and investing activities. As an advisor, the tax director would be present
when strategic investment decisions are made but may not be responsible for selecting the investments. Third, the tax director
can be charged with actively pursuing tax planning opportunities by generating investment opportunities where the net present
value of the project derives solely from tax benefits. We view this third role, termed the ‘‘active planning’’ role, as relatively more
tax aggressive than the other two advisory roles.2 It is difficult to empirically distinguish the advisor from the active planner, as
both roles could yield lower tax obligations, and there can easily be an overlap in duties.
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