This study documents to what extent small and medium sized enterprises (henceforth SMEs) are effectively planning their taxes, the determinants of the tax planning process and how the tax planning process influences outcome measures such as effective tax rates. We draw on the upper echelons theory to investigate whether the characteristics of the finance manager determine the likelihood of planning taxes in SMEs. Our study uses the semi-experimental setting of the Belgian Tax Reform in 2005 as an exogenous shock that provided incentives to nearly all companies established in Belgium to plan their corporate income taxes. Using both survey-gathered data and financial statement data on 112 SMEs, we find that the education, the tenure and the knowledge of the finance manager as well as a prior engagement with an external tax advisor prove to be strong determinants of tax planning. Also, our results suggest that an SME’s tax planning affects the effective tax rate, but the finance manager or firm characteristics of interest do not.
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