Tax planning in Norwegian private equity-backed companies : do Norwegian PE-backed companies engage in tax planning activities to a larger extent than their peers, and do PE-firms operating in Norway actively look for target companies that hold a potential for tax optimization?

Abstract

We investigate whether Norwegian PE-backed companies engage in tax planning activities to a larger extent than their peers, and if PE-firms operating in Norway actively look for targets that hold a potential for tax optimization, by utilizing five proxies for tax planning. Our results show that Norwegian PE-backed companies exhibit significantly larger leverage ratios than comparable companies. The PE-backed companies’ leverage ratios are on average 100.82 percentage points higher than the ratios of non-PE-backed companies. This indicates that PE-backed companies engage in tax planning activities to a somewhat larger extent than their peers, by generating debt tax shields. We do although see limitations to this result, as we have not included holding company debt of the peer companies in our sample, and as we cast doubt over the relevance of using Leverage Ratio as a proxy for tax planning. In addition to this, none of the four other proxies for tax planning we investigate display significant differences between the tax planning activities performed in PE-backed companies and comparable non-PE-backed companies. This result is very different from the findings in similar studies performed on American and Finnish data, and indicates that Norwegian PE-backed companies are much less tax aggressive than similar foreign companies. Our research also shows that PE-firms operating in Norway do not deliberately seek out target companies that hold a potential for tax optimization, as there exist no differences in the level of tax planning activities in PE-Target companies and comparable non-PE-backed firms.