A longitudinal analysis of tax planning schemes of firms in East Africa

In 2011, Korea required all firms to report all value added tax (VAT) invoices electronically to tax authorities. This unique law provided a natural experiment to examine the effects of this disclosure on income taxes and firms’ related responses. The authors find that this additional required disclosure caused firms to become less aggressive on their income taxes, and that they were unable to pass increased tax burdens forward to consumers or backward to suppliers and labor. To maintain, profitability firms cut research and development (R&D) costs, and this cost cutting was larger for tax aggressive firms. Policy implications of this unintended result are discussed.

This study examines the association between tax aggressiveness and overconfidence in 277 Brazilian stock market listed companies from 2010 to 2017, with the supposition (based on optimal capital ownership structure theory) that the greater a manager’s overconfidence, the more aggressive the company’s tax decisions. Overconfidence is measured in an innovative way in which normalizing excess acquisitions and excess investments using the company’s market value and then combining these two variables with indebtedness to capture, more directly, the possible effects of overconfidence on the corporation’s operations. Tax aggressiveness is computed using a tax burden on earnings and value-added. The variables included in the model were obtained from data contained in the selected companies’ financial statements. Data analysis was performed by multiple linear regression. The parameters used combined and fixed effects methods to identify an association between tax aggressiveness and overconfidence. Data related to corporate governance, CEO’s characteristics, and capital concentration were used as control variables. The study’s main finding does not show any significant relationship between fiscal aggressiveness and overconfidence; however, they did show a significant association with tax aggressiveness, the company’s size, the return on shares, and the education level of the CEO. An interesting finding of the robustness tests is the stationarity of tax aggressiveness, which could partially explain the non-significance of the main finding.

This paper examines the effect of industry-wide factors such as product market competition on corporate tax avoidance. Specifically, the focus is on the moderating role of corporate governance in the relationship between product market competition and tax avoidance. To conduct an empirical analysis, a sample of public companies that are listed on the Korea Stock Exchange between 2001 and 2016 is used. The empirical analyses provide the following results. First, product market competition is negatively related to tax avoidance. This suggests that competitive markets act as external corporate governance mechanisms and discipline managers to decrease tax avoidance. Second, the negative association between product market competition and tax avoidance is more pronounced for firms with more independent board of directors and firms with audit committee consisting of outside directors. These findings imply that product market competition acts more effectively when the firm has strong internal governance mechanisms such as board independence and audit committee independence. Therefore, we provide evidence on a complementary relationship between internal governance system and product market competition. The results may be of interest to policy makers and regulators like Korea Fair Trade Commission and Financial Supervisory Service who are involved in promoting market competition, monitoring any abuse of market dominance, and supervising financial reporting quality.