FIRM LEVEL CHARACTERISTICS AND EFFECTIVE TAX RATE

ABSTRACT

The broad objective of this contribution is to investigate which firm-specific characteristics impact on effective tax rates. In addition, the study provides an insight into how corporate governance helps to moderate the conflict of interest between resource owners and management in the area of effective tax planning Leaning on the positivist theory and the To achieve the above objectives, we select a sample of 87 companies quoted on the Nigerian Stock Exchange between 2008 and 2014. The econometric model specified for the study was estimated using panel data regression approach with a preference for the fixed effect model based on the result of the Hausman test. The result of the study shows that a negative relationship exists between the explanatory variables of leverage, capital intensity, and effective tax rate. Implying that preponderance of debt over equity financing and huge investment on non-current assets tends to minimise corporate tax liabilities. The result reports a positive relationship between profitability, firm size, the moderating variable of ownership concentration and effective tax rate. We recommend debt financing, more investment in non-current assets so that companies can take advantage of the incentives, allowances to cut down on their tax liabilities.

INTRODUCTION

Planning at the level of the national economy is essential or the effective allocation of scarce resources to improve societal welfare. To achieve this objective, a solid based public finance rooted on efficient tax policy is a prerequisite. Taxation as a fiscal policy tool is required to raise revenue to fund government expenditure. Tax is a compulsory levy without a quid pro quo effect and cast a burden by eroding the disposable income of the taxpayer. To reconcile these complexities, the taxpayer is faced with the dilemma of either contending with the eroded disposable income or making a concerted effort within the confines of the tax laws to reduce his tax liability. Modern corporate taxpayers have opted for the latter.

Tax planning is neither tax avoidance nor tax evasion, but the systematic application of professional expertise in ordering the activities of the taxpayer within the approved legal or regulatory frameworks to minimize the tax liabilities of the taxpayers. Issues of tax planning drew inspiration from the celebrated case of the Commissioner of Inland Revenue v Duke ofWestminster (1938) when Tomlin opined that:

Every man is entitled, if he can, to order his affairs so that the tax under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however, inappropriate the Commissioner of Inland Revenue or his fellow taxpayers may be, of his ingenuity, he cannot be compelled to pay an increased tax.

Tax incentives, exemptions or deductions offered by the tax authority to the taxpayer, has helped to encourage tax planning activities. Tax incentives are provided by the government to promote voluntary tax compliance, promote export activities, and encourage investment in some specific sectors. Companies leverage on these incentives to minimize their tax liabilities. While these incentives are not targeted at reducing government revenue, they are meant to attract more investment and improve the sophistication of the stock exchange market. However, the extent to which firms take advantage of these strategies varies from one company to another. Not all companies have equal tax planning capabilities. Hence, the question of which firm-specific characteristics predispose firms to tax planning?

The corporate tax planning literature is relatively young but very active (Hanlon & Heitzman, 2010). Advancement in this area of research has been achieved through developments in the principal – agent- government framework which is an extension of the agency theory propounded by Jensen and Meckling (1976). The recent inclusion of the corporate governance variable in the dynamics of tax planning has broadened the vista of tax planning research.

Extant literature in the developed countries of Europe and America are replete with studies on the variation of the tax burden in relation to firm-specific characteristics (Desai & Dharmapala, 2006; Gupta & Newbery, 1997; Holland, 1998 Minick & Noga, 2010). Conversely, to the best of our knowledge, there exist sparse empirical evidence on the determinants of tax planning in developing the economy with Nigeria as a reference point (Kiabel & Akenbor, 2014).

In summary, we find evidence of a negative relationship between leverage and capital intensity which means the tax shield in interest payment, capital and investment allowances helps to reduce effective tax rate for the selected companies. The explanatory variables of profitability, firm size and the interaction between effective tax rate and ownership concentration were positive.

Following the introduction, the next session focuses on literature review and development of hypotheses. Section three explicates the methodology with emphasis on the theoretical framework and model specification. Section four presents the estimation results and discussion of findings. Section five concludes the study.