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

Alfred James Kimea,Msizi Mkhize

doi:10.21511/imfi.18(3).2021.18

Abstract

Taxes play a significant role in the social and economic development of counties. On the other hand, taxes represent a significant cost to firms; hence they devise legal ways to reduce their taxes through tax planning. In East Africa, the statutory tax rate of firms averages 30%, which is considered a major burden to the firms. As a result, this study aims to longitudinally examine the tax planning practices of listed firms in East Africa countries (EACs). The study used twelve-year annual reports of ninety-one firms from EACs. Both cash effective tax rate (CEFR) and accounting effective tax rate were employed as tax planning measures. Descriptive statistics together with Wilcoxon signed-ranked test were used to analyze the results. The study demonstrates the existence of corporate tax planning by the listed firms in EACs. The average CETR of the firms was 17% as opposed to the statutory tax rate of 30%, demonstrating that the firms actively engage in tax planning activities. The evidence further demonstrated a gradual decrease in the tax planning activities of the firms over the past twelve years. The study further found out that the rates of decline in the firms’ tax planning were statistically insignificant. Despite the decrease in the firms’ tax planning, the tax authorities in EACs should enforce tax laws to eliminate the tax planning problem.

Highlights

Firms are increasingly finding ways to reduce costs, maintain more profit for investment opportunities and increase their values
The line graph depicts the firms’ tax savings, which is the difference between the accounting effective tax rate (AETR) and the cash effective tax rate (CETR), which provides an accurate measure of the actual benefit emanated from the tax planning activity
The results show that component of tax income, it is expected that such the CETR for 2017 was 16.5%, whilst the AETR policies would curb the incidence of tax planning

Summary

Introduction

Firms are increasingly finding ways to reduce costs, maintain more profit for investment opportunities and increase their values. Among the strategies to achieve these objectives, tax planning represents a major activity that takes a large part of management time and resources (Lee, 2020). This is because tax erodes a significant percentage of firms’ income. The predominant assumption of shareholders is that they do because taxes represent a substantial burden to companies; any tax activity that reduces a firm’s tax liabilities is considered to increase the value of the firm (Jacob & Schütt, 2020; Kirkpatrick & Radicic, 2020). Apart from the risk of a firm being fined or punished for engaging in tax planning, it can create costs arising from its implementation, legal fees, and reputational loss, which can negatively influence the value of firms that engage in such practices

Objectives

Results

Conclusion