Business-finance integration, tax avoidance and tax risk—empirical evidence based on firm recruitment data

This study examines the relationship between corporate social responsibility expenditure and tax avoidance in Tanzanian listed firms, utilising secondary data from 25 firms listed on the Dar es Salaam Stock Exchange over a ten-year period from 2013 to 2022. Employing a retrospective research design and purposive sampling, we applied the fixed effects model as the estimation technique. The analysis reveals a positive and significant association between corporate social responsibility expenditure and tax avoidance, indicating that firms with higher levels of corporate social responsibility expenditure are more likely to engage in tax avoidance practices. Furthermore, control variables such as firm size, profitability, and leverage also demonstrated positive and significant relationships with tax avoidance. The findings contribute to the understanding of the intricate dynamics between corporate social responsibility initiatives and tax management strategies in the Tanzanian context. The implications of this study extend to policymakers, suggesting the need for a nuanced approach to corporate tax regulation, taking into account the interplay between corporate social responsibility initiatives and tax management practices. Policymakers should recognise that firms engaging in higher corporate social responsibility activities may employ tax planning strategies that warrant attention in regulatory frameworks. This study contributes to the ongoing discourse on the complex dynamics between corporate social responsibility and financial decision-making in emerging market contexts.

This study analyzes how the level of perceived tax risk affects a company's decision on whether to use corporate tax savings for investment or retain them as cash. While many previous studies have examined the determinants of tax avoidance, little attention has been given to how companies utilize the cash obtained through tax avoidance. Therefore, this study focuses on the utilization of tax savings by companies. Previous studies paid attention to financial constraints as a factor influencing the use of tax savings, but did not consider the risks of tax－saving cash. For the first hypothesis, we tested whether the risk of tax savings affects the use of tax savings. The results show that tax savings are not used for investment activities when tax risk is high, but investment using tax savings is increased when tax risk is low. Secondly, we examined whether the tendency to use less tax savings for investment when tax risk is high is dependent on financial constraints. As a result, it was found that this phenomenon does not depend on financial constraints. This means that tax risk is a more important determinant than financial constraints in the use of tax savings. On the other hand, the impact of tax risk on the utilization of tax savings may vary depending on whether the tax savings for the current year are subject to future payments or are permanently exempt. To confirm this, we classified tax savings into temporary and permanent differences between accounting standards and corporate tax law, and verified whether the use of temporary or permanent tax savings shows a discriminatory response to tax risk. As a result, the temporary difference in tax savings was not used for investment, but the permanent difference was used for investment, and more money was used for investment when tax risk was low. Fourthly, the analysis examined whether investment preferences vary based on tax risk, revealing that tax savings are seldom utilized for investment when tax risk is high, but there is a possibility to invest in liquid financial assets. This study contributes to existing research by examining tax risk as a determinant of corporate tax savings utilization. In addition, the firm fixed effect, which was not controlled in previous Korean studies, was additionally controlled. In addition, previous studies were developed in that tax savings were divided into temporary and permanent differences, and that investment types changed according to tax risks. According to the research result, the volatility of the corporate tax burden affects the use of tax savings. Even if the government implements business－friendly policies such as corporate tax reduction, if the corporate tax burden volatility increases due to frequent policy changes, financial resources may not be used for investment.

Summaries of Papers in This Issue

Corporate Governance, Earnings Management and Tax Management

This study examines the association between the effective corporate tax rate and the volatility of future effective corporate tax rates in Korean companies. We analyzed the effect of corporate governance on the association between tax avoidance and tax risk. Our sample is comprised of all the firms listed on the Korea Composite Stock Price Index market. We measure each firm’s tax avoidance as GAAP ETR, Cash ETR, and BTD, and use the corporate governance rating of the Korea Corporate Governance Service to measure corporate governance. Our results show that the volatility of the effective corporate tax rate and the effective corporate tax rate would have a significant negative association. Our results show that tax risk decreases when the corporate tax avoidance level increases and the tax risk increases when the corporate tax avoidance level decreases. In addition, we find that the better the corporate governance structure, the higher the level of supervision and control of managers, thereby mitigating the impact of tax evasion on future corporate tax risk. The findings of this study regarding tax avoidance and corporate governance are important for investors because tax risk can significantly affect investor welfare.

This study aims to determine the effects of applying good corporate governance and tax management against corporate social responsibility in company with risk disclosure as moderated variabel. The dependent variable in this study is Corporate Social Responsibility, while the independent variable is Good Corporate Governance and Tax Management. Moderating variables using variable Risk Disclosure . The study population was companies listed in Index Sri Kehati in Indonesia. Samples that meet the criteria are as many as 84 companies. With a period of four year of research data. The results of this study demonstrate in partially variable Tax Management no significant effect on Corporate Social Responsibility, while Most of the indicators variables of good corporate governance significant effect on the Corporate Social Responsibility as composition of independent of BOC, Board of commissioners and composition of institutional shareholders. And most of the indicators variables of good corporate governance have no significant effect on the Corporate Social Responsibility as shareholders composition of Managerial, debt policy and the size of the company. Variables simultaneously Good Corporate Governance and Tax Management have a significant effect on Corporate Social Responsibility. Moderation Risk Disclosure is not able to amplify the effect of tax management and good corporate governance of the Corporate Social Responsibility

Purpose This study examines the moderating effect of XBRL mandatory adoption on the association between managerial ability and corporate tax outcomes.Design/methodology/approach This study used a quantitative method with panel data regression models using a sample of listed firms on the Indonesia Stock Exchange from 2010 to 2019.Findings The regression results indicate that XBRL adoption moderates the relationship between managerial ability on tax avoidance and tax risk. Firms with higher managerial ability have relatively greater tax avoidance practices and lower tax risk following XBRL adoption. In this study, the authors document unfavorable and unexpected consequences of XBRL in an emerging country.Research limitations/implications Results are from a sample of firms from one emerging country.Practical implications It becomes important and necessary to develop more and better taxonomies with standardized extensions related to taxes information in the XBRL financial reporting to support the tax administrator’s performance in assessing firms’ tax avoidance and tax risk. The authors underscore the importance of improving taxes tags, including tags from financial statements and the disclosure section. This study may also inform policymakers in other countries that more adequate tax tags are needed to leverage benefit from XBRL adoption in monitoring and assessing corporate tax avoidance and tax risk.Originality/value This study is among the first to test an explanation for the moderating role of XBRL adoption on the association between managerial ability and corporate tax avoidance and tax risk.

Taxation play an essential role both in a country and in a corporation. To minimize the tax payment, corporation conduct a corporate tax management. According to some of previous research, there is a correlation between corporate governance and corporate tax management. In this research we are focusing on three: number of board, number of independent board and board compensation. We measure corporate tax management by using effective tax rate (GAAP ETR and current ETR are used in this research). By using several other control variables, we found that corporate governance have a significant correlation to corporate tax management.

The analysis conducted on the relationship between Corporate Social Responsibility (CSR), Investment Opportunity, Profitability, and Tax Avoidance in Energy Sector Companies listed on the Indonesia Stock Exchange between 2017 and 2021 has yielded significant insights. While the influence of CSR on Tax Avoidance was found to be insignificant, both Investment Opportunity and Profitability demonstrated notable effects, with the latter displaying a negative influence. Furthermore, the combined impact of CSR, Investment Opportunity, and Profitability on Tax Avoidance was found to be substantial, explaining 63% of the observed variance. These findings underscore the intricate relationship between corporate practices, financial performance, and tax management strategies, offering valuable implications for various stakeholders. In light of these conclusions, several recommendations can be drawn. Firstly, collaboration between tax authorities and relevant stakeholders is essential to refine tax policies, integrating sustainability considerations and ensuring transparency in corporate tax practices. Secondly, investors should adopt a comprehensive approach when assessing investment opportunities, taking into account factors beyond financial performance, including corporate social responsibility and tax management strategies. Additionally, companies are encouraged to enhance their disclosure practices concerning CSR activities, thereby promoting greater transparency and accountability. Finally, future research efforts should focus on expanding the scope of analysis across different sectors and incorporating additional variables to deepen our understanding of tax avoidance dynamics in the Indonesian context. By implementing these recommendations, policymakers, tax authorities, investors, and corporate entities can collectively contribute to fostering a more responsible and sustainable business environment.

Executive Inside Debt and Corporate Tax Avoidance

PurposeThe purpose of this study is to examine the interactive impact of tax avoidance and tax risk on the firm value.Design/methodology/approachThis study covers 290 observations on non-financial corporations listed on the Tunisian Stock Exchange for the period ranging from 2008 to 2020, using the multiple linear regression technique.FindingsThe results show that tax avoidance positively affects the firm value while tax risk has a negative influence on the company value. More importantly, tax risk moderates the positive impact of tax avoidance on the firm value. Accordingly, tax avoidance must be considered in conjunction with tax risk when studying the effect on the firm value. The findings of additional analyses indicate that when tax avoidance is associated with a high level of tax risk, it negatively affects the firm value. Thus, investors negatively rate the high-risk tax avoidance.Research limitations/implicationsThe major limitation of this study is that it focuses only on Tunisian listed companies since their financial statements are publicly available. Although the sample is relatively small due to the problem of data availability, it is satisfactory owing to the twelve-year sampling period (from 2008 to 2020). Research implications- The results obtained are of great interest to researchers as they should be more careful in simply using effective tax rates as a measure of risky or aggressive tax avoidance.Practical implicationsThe findings may signal the need for Tunisian firm managers to consider spillovers when adopting risky tax avoidance strategies and to implement a tax risk management policy within the firm. They are also substantial for Tunisian regulators to create requirements for reporting risky tax avoidance practices in the company annual reports to protect the investors’ rights and the society interest in general. The results are also useful for the investors who would like to make good decisions with respect to tax planning strategies. It is not enough to rely on the Effective Tax Rate (ETR) to judge whether or not tax planning is risky. Volatile ETRs, as a proxy of the tax risk, can be useful for them in decision-making.Social implicationsThe results also highlight that risky tax avoidance decreases the firm value, and thus confirm the negative repercussions that such behavior can have not only on the firm, but also on the society in general, as the corporate tax contributes to covering the State public expenditure. Hence, it is considered a general concern.Originality/valueThe present study differs from others in the existing literature. In fact, it examines the joint effect of tax avoidance and tax risk on the firm value for Tunisian listed companies which are characterized by the predominance of agency conflicts between major shareholders and minor ones. Therefore, the authors seek to investigate if small shareholders can penalize risky tax avoidance practices by decreasing the firm value.

This study investigates how corporate governance affects tax management behavior and contributes the literature on corporate governance. First, this study examines directors compensation and directors ownership, as corporate governance mechanism of a firm, in managing taxes to increase performance. Second, to the best of our knowledge, this is the first study in Indonesia investigating the link between managerial compensation to tax management. This study finds that directors ownership exhibits a significance relationship in reducing cash tax paid. But, directors compensation does not result lower taxes paid and it is seems not an effective mechanism in engaging tax management. Implementing corporate governance mechanism also will not result in lower taxes because corporate governance induces managers to be more careful in managing taxes.

This thesis consists of three separate chapters that explore issues at the intersection of taxation and financial accounting. The unifying theme is corporate tax avoidance and the consequences of increased transparency of tax practices on firm behaviour and financial reporting. Chapter 1 (co-authored with Chris Evans and Youngdeok Lim) examines the impact of changes to a full dividend imputation system on corporate tax avoidance. We exploit an exogenous shock to the Australian dividend imputation system which became effective on 1 July 2000 and allows shareholders to claim all imputation credits attached to dividends, even if it propels them into a tax refund position. This enhancement to shareholder’s after-tax positions likely provides stronger incentives for firms to minimise tax avoidance activities to generate valuable imputation credits for distribution to shareholders. We implement a difference-in-differences research design to examine the impact of the legislative change on tax avoidance for a variety of treatment and control groups after the change. Consistent with our expectations, we find evidence of an increase in cash effective tax rates (decrease in tax avoidance) for domestic dividend-paying firms relative to domestic non-dividend-paying firms. This finding is even more pronounced for firms paying fully-franked dividends, and the decreases in tax avoidance are economically significant. Our results are consistent with the notion that firms undertake less tax avoidance in the post 1 July 2000 period given the presence of stronger incentives for them to pay corporate tax. In Chapter 2 (solo-authored), I exploit the availability of new data to examine the impact of mandatory public country-by-country disclosures on the tax aggressiveness of European Union (EU) banks. In response to growing public and political backlash against tax avoidance, the European Parliament introduced new rules in 2013 requiring the public disclosure, on a country-by-country basis, of certain tax-related information by credit and investment firms operating in the EU. Enhanced transparency via public country-by-country-reporting (CBCR) allows greater scrutiny by stakeholders and is considered one way of increasing pressure on EU banks to pay corporate taxes that reflect their true economic presence in each country they operate in. I conduct a range of empirical tests using cash and book effective tax rates to proxy for tax avoidance and based on a hand-collected sample of 72 banks, I do not find any evidence of a reduction in tax avoidance in response to increased transparency. A similar result is found when a differences-in-differences research design is employed to test for any change in tax avoidance of EU banks relative to a control group of 39 multinational EU insurers exempt from CBCR rules. In fact, in some tests, I find that, on average, EU banks increased their tax avoidance relative to EU insurers despite increased disclosure levels. I also find that tax haven use, calculated as the proportion of turnover, profit before tax, and subsidiaries/branches disclosed in tax havens, remains largely unchanged despite increased transparency. The results suggest that mandatory public CBCR has not altered the cost-benefit equilibrium of tax avoidance sufficiently to encourage EU banks to curtail their tax avoidance practices. Chapter 3 (co-authored with Bjorn Jorgensen and Peter Pope) investigates the interplay between mandatory public CBCR, geographic segment reporting, and tax haven use. We examine whether the availability of country-level financial information impacts geographic segment reporting and the extent to which firms aggregate geographic segments. Based on a hand-collected sample of 70 banks operating in the EU, we document the location of their operations and the extent to which they operate in tax havens. We find that, on average, banks with tax haven operations enjoy significantly higher profit margins, turnover per employee, and profit per employee, and lower book effective tax rates, in these jurisdictions relative to non-tax havens. Using a difference-in-differences research design, we find no significant change in the number of geographic segments, country segments, or line items per geographic segment, disclosed in segment reporting notes after the introduction of CBCR relative to a control sample of 39 multinational EU insurers exempt from CBCR. Furthermore, we find a positive association between tax haven intensity and geographic segment aggregation consistent with the notion that EU banks may aggregate geographic segments to obfuscate tax haven activities. This early empirical evidence suggests that mandatory public CBCR has limited impact on geographic segment reporting. In sum, the three chapters of this thesis contribute to the emerging literature on the determinants and consequences of corporate tax avoidance. The findings should inform global regulators and policy makers interested in the extent of corporate tax avoidance and especially, EU policy makers currently considering the extension of public CBCR to all industries.

ABSTRACTThis study uses insights from tax practitioners and tax authorities to define and develop an estimate of ex ante tax risk that is independent of common tax outcomes studied in prior literature. Validation tests confirm that our tax risk measure (i) represents the predictable and unpredictable uncertainty inherent in the three sources of tax risk (i.e., economic risk, tax law uncertainty, and inaccurate information processing) and (ii) is a construct different from tax avoidance, tax uncertainty, and general business risk. Using our tax risk measure, we address two research questions of interest to academics and practitioners. First, we examine the association between tax risk and long‐run tax avoidance and find a negative association between tax risk and future long‐run cash effective tax rates (ETRs). Second, we consider the extent to which unrecognized tax benefits (UTBs) reflect tax risk, tax avoidance, or financial reporting incentives and demonstrate that our tax risk measure explains a substantial portion of UTBs, incremental and relative to measures of information risk, conditional conservatism, unconditional conservatism, and tax avoidance. Our study offers a measure of tax risk that, consistent with the Scholes‐Wolfson paradigm, reflects the tax risk inherent in all business activities, not just tax avoidance activities; has unique industry effects; and contributes to our understanding of the factors that affect tax planning decisions and result in variation in firms' ETRs. Our findings will help managers and tax practitioners focus on industry‐specific tax risk components, assess risk during tax planning initiatives, exercise caution when engaging in additional risk if ETRs are low, and adapt tax risk strategies to fit specific company needs. We enhance future tax research by improving the definition and measurement of tax risk.

PurposeThis paper aims to study the impact of tax avoidance on corporate risk. It also examines the moderating impact of tax risk on the relationship between tax avoidance and firm risk.Design/methodology/approachBased on available information in the DATASTREAM database about a sample of French firms listed in the CAC 40 from 2010 to 2022, the study uses the feasible generalized least squares method to investigate the impact of tax avoidance on firm risk and the moderating impact of tax risk. To check the robustness of our results, the authors changed the measurement of variables to identify potential biases and they significantly mitigated the endogeneity concerns using instrumental variable regression. Additional estimations were performed, first by using book-tax differences (BTD) and its components, i.e. temporary and permanent, and second by retesting hypotheses of years before the outbreak of the corona virus disease 2019 (COVID-19) pandemic.FindingsThe results show that tax avoidance negatively affects the firm risk while tax risk has a positive effect on firm risk. More importantly, tax risk moderates the negative impact of tax avoidance on the firm risk. When tax avoidance is associated with a high level of tax risk, it leads to a high firm risk. Accordingly, tax avoidance should be considered in conjunction with tax risk when studying the effect put on the firm risk. Further analyses indicate that tax risk moderates the negative relationship between permanent BTD and firm risk.Research limitations/implicationsThe major limitation of this study is that it focuses only on French-listed firms, which make it difficult to generalize the results. Furthermore, the authors did not introduce governance variables into our models. An effective governance system and transparent information can reduce some of the perverse effects of risky tax avoidance by reducing the tax avoidance costs. The obtained results are of great interest to researchers who need to include the tax risk concept in their examination of the tax avoidance impacts.Practical implicationsThe results are useful for investors wishing to make sound decisions regarding risky tax avoidance practices. Furthermore, the results may signal the need for French policymakers to make more efforts to reduce risky tax avoidance activities that are harmful to investors. They must enforce the existence and the reporting of a tax risk management strategy by firms.Originality/valueThis study contributes to the growing body of literature on the tax avoidance effects with a special focus on firm risk. This study provides the first French evidence of the role of tax risk in the relationship between tax avoidance and firm risk.