The Impact of Firm Life cycle on the Corporate Tax Avoidance Strategies

Abstract

The aim of this research is to evaluate the relationship between rm life cycle stages and corporate taxavoidance. This study has been conducted on the non-nancial sector companies of Pakistan listed on thePakistan stock exchange. The sample consists of 100 companies out of 443 total non-nancial companiesover the period of 2008-2015. Tax avoidance has been estimated using two proxies i.e. GAAP_ETR and LETR.Moreover, rm cycle stages, based on Dickinson's model (2011), have been measured using the cash owoperations of the company i.e. operating, investing and nancing activities. The empirical ndings areconsistent with the Resource Based Theory (RBT) perspective and indicate that there is a signicantrelationship between rm cycle stages and corporate tax avoidance. Furthermore, Robustness tests showthat rms tend to evade taxes in the introductory, shake-out and decline stages; however, rms are less likelyto engage in tax planning in growth and maturity stages of their rm life cycle. In conclusion, companies areless incentivized to engage in tax avoidance in their peek stages due to certain cash ows (stable protstream) and more motivated to do so near their shaky dawn and impending doom (unstable protstream).The results of this thesis have several implications for tax authorities and Government to counter themenace of tax evasion from the Pakistani Economy by enhancing check and balance on rms in theirsubsequent phases of low prots and reduce the ever growing scal decit and black economy.