Tax planning and corporate effective tax rates

Abstract

This study attempts to investigate the tax planning activities of Malaysian public companies listed on Bursa Malaysia during the official assessment system tax regime (OAS) (whereby the tax computation is prepared by tax authorities) and the self assessment system tax regime (OAS) (the tax computation is prepared by taxpayers). The objective is to examine the level of corporate effective tax rates (ETRs) experienced by companies during both tax regimes. This study uses pooled sample data of 316 companies for the years 1993 to 2006. In investigating the aggresiveness of the tax planning activites during the two tax regimes, the investigation period is classified into two: the period from 1993 to 2000 represents the official assessment system tax regime, and the period from 2001 to 2006 represents the self assessment system tax regime. This study finds that corporate ETRs are below the statutory tax rate (STR) in both tax regimes. The current study reveals that ETRs during the self assessment system tax regime is lower than the official assessment system tax regime. Additionally, this study examines the determinants of corporate ETRs during both tax regimes. The result supports political cost theory which suggests that larger companies endure higher ETRs. Further, the statistical results provide evidence that lower ETRs are significantly related to highly leverage companies, greater investment in fixed assets and lower investment in inventory. This study finds that companies with higher return on assets face lower ETRs. In addition, sector analysis are carried out to provide the evidence for the variability of ETRs across sectors. The results indicate that companies from trading and services, properties and construction sectors face higher ETRs. Overall, this study explains the impacts of tax provisions on corporate ETRs and determinants of corporate ETRs.