Corporate Tax Avoidance: Evidence From Trading and Services Companies

Abstract

The financial statements provide an analysis of the effectiveness that management uses to control the resources available to the organisation. In preparing financial statements, management has discretion over which accounting methods to use. According to agency theory, managers manipulate earnings to present financial performance and financial position in a favourable manner. In tax reporting, the objective of companies is to reduce their tax burden in order to increase the value of the company through tax planning strategies. However, aggressive tax avoidance can lead to corporate tax avoidance, which has a negative impact on government revenues. This situation prompted the researcher to investigate whether financial factors influence corporate tax avoidance. Hence, this paper examines the extent to which financial manipulation, leverage, firm size, and profitability influence tax avoidance. The final sample of 470 firm-year observations was analysed using a fixed effects regression model. Using the dataset of trading and service companies listed on Bursa Malaysia from 2016 to 2021, the results suggest that financial manipulation is associated with higher corporate tax avoidance. In addition, there is a positive relationship between companies with high profitability and corporate tax avoidance. Further analysis shows that tax avoidance is lower for firms with higher leverage. However, corporate tax avoidance is not affected by company size. The results suggest that financial variables play an important role in explaining differences in corporate tax avoidance.