Determinants of corporate tax avoidance among Malaysian public listed companies

Abstract

Although the issue of tax avoidance practices is as old as tax itself, the manners and ways they are being perpetrated in recent times have transmuted so sophisticated among the corporate taxpayers. A report by the Global Financial Integrity in 2011 ascribes sixty to sixty-five percent of the global illicit flow of fund among developing economies to commercial tax non-compliance. Unfortunately the report ranks Malaysia fifth among the developing economies with the most illicit outflow of fund. This study, thus, investigates the determinants of corporate tax avoidance among Malaysian large companies. Specifically, the study investigates relationships of corporate tax avoidance with three forms of corporate ownership (family; foreign and government ownerships) and whether internal and external corporate governance mechanisms could mitigate such relationships. The study is among the very few studies on corporate tax avoidance both in Malaysia and internationally. The empirical data were obtained from the annual reports of the top 200 companies based on market capitalization of Bursa Malaysia over a period of five financial years. The collected data of 600 firm-year observations were analysed using the system Generalised Method of Moment (GMM) estimator. The findings showed that family oriented; foreign related firms and government-linked companies (GLCs) are tax avoidant in the main and interaction effect model estimations. However, the directors on the boards have little impact in mitigating firms’ tax avoidance practices given their financial interests in the companies. However, despite this, board independence is found to have interactive negative effect with the forms of ownership in relations to corporate tax avoidance. The quality of external audit was equally documented to reduce the chances of tax avoidance practices. These findings were later subjected to qualitative investigation through face-to-face interview sessions with tax auditors in Inland Revenue Board Malaysia. The findings from the analysis of their responses provided further explanation to the quantitative results. It was concluded that tax avoidance practices are more of cost-benefit consideration rather than the issue of organizational legitimacy. The findings of this study are of relevant importance in the selection of cases for tax audit and investigation by the IRBM.