AN EXAMINATION OF THE GOVERNANCE MECHANISM AND ITS INFLUENCE ON EXCESSIVE TAXATION

Background to the study: Taxes are the major contributor to government’s revenue and become an important issue in every country; therefore taxes are a crucial element in a firm. In maximizing shareholders’ wealth, company tries to minimize its tax burden. Shareholders would like to minimize corporate tax payments net of the private costs to maximize the firm value (Hanlon & Slemrod, 2007). The minimization of the tax payment is called tax aggressiveness or tax planning.  

Tax aggressiveness is defined by Chen and Shevlin (2008), as a downward management of taxable income through tax planning with respect to reducing tax paid to tax authority. The tax planning activities refers to legal activities which usually provides by the auditor or tax agent, or can be classified as gray area activities, as well as illegal activities (Chen, Chen, Cheng, & Shevlin, 2008). In Nigerian context, example of tax planning activities including excessive claim of tax incentives or claiming incentives which company are not entitled to. Furthermore, company also claiming unallowable expenses which are not allowed by Income Tax Act, 1967.        

 

Taxes and corporate governance may intercept in many angle. Corporate governance is the interplay of the governors in managing and controlling a firm; while taxes influence firm financial decision making including in determined the organisational form, restructuring decisions, payout policy, compensation policy and risk management decision (Desai and Dharmapala, 2004). In connection with that, corporate governance is view as a factor influencing tax aggressiveness since minimizing tax payment may increase company’s cash flow and the governors play major role in allocating the fund and also in decision making.

Over the years, there are studies that examine the relationship between tax aggressiveness and corporate governance mechanism such as board of director composition (Lanis & Richardson, 2009), form of ownership (Chen & Shevlin, 2010) corporate governance and tax environment changes (Jimenez-Angueira & Eriel, 2007), the influence of ownership structure and the corporate governance mechanisms of Nigerian PLCs on tax aggressiveness (Mahenthrian & Kasipillai, 2011), equity risk incentives and tax planning activities (Rego & Wilson, 2011) and the role of executive in determining the level of tax aggressiveness (Dyreng, Hanlon, & Maydew, 2009).  

In Nigeria, the emphasis on the need for corporate governance reform sprung up with the incidence of fraudulent financial reporting as in the case of African Petroleum, Cadbury Plc., Oceanic Bank Plc. Afribank Nigeria Plc. among others. This was caused by poor management, high gearing ratios, overtrading creative accounting, and fraud. Presently, there are numerous codes of corporate governance in Nigeria such as Central Bank of Nigeria (CBN) reviewed Code 2014, for Banks established under the provision of the Bank and Other Financial Institution Act (BOFIA), Security and

Exchange Commission (SEC) reviewed code 2011, directed at public companies with securities listed on the Stock Exchange; companies seeking to raise funds from the capital market through securities issuance or listing and all other public companies, National Insurance Commission (NAICOM) Code 2009, directed at all insurance, reinsurance, broking and loss adjusting companies in Nigeria, and Pension Commission (PENCOM) Code 2008, for all licensed pension operators.  These codes were established with the view to enhancing transparency and accountability in the financial sector, so that the Nigerian economy can forge ahead.

Tax aggressive firms were identified by using effective tax rates (ETR) method.  Then the relationship of corporate governance mechanism and tax aggressiveness were examined using E-views statistical tools. It is expected that tax aggressiveness has negative relationship with corporate governance mechanism, hence proves that better governance deter the likelihood of tax aggressiveness. Consistent with the prediction, the empirical result appears that board size and institutional investors shows a significant negative relationship with tax aggressiveness.