Impact of corporate governance on effective corporate tax rates among listed firms in Kenya

Abstract

Corporate income tax is an important source of revenue to governments around the world. Conversely, Corporation tax represents a significant expense to companies thereby impacting on major corporate decisions. Understanding factors that affect the effective corporate tax rates is therefore important not only to corporations but also to governments and other policy makers. Despite the well documented corporate tax leakages across the world, widening budget deficits and ballooning public debt in Kenya, limited studies have been conducted to show the level of tax management practices among NSE listed firms in Kenya. Equally, few studies, if any, have been done to investigate the impact of corporate governance on effective tax rates among the listed firms. The purpose of this study was therefore to investigate the impact of corporate governance on effective corporate tax rates among firms listed on the Nairobi Securities Exchange between 2011 and 2017. Specifically, the study investigated the impact of board size, board independence, board gender diversity and corporate ownership structure on effective corporate tax rates among the listed firms in Kenya. The moderating effect of capital intensity and leverage on the relationship between corporate governance and effective tax rate was also examined. Agency and stakeholder theories provided the theoretical framework for this study. Longitudinal research design was used to take care of accruals and deferrals in tax payment. Secondary data was extracted from annual financial statements and reports of the listed firms using a content analysis form. Purposive sampling was used to select a sample from the list of 67 listed firms. Both descriptive and inferential tests were conducted with the aid of STATA software. Descriptive statistics revealed a mean ECTR of 24.7%. Diagnostic tests revealed that there was no violation of the assumptions of the regression model. The study found that the correlation between board size, board independence, board gender diversity with effective corporate tax rate was positive and significant. However, there was a significant negative correlation between corporate ownership structure and effective corporate tax rate. The findings of the random effects model indicated that board size (β=.148, p=.034), board independence (β=.452, p=.000), and board gender diversity (β=.273, p=.002), had a positive and significant effect on effective corporate tax rate. On the other hand, corporate ownership structure (β=-.136, p=.004) was shown to have a negative and significant effect on effective corporate tax rate. There was a significant moderating effect of capital intensity on the relationship between board size (R 2∆=0.06; β= 0.33; ρ<0.05), board independence (R 2∆=0.06; β= 0.57; ρ<0.01) and board gender diversity (R 2∆=0.03; β= 0.17; ρ<0.01) and effective corporate tax rate. Similarly, there was a significant moderating effect of leverage on the relationship between board size (R 2∆=0.06; β= -0.52; ρ<0.01), board independence (R 2∆=0.08; β= -0.23; ρ<0.01) and board gender diversity (R 2∆=0.06; β= - 0.27; ρ<0.01) and effective corporate tax rate. The study therefore concludes that corporate governance has a significant impact on effective corporate tax rates among NSE listed firms. This study was expected to aid policy makers in corporate and fiscal policy formulation as well as enriching the existing literature. Similar studies can be extended to other firms not listed on the NSE.