Impact of Corporate Governance & Profitability on Tax Avoidance (Evidence from Pakistani Listed Non Financial Firms)

Abstract

The phenomenon of running business effectively and accurately is known as corporate governance. It is a set of instructions and guidelines provided by the team of board of governors elected by the stakeholders to effectively run their businesses. Corporate governance is widely used in the world but in Pakistan, this term is relatively new and is not adopted by most of the firms yet. The main purpose of corporate governance is to provide discipline and stability to the firm by following certain rules and procedures and also performing accountability. Another approach followed by the businesses across the world is tax reduction which is legal. In underdeveloped countries like Pakistan, this is most commonly used. All sorts of firms seek tax reduction as much as they can and also hire skilled persons to perform tax reduction. As this approach is legal, so all the businesses try their best to get benefited from it. In this study, the main focus is to find the impact of corporate governance and the profit earned by the firms on tax avoidance. The literature review studied for this research put a lot of emphasis on tax reduction and profitability. However, no study addressed the impact of corporate governance and profitability on tax avoidance in Pakistani firms. To achieve the results and answers to the questions, a pool of data is gathered from the balance sheet analysis provided by the state bank of Pakistan on the website of Pakistan stock exchange. The sample data covers the information regarding firms from 2012-2019. Both Shariah and non-Shariah-conventional firms are observed for this study. 416 Shariah and 1384 non-Shariah firms are observed for finding the results. The number of companies observed for Shariah firms is 60 and the number of companies observed for non-Shariah firms is 98. Regression models are used to find the results which showed that independent board and audit committee have positive impact on tax avoidance and profitability has negative impact on tax avoidance. The results are same for both the Shariah and non-Shariah firms. The significance of this study is to provide the reasons behind this tax reduction. The government can benefit itself by forming new rules and policies to collect maximum tax. Also, the stakeholders take tax reduction as their benefit but it is a loss for them in long term. The significance of this study is also towards the existing Business Analysis Body of Knowledge (BABOK)