Determinants and Value Relevance of Corporate Tax Planning: Malaysian Evidence

Rohaya Md Noor, Faculty of Accountancy, Research Institute and Research Management Institute, University Teknologi MARA has provided new evidence on the pervasiveness of tax planning activities among the publicly-listed Malaysian firms. The study was completed last year.

The pervasiveness of these tax planning activities are from the provision of tax incentives and different rules in tax reporting and financial reporting commands a considerable influence on corporate tax burdens such as corporate effective tax rates (ETRs). Using a micro backward-looking approach of a balanced panel data for 294 listed firms between 2000 and 2004, Rohaya examined 5 elements. The elements were the impact of tax policy and dual reporting systems on corporate ETRs, the determinants of corporate ETRs, the variation of corporate ETRs from the statutory tax rate, the extent of gap between financial accounting income and taxable income (book-tax differences), and the value relevance of taxable income as an earnings quality indicator and performance measure.

She discovered that ETRs are significantly different among firms within and across sectors. The average industry ETR during the years 2000-2004 is 20.4% and average ETRs for all sectors fell below the statutory tax rate of 28%. She also observed that firms dealing with industrial and consumer products, infrastructure and hotel services faced lower ETRs, while those dealing with trading and services, properties and construction experienced higher ETRs.

It was evident that low ETRs were much associated with highly leveraged firms, extensive investment in fixed assets, higher profitability and greater extent of international operations. However, she discovered that it was the political cost theory, instead of political clout theory that indicated larger firms facing higher ETRs. In tax planning strategies, the firms utilized permanent and temporary differences to reduce their ETRs. These firms also benefitted from tax provisions such as exempt income, deductible expenses, specific tax incentives, business losses and capital allowance carry forwards tax reliefs and deferred tax which caused their ETRs to diverge from the statutory tax rate. As such the firms reported higher financial accounting income than taxable income. Additionally, it was also found that taxable income provided useful information about the quality of corporate earnings and firms’ performance.

Hence, in Malaysia, it shows that tax planning activities are pervasive and have lowered corporate ETRs below the statutory tax rate during the years 2000-2004. In tax planning strategies, managers of firms opportunistically utilized tax incentives and adopted accounting policies which traded-off financial reporting and tax reporting to maximize shareholders’ wealth. In addition, aggressive tax planning activities and dual reporting systems had contributed to a large gap between financial accounting income and taxable income. She concluded that tax competition does not lead corporate tax rates to race to the bottom.


Rohaya Md Noor, Faculty of Accountancy,
Research Institute and Research Management Institute
University Teknologi MARA
(email: [email protected])

Reported by Megawati Omar, Research Management Institute

Published: 04 Nov 2009

Contact details:

Chief Information Officer (CIO)

Institute of Research, Development and Commersialisation (IRDC) Universiti Teknologi MARA (UiTM) Shah Alam, 50450 Shah Alam Selangor Malaysia

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