A longitudinal analysis of tax planning schemes of firms in East Africa

Abstract

Taxes play a significant role in the social and economic development of counties. On the other hand, taxes represent a significant cost to firms; hence they devise legal ways to reduce their taxes through tax planning. In East Africa, the statutory tax rate of firms averages 30%, which is considered a major burden to the firms. As a result, this study aims to longitudinally examine the tax planning practices of listed firms in East Africa countries (EACs). The study used twelve-year annual reports of ninety-one firms from EACs. Both cash effective tax rate (CEFR) and accounting effective tax rate were employed as tax planning measures. Descriptive statistics together with Wilcoxon signed-ranked test were used to analyze the results. The study demonstrates the existence of corporate tax planning by the listed firms in EACs. The average CETR of the firms was 17% as opposed to the statutory tax rate of 30%, demonstrating that the firms actively engage in tax planning activities. The evidence further demonstrated a gradual decrease in the tax planning activities of the firms over the past twelve years. The study further found out that the rates of decline in the firms’ tax planning were statistically insignificant. Despite the decrease in the firms’ tax planning, the tax authorities in EACs should enforce tax laws to eliminate the tax planning problem.

Nexus of Corporate Tax Planning In Malaysia's Trading and Services

“…Similarly, managers abuse their position to engage in aggressive tax planning that can create room for creative accounting strategies. Because taxes are viewed as a cash outflow, firms engage in tax planning by identifying ways to reduce these costs (James Kimea & Mkhize, 2021). Corporate taxpayers will benefit from tax savings by paying a lower tax than STR.…”

Firm-specific Determinants of Aggressive Tax Management among East African Firms

“…Some studies such as those of Cooper and Nguyen (2020), Sianipar et al (2020), Nasution et al (2020) and Chyz et al (2021) documented the level and trend of tax planning in some countries, which indicated that tax planning activities are carried out by firms and that there was a gradual increase in these activities. Such practice is becoming common in East African Countries (EACs) where Kimea and Mkhize (2021) reported that firms were increasingly adopting aggressive tax planning posture. Nonetheless, these studies did not clearly reveal the determinants (factors) that may affect tax planning in these countries.…”