Corporate governance and tax disclosure phenomenon in the Malaysian listed companies

Abstract

Purpose This paper aims to examine the impact of corporate governance internal mechanisms on tax disclosure in non-financial firms in Malaysia. Managerial ownership and incentive compensation are used as proxies to reflect corporate governance conduct. Design/methodology/approach This study uses panel data set to analyse 286 non-financial listed companies on Bursa Malaysia for the years 2010-2012. Tax disclosure was gathered from the financial statements, particularly in the consolidated of tax expenses. Tax disclosure was measured using modified effective tax rate reconciling items. Multivariate statistical analyses were run on the sample data. Findings This study finds that managerial ownership and incentive compensation do not significantly influence tax disclosure. On the other hand, it is found that there are significant positive associations between each of firm size and industry dummy, and tax disclosure. This means that company-specific characteristics are important factors affecting corporate tax disclosure. Research limitations/implications This study extends the work of previous studies by suggesting that the signalling theory and the agency theory are the main theories concerned with tax disclosure and corporate governance. The authors add an additional appreciation of the contribution of corporate governance from the interested parties’ tax disclosure evaluation in the Malaysian environment. Practical implications The evidence found by this study has important policy and practical knowledge implications for the authorities, researchers, decisionmakers and firm managers. The findings provide them with some relevant insights on the importance of corporate governance practices from the companies’ perspectives and contribute to the discussion of who verifies and deduces from tax disclosure directed by companies. Originality/value To the best of the authors’ knowledge, this study is the first attempt to examine the influence of the corporate governance internal mechanisms on tax disclosure in a developing nation like Malaysia. Although this paper focuses on a single country, it contributes significantly to the debate about tax disclosure in relation to “comply or explain”, as suggested in the Code of Corporate Governance. This study shows that companies are trying to avoid as far as possible disclosing tax-related information.

Earning Quality and Tax Planning: Evidence on Indonesia Listed Company

“…Tax planning and earnings management are related to each other because both aim to achieve profit targets by engineering the company's profit numbers. If carried out by management, the published profit does not reflect actual profit and can mislead investors in decision making (Blouin, 2014;Mgammal, Bardai, & Ku Ismail, 2018). Based on the description can be formulated hypotheses: H 3 : Tax planning moderates the effect of profit growth on earnings quality.…”

Tax-Saving Components on Tax Disclosures

“…The signalling theory is the most relevant theory and fuels the argument about tax disclosures [8]. The signalling theory states that companies issue the "signals" about what they believe and who they are [15].…”

“…Companies can estimate these tax losses by focusing on their operating losses as exhibited in the income statement. According to [8], the parties involved in the company will probably appreciate each tax loss as part of the tax planning. This depends on the items presented in the company's financial statements.…”

“…Tax disclosures can be associated with tax avoidance. The disclosure of tax in the financial statements is a concrete form of tax planning [8]. The result from [2] shows that in Australia large companies experience several reactions from consumers.…”

The effect of components of tax saving on tax disclosure

“…There has been increased attention paid to companies’ TD information since 2003 (Hasegawa et al , 2013; Mgammal et al , 2018). Sweden, Norway and Finland all presently have a policy, which requires the public disclosure of companies’ taxable profits; in Japan, TD was required from 1950 until 2004.…”