Political connections, corporate governance, and tax aggressiveness in Malaysia

Abstract

This study examines the relationship between political connections, corporate governance, and tax aggressiveness among firms listed on the Main Board of Bursa Malaysia. Corporate governance is proxied by firm-level internal and external governance, whereas tax aggressiveness is identified by using the effective tax rates of firms. Data collected from 2000 to 2009 resulted in 2,538 firm-year observations. We find that politically connected firms are more tax aggressive than non-connected firms. Further, we find that a large board size decreases the likelihood of tax aggressiveness, and that an inverse U relationship exists between institutional ownership and tax aggressiveness, which suggests an increase in monitoring as the ownership increases. However, we find no evidence to suggest that corporate governance mitigates the influence of political connections in promoting taxaggressiveness behaviour. Our findings suggest that the impact of political connections could neutralise the benefits of changes in corporate governance in Malaysia.

Tax Aggressiveness and Politically Connected Company

“…this finding imply that politically connected companies is more tax aggressiveness compared to non-connected companies. This findings confirm the finding of previous studies (Adhikari et al, 2006; C. Kim & Zhang, 2016;Wahab et al, 2017) which conclude that politically connected companies are more tax aggressiveness. However, the means difference is not significant at 5%.…”

“…The First ELEHIC However, (Hanlon & Slemrod, 2009) add that the disadvantage of tax aggressiveness are the potential for tax fine and penalties, implementation cost, reputational cost, and political cost. Corporate tax aggressiveness may generate agency problems due to the unaligned interest of managers and stockholders regarding to tax risk (Wahab, Ariff, Marzuki, & Sanusi, 2017). Further, (Wahab et al, 2017) argue that the stockholders want manager or directors will take actions on benefit of them and one way to do it is by focusing on profit maximatition through reducing the tax liabilities.…”

“…Corporate tax aggressiveness may generate agency problems due to the unaligned interest of managers and stockholders regarding to tax risk (Wahab, Ariff, Marzuki, & Sanusi, 2017). Further, (Wahab et al, 2017) argue that the stockholders want manager or directors will take actions on benefit of them and one way to do it is by focusing on profit maximatition through reducing the tax liabilities.…”

The Influence of Political Connection on Tax Avoidance

“…Firm management's political connection is one of the many factors that can influence tax avoidance. Firms that have political connections or officials or people who hold important positions in the government are indicated to receive special treatments from the government [9]. [9] identifies firms as having political connections if one of their main shareholder (at least 10% of voting rights) or one of their leaders (CEO, president, vice president, chairman, or secretary) are members of the state parliament, or have relations with politicians or political parties.…”

“…Firms that have political connections or officials or people who hold important positions in the government are indicated to receive special treatments from the government [9]. [9] identifies firms as having political connections if one of their main shareholder (at least 10% of voting rights) or one of their leaders (CEO, president, vice president, chairman, or secretary) are members of the state parliament, or have relations with politicians or political parties. [12] also explains that a military officer can also be categorized as a criterion of political connection because it has a role in governance.…”