VIỆN ĐÀO TẠO QUỐC TẾ BÁO CÁO TỔNG KẾT ĐỀ TÀI THAM DỰ CUỘC THI “SINH VIÊN NGHIÊN CỨU KHOA HỌC” CẤP VIỆN ĐÀO TẠO QUỐC TẾ NĂM HỌC 2023-2024 TÊN ĐỀ TÀI: THE IMPACT OF EARNINGS MANAGEMENT
The necessity of research issue
Profit serves as a vital indicator for businesses, directly affecting their survival and influencing decision-making for information users While fluctuations in earnings and costs are common in business operations, they can raise concerns for investors seeking stability and growth To attract investment capital, organizations often resort to profit management techniques, manipulating transaction structures and financial reports to present more favorable earnings This practice, known as earnings management, can mislead stakeholders regarding the company's true economic performance (Healy and Wahlen, 1999).
In the last ten years, Vietnam's economic growth has been largely driven by the manufacturing sector, which accounts for over 20% of the country's GDP, enhances the trade balance, and attracts substantial foreign direct investment (FDI) This sector has played a crucial role in helping Vietnam effectively manage global disruptions, particularly during the COVID-19 pandemic.
In 2021, Vietnam achieved a positive GDP growth rate of 2.6%, which accelerated to 8% in 2022, showcasing the nation's economic resilience attributed to strict regulations and a well-planned economic strategy (Francois et al., 2023) Corporate tax avoidance in Vietnam is significantly influenced by company profitability, as higher profits result in increased tax liabilities, prompting firms to adopt tax avoidance strategies Managers must balance effective tax planning to minimize tax burdens while ensuring compliance with legal requirements.
Vietnam's tax administration is currently grappling with significant challenges, notably the widespread use of various tax avoidance strategies Tax avoidance involves the strategic organization of a taxpayer's financial affairs to reduce tax liabilities, which, while often legal, can contradict the underlying purpose of tax laws (Vlcek, 2019) Research indicates a correlation between earnings management and tax avoidance, revealing that companies that manipulate their profits through different accounting practices are likely to pursue tactics aimed at lowering their effective tax rates This implies that firms that inflate their profits may also seek ways to diminish their tax responsibilities.
In recent years, Vietnamese scholars have increasingly examined tax avoidance, leading to numerous studies; however, there is a lack of independent research on the impact of earnings management on tax avoidance in specific industries like manufacturing Corporate income tax (CIT) plays a vital role in attracting investment and ensuring the stability of Vietnam's state budget Government policies, including CIT incentives for certain industrial zones and high-tech firms, have supported this objective Despite these favorable policies, many businesses exploit them to engage in tax avoidance, which poses significant risks to the state budget and the national economy.
This article examines how various enterprise characteristics, including size, assets, profitability, financial leverage, and audit quality, influence the tax avoidance behavior of publicly listed manufacturing companies from 2018 onward.
2022 The findings will provide valuable recommendations for tax authorities and business administrators to mitigate tax avoidance effectively
Research Objectives
This study focuses on two key research objectives: exploring the relationship between earnings management and tax avoidance practices, and assessing the level of earnings management in Vietnam's manufacturing sector in relation to corporate income tax policies during the COVID-19 pandemic To achieve these goals, the research poses critical questions about the link between earnings management and tax avoidance.
Firstly, how prevalent is earnings management among manufacturing companies in Vietnam?
Secondly, what is the association of earnings management with tax avoidance in these companies?
The subject and scope of the research
This study focuses on manufacturing companies in Vietnam, specifically within the textile, machinery, electronics, agricultural processing, and pharmaceutical sectors It utilizes quantitative data derived from the financial statements of businesses listed on the HOSE over a five-year period, from 2018 to 2022, to analyze their earnings management behaviors and tax avoidance strategies.
The methodology of the research
This article employs qualitative research methods, integrating synthesis, analysis, and evaluation to establish a theoretical framework for understanding the factors influencing tax avoidance behavior among firms in Vietnam's manufacturing sector listed on HOSE Based on this theoretical foundation, the authors propose a suitable output model for the research.
The study utilized secondary data obtained through purposive sampling from the financial statements of 145 manufacturing companies listed on the HOSE stock exchange, covering a five-year period from 2018 to 2022.
A total of 665 observations were collected to run the quantitative mode
This study employs quantitative research methods utilizing OLS, REM, and FGLS regression models, based on a research model derived from prior studies Using Stata software, the analysis conducts necessary tests to assess model suitability and examine the impact of independent variables on the dependent variable, tax avoidance, in accordance with each regression model.
The structure of the research
To develop a comprehensive paper, its structure would including the followings:
Chapter 2: Literature review and hypothesis development Chapter 3: Methodology
THEORETICAL FRAMEWORK
Earnings management
Earnings management refers to the intentional manipulation of accounting techniques to create financial statements that portray an overly favorable view of a company's financial health and performance (Ghazali, 2015) This practice takes advantage of the discretion allowed by various accounting regulations and principles, enabling management to inflate or distort results through the application of these rules.
Accrual-based earnings management involves the intentional manipulation of accounting entries, such as prematurely recognizing revenue or postponing expenses, to portray an artificial financial performance that does not reflect true economic activity (Braam et al., 2015) This practice often includes altering non-cash items on the income statement to influence reported earnings, ultimately enhancing short-term profitability for the corporation.
Accrual accounting is widely adopted in accounting systems across many countries and is recognized by Generally Accepted Accounting Principles (GAAP) for its ability to record higher income and expenses compared to cash accounting.
2017) GAAP refers to a collection of general accounting standards, principles, and procedures that are established by the Financial Accounting Standards Board (Kothari,
2019) The accrual accounting technique is selected due to its ability to fulfill the requirement for maintaining records
Accrual accounting is essential for businesses as it accurately records income and expenses in a timely manner, reflecting past, present, and future transactions This method aligns revenue with corresponding expenses, making it particularly necessary for large corporations with complex operations By recognizing revenue and expenses at the time of sales, rather than when cash is exchanged, accrual accounting provides business administrators with a clearer understanding of the true causes and outcomes of their activities Consequently, revenue and expenses are recorded in the same accounting period, offering a more precise financial picture.
Vietnam is increasingly integrating into the global economy by joining various large and small economic organizations at both global and regional levels, as highlighted by accounting experts Nguyen and Nguyen.
In 2017, research revealed that Vietnamese companies often engage in the manipulation of accruals to inflate their profits This trend is particularly evident among firms facing minimal financial challenges, highlighting a concerning practice of profitability distortion within the Vietnamese corporate landscape.
1.1.2 Real activities-based earnings management
Real activities-based earnings management involves the intentional manipulation of actual business operations to impact financial results, such as altering investment timelines, adjusting production schedules, or changing sales conditions to achieve profit targets Unlike accrual-based methods, this approach directly affects a company's operational aspects, which could jeopardize its long-term sustainability.
Vietnamese companies often struggle with corporate governance, leading to significant issues such as profit management A notable case is KSS, a mining company that experienced an 80% drop in market value and was delisted after its chairman, CEO, and chief accountant were arrested for fraudulent financial reporting in June 2015 Prior to this incident, KSS had reported favorable net income while facing negative operational cash flows for nearly ten years Additionally, in the same month, the CEO of JVC, a medical equipment distributor, faced charges for malfeasance.
(Thien, 2015) Shortly thereafter, the shareholders discovered that a substantial amount of VND400 billion (equivalent to USD20 million) in cash had mysteriously vanished
Vietnamese equities are poised to attract significant international portfolio investment in the coming years, driven by the country's growing market potential (Ellis and Vo, 2018) To capitalize on this upcoming wave of opportunities, the government is actively working to enhance market stability and liberalization Since the introduction of Circular No 123/2015/TT in 2015, which lifted restrictions on foreign ownership, Vietnam has set its sights on an MSCI market upgrade Achieving this goal requires government agencies to ensure the reliability of the financial reporting system and to build investor confidence.
The first point is to the reason behind the Capital Market According to (Dye,
Managers often manipulate accounting results to influence investor perceptions and attract investment, as consistent income patterns are believed to be more appealing to investors This practice, known as income smoothing, involves the strategic manipulation of profits Research indicates a link between management buyouts and earnings management, with evidence suggesting that managers of buyout firms typically report lower profits before the buyout DeAngelo (1988) emphasizes the critical role of earnings figures in evaluating management buyouts, proposing that managers may intentionally underreport profits to achieve their objectives.
The management of unforeseen accruals plays a significant role in earnings management, as highlighted by research from Williams and Perry (1994), which shows that organizations often control unexpected changes in depreciable capital and revenue Their findings suggest that unanticipated accruals are typically negative before a management buyout However, managers do not always underestimate profits; they may also intentionally inflate them, especially during share issuance, as noted by Teoh, Welch, and Wong.
(1998) companies tend to disclose positive surprise accruals before to their initial public offerings and seasoned stock issues
Contracting incentives play a crucial role in ensuring that parties adhere to agreed-upon terms, as outlined by Man and Wong (2013) When contract conditions are linked to a company's profits, management may engage in earnings management to meet these requirements Executive compensation is often directly related to financial performance (Nia, Huang, and Abidin, 2015), leading managers to employ strategies like "Big Bath" or "Cookie Jar Reserve" to manipulate accrual reporting, especially under bonus limitations Research by Guidry, Leone, and Rock (1999) indicates that managers may delay income recognition when they are unlikely to meet bonus targets or when they aim for maximum rewards Firms with no bonus limits tend to report accruals more accurately than those with capped bonuses (Healy, 1985) Moreover, factors beyond compensation schemes can influence management's perception of profitability Dechow and Sloan (1999) found that CEOs nearing retirement may cut R&D costs to enhance reported profits, while DeAngelo (1988) noted that current managers might manipulate profits during management control contests Ultimately, managers often leverage their profit control under Management Compensation Contracts for personal gain, such as larger bonuses and job security, though Wahlen and Healy (1999) found inconclusive evidence regarding the prevalence and impact of these practices on stock prices.
The "big bath" strategy is used by managers when they need to disclose negative news, such as losses resulting from significant restructuring (Jordan and Clark, 1998)
The concept of "big bath" refers to a strategy used by companies to enhance future earnings by intentionally worsening current financial results According to Tokuga and Yamashita (2011), this approach involves recording current expenses related to future liabilities, thereby exacerbating already poor financial outcomes Companies may face unexpected costs, such as asset write-downs or operational closures, which necessitate the establishment of restructuring reserves (Rahman, Moniruzzaman, and Sharif, 2012) These unavoidable expenses can negatively impact profits and stock values In response, firms may opt to "take a big bath" by recognizing all past liabilities at once, aiming to mitigate potential adverse effects on future profitability (Cao, Shaari, and Donnelly, 2018).
The term "cookie jar" refers to hidden financial reserves that companies do not disclose in their financial statements, often representing funds set aside for future commitments This concept likely stems from the practice of companies accessing these reserves at their convenience, akin to reaching into a cookie jar.
Cookie jar accounting is a financial strategy that involves setting aside cash reserves during profitable periods to cushion the impact of low profits in tougher times This method works by reducing reported profits through the establishment of provisions for potential losses, which can then be accessed when facing financial difficulties.
Tax avoidance
2.1.1 The impact of Earning Management on Tax Avoidance
Over the past thirty years, extensive research has been conducted to examine the impact of earnings management (EM) on tax avoidance (TA) Scholars have focused on understanding how firms manipulate their earnings to strategically reduce their tax liabilities This area of study has seen substantial growth in publications, especially in the last two decades, with significant contributions from researchers in both Asia and America.
Numerous international studies have explored the relationship between emotional management (EM) and talent acquisition (TA), revealing mixed outcomes However, a notable trend is the consistent identification of a significant positive correlation between these two factors For instance, Wang and Chen (2012) conducted research focusing on non-financial listed companies within the Chinese A-share market, highlighting this association.
Between 2004 and 2006, a Structural Equation Modeling (SEM) analysis was conducted to investigate the incentives behind tax avoidance methods related to profit management Discretionary accruals were identified as a measure of earnings management, while return on investment served as an indicator of company performance, both treated as independent variables The cash effective tax rate (ETR) was utilized as a proxy for tax avoidance, revealing a significant positive correlation between profit management and tax avoidance Additionally, corporations that engaged in higher levels of earnings manipulation, indicated by adjusted results, exhibited a higher ETR, suggesting a reduced capacity for tax avoidance.
A study by Francisco et al (2023) explored tax avoidance in Germany, the UK, France, Italy, and Spain from 2006 to 2015, employing artificial neural networks (ANN) to analyze complex data patterns This innovative methodology addressed limitations in previous research by using three distinct indicators of tax avoidance, derived from the effective tax rate (ETR) and the differences between accounting profits and taxable income (book-tax differences).
LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT
Overview of the past research
2.1.1 The impact of Earning Management on Tax Avoidance
Over the past thirty years, numerous studies have examined the impact of earnings management (EM) on tax avoidance (TA), aiming to clarify how companies manipulate earnings to reduce tax liabilities This research has led to a substantial increase in publications, especially in the last two decades, with significant contributions from scholars in both Asia and America.
Numerous international studies have explored the impact of earnings management (EM) on tax avoidance (TA), producing mixed outcomes A notable finding is the frequent observation of a significant positive relationship between these two variables For instance, Wang and Chen (2012) conducted research on non-financial listed companies within the Chinese A-share market.
Between 2004 and 2006, a study utilized Structural Equation Modeling (SEM) to explore the incentives behind tax avoidance methods related to profit management The research identified discretionary accruals as a measure of earnings management and return on investment as an indicator of company performance, treating these as independent variables The effective tax rate (ETR) served as a proxy for tax avoidance, revealing a significant positive correlation between profit management and tax avoidance Furthermore, corporations that engaged in greater earnings manipulation, as indicated by adjusted results, exhibited a higher ETR, suggesting a reduced capacity for tax avoidance.
A study by Francisco et al (2023) examined tax avoidance in Germany, the UK, France, Italy, and Spain from 2006 to 2015, utilizing artificial neural networks (ANN) to analyze complex data patterns By employing three distinct indicators of tax avoidance derived from the effective tax rate (ETR) and book-tax differences, the research identified non-linear patterns and a significant positive correlation between discretionary accruals and ETR measures This indicates that firms engaging in greater profit manipulation tend to generate more taxable income, leading to higher tax payments and lower levels of tax avoidance Interestingly, no correlation was found between earnings manipulation and book-tax differences, suggesting that these companies did not use accounting strategies to reduce tax liabilities, thus indicating that earnings manipulation did not significantly impact the gap between reported profits and actual tax payments.
A study conducted in Ghana by Amidu et al (2017) examined the connections between tax avoidance, profit management, and transfer pricing among multinational companies in both financial and non-financial sectors from 2008 to 2015 Tax avoidance was assessed by comparing the effective tax rate (ETR) with the statutory tax rate (STR) The findings revealed a positive correlation between tax avoidance and earnings management, as indicated by discretionary accruals Notably, the research indicated that non-financial companies predominantly employed profit management strategies, while those in the financial sector were more inclined to utilize transfer pricing for tax avoidance.
McCarthy (2021) similarly noted that before Ghana adopted the Income Tax Act,
A study conducted on 24 companies listed on the Ghana Stock Exchange from 2001 to 2020 revealed that earnings management positively influences tax avoidance Utilizing panel data regression, the research identified that the tax avoidance strategies of these companies were primarily driven by profit management and various macroeconomic factors Furthermore, a significant positive relationship was established between earnings management, deferred tax, and leverage in relation to tax avoidance.
Wang et al (2018) examined the impact of accrual earnings management on tax avoidance in Chinese manufacturing firms from 2011 to 2015 They utilized the discretionary accrual Modified Jones model to measure accrual earnings management and employed the Book-Tax Difference as an indicator of tax avoidance Their findings aligned with previous research, revealing that profit management significantly reduced the likelihood of tax avoidance.
Research in Indonesia indicates a significant positive relationship between tax avoidance and accrual earnings management, as highlighted by studies conducted by Geraldina (2013), Syanthi et al (2012), Surahman and Firmansyah (2017), and Purba.
In a study conducted by Purba (2018), it was found that accrual profits management significantly influences tax avoidance, as measured by the effective tax rate (ETR) This research focused on manufacturing companies listed on the Indonesia Stock Exchange during the period from 2013 to 2018.
A study by Gregova et al conducted between 2014 and 2017 on 10,627 companies from the V4 countries (Czech Republic, Hungary, Poland, and Slovakia) found a significant negative correlation between tax avoidance, as measured by tax shields, and discretionary accruals, which indicate earnings management This suggests that firms can enhance their financial performance through earnings management strategies, utilizing debt to leverage tax shields, thereby reducing tax liabilities and increasing opportunities for tax avoidance.
Research indicates a negative relationship between tax avoidance and earnings management Geraldina (2013) concluded that accrual earnings management significantly undermines tax avoidance Her study, which focused on manufacturing firms listed on the Indonesia Stock Exchange from 2001 to 2010, utilized the Surat Ketetapan Pajak Kurang Bayar (notice of tax shortfall) as a proxy for tax shelters The findings revealed that aggressive tax shelter activities were more prevalent when actual earnings management was indicated by abnormal operating cash flows and discretionary production Similarly, Guenther et al (2017) identified a harmful correlation between profit management and tax avoidance, particularly when tax aggressiveness was measured by the effective tax rate (ETR) Their analysis of US data from 1987 to 2011 reinforced the notion that superior earnings management correlates with reduced tax shelter activities, as assessed by ETR.
Syanthi et al (2012) found that manipulating accrual profits, assessed through discretionary accruals, does not have a significant impact on tax planning as measured by Current Effective Tax Rate (ETR) proxies This study focused on a sample of firms listed on the Indonesian Stock Exchange from 2006 to 2010.
Tax avoidance in Vietnam has been widely studied, yet the specific impact of earnings management on corporate income tax (CIT) avoidance, particularly in the manufacturing sector, remains underexplored While some research has addressed related topics and established benchmarks for future studies, notable work includes Bui and Nguyen's 2015 analysis of the variables influencing income adjustment practices aimed at minimizing CIT liability in Vietnam.
Between 2009 and 2013, a study of 211 firms listed on the Hanoi and Ho Chi Minh Stock Exchanges revealed that companies often manipulate profits to maximize corporate income tax (CIT) payments during periods of favorable tax legislation Conversely, businesses adjust their income downward through deferred revenue, income from construction contracts, and other provisions to minimize CIT liabilities Research by Nguyen (2018) found a positive correlation between corporate income tax avoidance and factors such as business size, growth, profitability, tangible assets, and dual board structures, while negative influences included inventories, debt, and state ownership Additionally, Nguyen et al (2021) identified that between 2013 and 2017, higher revenues increased pressure for tax compliance among Ho Chi Minh City firms, leading to potential non-compliance Companies often employed earnings management strategies, including utilizing loan capital and reporting significant prior losses, to enhance tax shields and improve the likelihood of avoiding corporate income tax payments.
H1: The earning management has an impact on the tax avoidance
2.1.2 The impact of Company size on Tax Avoidance
The size of a company, as defined by Ardiansyah (2015), is measured by the logarithm of its total assets and plays a significant role in tax avoidance strategies Larger organizations, with their more complex financial structures, have increased opportunities to exploit gaps in the tax code, leading to potential tax avoidance issues These businesses often face higher tax obligations due to their ability to generate greater profits, as noted by Sumaryati and Prawitasari (202) The political cost argument suggests that larger firms are subject to more scrutiny, resulting in higher effective tax rates and a lower likelihood of engaging in tax avoidance, as indicated by Qui et al (2010) Moreover, aggressive tax avoidance tactics can expose these companies to political risks, including regulatory changes and reputational damage, prompting them to adopt a more cautious approach to tax planning Supporting this notion, research by Putra and Jati (2018) reveals that profitability influences tax avoidance irrespective of company size Thus, the paper proposes a hypothesis based on these findings.
H2: The Company size has an impact on Tax Avoidance
2.1.3 The impact of Leverage on tax Avoidance
Research gap
Previous research has thoroughly explored the link between earnings management and tax avoidance across various global contexts However, there is a significant shortage of empirical studies focused on this relationship within the Vietnamese manufacturing sector This gap is crucial to address, as the sector functions within a unique regulatory, economic, and cultural landscape Understanding how these practices manifest in Vietnam is essential, as they may differ considerably from those observed in more developed economies due to differences in legislative frameworks, corporate governance standards, and enforcement mechanisms.
The period from 2018 to 2022 is crucial due to significant changes in Vietnamese tax legislation, particularly the 30% reduction in corporate income tax (CIT) for companies as outlined in Resolution 406/NQ-UBTVQH15 in 2021 Despite this, there is a notable lack of research examining the impact of these changes on corporate behavior, especially against the backdrop of global financial disruptions and the COVID-19 pandemic The complex interplay between earnings management and tax avoidance strategies within Vietnam's manufacturing sector remains underexplored, highlighting a critical knowledge gap in understanding how companies have adapted their financial reporting and tax planning in response to evolving economic conditions and regulatory frameworks.
Current research often overlooks sector-specific factors, such as capital intensity, BIG4 affiliation, and inventory intensity, which significantly influence the relationship between earnings management and tax avoidance This gap highlights a limitation in the literature concerning the applicability of general findings to Vietnam's manufacturing sector, known for its diversity and vital role in the national economy.
This research identifies a critical gap in understanding the impact of earnings management on tax avoidance within Vietnam's manufacturing sector, particularly during a period of significant economic and regulatory change Addressing this gap is vital for scholars looking to advance knowledge in this area, as well as for policymakers and practitioners focused on creating effective regulations and corporate governance that foster a transparent, equitable, and sustainable business landscape in Vietnam.
Research model
The paper incorporates three types of factors, as determined by the literature review and previous investigations
The dependent variable is the variable that is influenced by changes in the independent variable(s)
The second factor is the independent variable(s), also referred to as the explanatory variable This variable is believed to be the source or impact on the dependent variable
Control variables, also known as confounding or extraneous factors, are elements in a study that, while not the primary focus, can significantly influence the relationship between the independent and dependent variables.
Hence, the model of the research is:
Figure 1: Model of the impacts of Earning Management and other factors on Tax
METHODOLOGY
Data Collection
The study examines the impact of earnings management on tax avoidance in Vietnam, utilizing control variables such as the influence of the Big Four accounting firms, GDP growth, leverage, capital intensity, inventory intensity, and return on assets Researchers analyzed panel data from 145 manufacturing companies over a five-year period from 2018 to 2022, sourcing information from the reputable VietstockFinance database.
Variable description and measurements
Research indicates that tax avoidance is significantly influenced by earnings management and various control variables, including leverage, company size, return on assets, inventory intensity, inflation, GDP growth, capital intensity, and the role of Big4 firms The study identifies tax avoidance as the dependent variable, shaped by the aforementioned independent variables To analyze these effects comprehensively, the researchers employed the FGLS model using Stata software.
As authors noted above, the dependent variable was tax avoidance, defined in two ways:
• CASH_ETR: Income Taxes Paid/Pretax Income
• BTD: {[(Pretax Income×STR)–Income Taxes-Total]/Assets-Total}×(–1)
Between 2018 and 2022, our study examined 145 manufacturing enterprises in Vietnam, utilizing financial data sourced from Vietstock Finance, a provider of information on listed companies.
Earnings management serves as an independent variable in this study The authors based their analysis on existing literature, utilizing discretionary accruals (ACCRUALS) calculated through the Jones model, adjusted for Return on Assets (ROA) as outlined by Kothari et al (2005) This approach involves computing discretionary accruals annually and by industry to effectively measure earnings management.
• TACC stands for Total Accruals
• TA stands for total assets
• REV represents the difference in sales between year t-1 and year t
• AR represents the difference in accounts receivable between year t-1 and year t
• PPE refers to the total value of property, plant, and equipment
• ROALAG is the ratio of earnings before income tax to the previous year's total assets
Regarding the control variables, we provide the following measurements:
Company size, measured by the logarithm of total assets, significantly influences the effective tax rate (ETR) as highlighted by Belz, Hagen, and Steffens (2018) Their research indicates that tax planning characteristics can alter this relationship Furthermore, larger firms tend to allocate more resources to tax preparation, resulting in a negative correlation between organizational size and the use of three proposed tax avoidance strategies.
Leverage (LEV) is calculated by dividing total debt by total assets While previous studies have generally indicated a negative correlation between debt and effective tax rate (ETR), Molina and Barbera (2017) observed a positive correlation in their research focused on the European Union, likely due to recent limitations on interest deductibility.
Capital intensity (CAPINT) is a financial metric calculated by dividing the value of gross property, plant, and equipment by total assets Previous studies have identified a negative correlation between CAPINT and effective tax rate (ETR), primarily due to the tax deductibility of depreciation Our analysis anticipates this relationship.
Inventory intensity (INVINT) is calculated by dividing the value of inventories by total assets, and it is an important metric that complements CAPINT Although often overlooked, prior research has shown that INVINT can have either a positive or negative correlation with effective tax rates (ETR), as equities may not generate profits or qualify for tax deductions.
Return on Assets (ROA) is calculated by dividing earnings before income taxes by total assets A study focusing on the European Union (Veronika and Alena, 2020) found a negative correlation between ROA and Effective Tax Rate (ETR).
A study by Caballé and Panadés in 2004 revealed that government-induced inflation reduces the relative value of penalties for tax avoidance, which in turn encourages tax evasion Consequently, when monetary expansion slows down, particularly during high inflation, overall tax revenue tends to decline.
• Gross Domestic Product (GDP), which is commonly utilized in research that examine the effective tax rate (ETR) across multiple nations (Fonseca-Díaz, Fernández-Rodríguez, & Martínez-Arias, 2018)
• Big4 role, a value of 1 indicates that the company's financial statements have been audited by one of these prestigious firms.
Data analysis techniques
This study investigates the relationship between earnings management and tax avoidance in Vietnamese manufacturing companies using three regression techniques: Ordinary Least Squares (OLS), Random Effects Model (REM), and Feasible Generalized Least Squares (FGLS) Each method is chosen to address specific data characteristics and econometric challenges, thereby providing robust and reliable findings.
The study utilized Ordinary Least Squares (OLS) regression, a key linear regression technique for estimating relationships between a dependent variable and multiple independent variables (Burton, 2021) This method minimizes the sum of squared differences between observed and predicted values, delivering unbiased estimates while assuming homoscedasticity and the absence of autocorrelation in residuals.
The Random Effects Model (REM) techniques address unobserved heterogeneity among entities by treating individual-specific effects as random and uncorrelated with explanatory variables, as noted by Kíhi et al (2023) This approach can lead to more efficient estimates than those produced by fixed effects models.
The FGLS technique is utilized on the residuals from the REM to address heteroscedasticity and autocorrelation (Bai et al., 2020) By incorporating the estimated variance-covariance structure from REM, FGLS re-estimates the coefficients, effectively correcting for these issues and resulting in more efficient and reliable parameter estimates.
Utilizing OLS, REM, and FGLS regression techniques, we conduct a thorough analysis of how earnings management influences tax avoidance in Vietnam's manufacturing sector Each regression method tackles distinct econometric issues, enhancing the robustness and validity of our results.
FINDINGS
Variable Obs Mean Std dev Min Max cash_etr 665 0.1919679 0.1634931 0 1 btd 664 -
0.0014035 0.0313141 -0.464088 0.482281 em 659 312.6589 675.3495 0.4125155 7606.064 size 664 7.31003 1.490536 2.484907 11.29325 lev 664 0.8807011 1.364032 0.015168 10.92308 capint 662 0.2133924 0.1577976 0.000974 0.766431 invint 660 0.2210088 0.1656089 0.000262 0.767744 roa 664 0.0804349 0.0900639 -0.289441 0.475569 growth 665 0.0568 0.0240464 0.026 0.08 inf 665 0.029 0.0059374 0.018 0.035 big4 665 0.406015 0.491457 0 1
Table 4.2 Correlation between variables cash_etr btd em size lev capint invint roa growth inf big4 cash_etr 1.0000 btd 0.0762 1.0000 em -0.0078 -0.0137 1.0000 size 0.0218 -0.0293 0.3228 1.0000 lev -0.0714 0.0751 0.0041 0.0505 1.0000 capint -0.0374 -0.0060 0.0985 0.1194 0.0433 1.0000 invint 0.1373 0.0068 0.0338 0.0829 -0.0569 -0.2514 1.0000 roa -0.0868 -0.1483 -0.0075 0.1048 0.1140 -0.0542 -0.0165 1.0000 growth 0.0556 0.0311 0.0228 -0.0134 -0.0050 0.0137 0.0186 0.0238 1.0000 inf 0.0640 0.0131 0.0253 -0.0272 -0.0121 0.0399 -0.0135 0.0080 0.5850 1.0000 big4 -0.0978 -0.0240 0.2670 0.3019 -0.0018 0.1119 0.0122 0.0777 0.0000 -0.0000 1.0000
Table 4.1 reveals that approximately 650 observations were collected for each variable, as some firms have not reported data for multiple years Table 4.2 indicates that most correlation coefficients are below 0.9, with the highest correlation of 0.585 observed between the inflation rate and GDP growth rate Consequently, the data confirms that all variables are distinct from one another and reflect their unique characteristics in the research.
Ordinary Least Squares (OLS) regression model is used to evaluate relationships between the dependent and independent variables
Table 4.3 OLS regression (Cash_ETR)
Coefficient P>|t| [95% conf interval] em -8.58e-07 0.885 -0.0000125 0.0000108 size 0.0058233 0.161 -0.0023274 0.0139739 lev -0.0071306 0.006 -0.0121911 -0.00207 capint -0.0088996 0.843 -0.0971645 0.0793653 invint 0.1231969 0.005 0.0371417 0.209252 roa -0.1341453 0.117 -0.3020641 0.0337735 growth 0.1707284 0.626 -0.5165288 0.8579857 inf 1.219307 0.325 -1.210937 3.64955 big4 -0.034689 0.003 -0.0573254 -0.0120526
The results of OLS regression (CASH_ETR) (Appendix 2) show that P-value is 0.0001, which is less than 0.05, and R-squared is 0.0436 These lead to the following result shown in Table 4.3
• About Earning management, when P>|t| = 0.885 > 0.05 and coefficient is negative, the relationship between Earning management and Tax avoidance (CASH_ETR) is negative and not significant
• About Company size, when P>|t| = 0.161 > 0.05 and coefficient is positive, the relationship between Company size and Tax avoidance (CASH_ETR) is positive and not significant
• About Leverage, when P>|t| = 0.006 < 0.05 and coefficient is negative, the relationship between Leverage and Tax avoidance (CASH_ETR) is negative and significant
• About Capital intensity, when P>|t| = 0.843 > 0.05 and coefficient is negative, the relationship between Capital intensity and Tax avoidance (CASH_ETR) is negative and not significant
• About Inventory intensity, when P>|t| = 0.005 < 0.05 and coefficient is positive, the relationship between Inventory intensity and Tax avoidance (CASH_ETR) is positive and significant
• About ROA, when P>|t| = 0.117 > 0.05 and coefficient is negative, the relationship between ROA and Tax avoidance (CASH_ETR) is negative and not significant
• About GDP growth, when P>|t| = 0.626 > 0.05 and coefficient is positive, the relationship between GDP growth and Tax avoidance (CASH_ETR) is positive and not significant
• About Inflation, when P>|t| = 0.325 > 0.05 and coefficient is positive, the relationship between Inflation and Tax avoidance (CASH_ETR) is positive and not significant
• About Big 4 audit, when P>|t| = 0.003 < 0.05 and coefficient is negative, the relationship between Big 4 audit and Tax avoidance (CASH_ETR) is negative and significant
BTD Coefficient P>t [95% conf interval] em -4.55e-07 0.850 -5.16e-06 4.25e-06 size -0.000286 0.780 -0.0022992 0.0017271 lev 0.002162 0.558 -0.0050783 0.0094024 capint -0.0034342 0.627 -0.0172924 0.0104239 invint 0.0011193 0.876 -0.0129503 0.0151888 roa -0.054788 0.000 -0.0821198 -0.0274561 growth 0.0526561 0.292 -0.0453775 0.1506896 inf -0.045516 0.658 -0.2475374 0.1565053 big4 -0.0002695 0.896 -0.0043074 0.0037684
The results of OLS regression (BTD) (Appendix 2) show that P-value is 0.0070, which is less than 0.05, and R-squared is 0.0320 These lead to the following result shown in Table 4.4:
• About Earning management, when P>|t| = 0.850 > 0.05 and coefficient is negative, the relationship between Earning management and Tax avoidance (BTD) is negative and not significant
• About Company size, when P>|t| = 0.558 > 0.05 and coefficient is negative, the relationship between Company size and Tax avoidance (BTD) is negative and not significant
• About Leverage, when P>|t| = 0.558 > 0.05 and coefficient is positive, the relationship between Leverage and Tax avoidance is (BTD) positive and not significant
• About Capital intensity, when P>|t| = 0.627 > 0.05 and coefficient is negative, the relationship between Capital intensity and Tax avoidance (BTD) is negative and not significant
• About Inventory intensity, when P>|t| = 0.876 > 0.05 and coefficient is positive, the relationship between Inventory intensity and Tax avoidance (BTD) is positive and not significant
• About ROA, when P>|t| = 0.000 < 0.05 and coefficient is negative, the relationship between ROA and Tax avoidance (BTD) is negative and significant
• About GDP growth, when P>|t| = 0.292 > 0.05 and coefficient is positive, the relationship between GDP growth and Tax avoidance (BTD) is positive and not significant
• About Inflation, when P>|t| = 0.658 > 0.05 and coefficient is negative, the relationship between Inflation and Tax avoidance (BTD) is negative and not significant
• About Big 4 audit, when P>|t| = 0.896 > 0.05 and coefficient is negative, the relationship between Big 4 audit and Tax avoidance (BTD) is negative and not significant
Table 4.5 VIF Variable VIF 1/VIF inf 1.52 0.659986 growth 1.51 0.661460 size 1.22 0.821998 em 1.17 0.858367 big4 1.15 0.870063 capint 1.11 0.901113 invint 1.09 0.917690 roa 1.04 0.961641 lev 1.02 0.979306
Researchers used the VIF coefficient to calculate collinearity Table 4.5 demonstrates that all VIF values are less than 3, indicating that the data of all variables are not biased
The analysis of Heteroskedasticity in the OLS models for CASH_ETR and BTD reveals P-values of 0.0015 and 0.0000, both below the 0.05 threshold, confirming the presence of Heteroskedasticity Consequently, the use of the OLS regression model is deemed unsuitable for this study.
The study employs the FEM and REM models to examine the relationships among the variables, while the Hausman test is utilized to determine the most suitable model for analysis.
Table 4.6 Selection of panel data regre
Estimated panel models CASH_ETR BTD
REM: Bruesch and Pagan Lagrangian multiplier test
Chi-bar square statistic p-value
Chi-bar square statistic p-value
According to Table 4.6, in terms of CASH_ETR and BTD, the most optimal model for both of them is REM model
Table 4.7 Checking the chosen model for
First-order Autocorrelation (Wooldridge test)
Heteroskedasticity (Bruesch and Pagan Lagrangian multiplier test)
Chi-bar square statistic p-value
Using the Wooldridge test, Table 4.7 shows that the REM model of
The analysis reveals that CASH_ETR exhibits a p-value less than 0.05, signifying the presence of first-order autocorrelation In contrast, BTD shows a p-value greater than 0.05, indicating the absence of first-order autocorrelation.
Using the Modified Wald test, Table 4.7 shows that the REM model of
CASH_ETR has p-value which is smaller than 0.05, indicating that Heteroskedasticity exists Meanwhile, the p-value for BTD is higher than 0.05, which means that
Finally, to address the limitations of the previous models, FGLS regressions is used for both cases
Table 4.8 FGLS regression (CASH_ETR)
CASH_ETR Coefficient P>z [95% conf interval] em -0.0000176 0.000 -0.0000209 -.0000142 size 0.0329207 0.000 0.0326614 0.03318 lev -0.0246302 0.000 -0.0264284 -0.0228321 capint 0.4042387 0.000 0.3990259 0.4094515 invint -0.0013453 0.011 -0.0023873 -0.0003033 roa -0.1153171 0.000 -0.1240984 -0.1065358 growth -0.0552835 0.000 -0.0565176 -0.0540495 inf -0.2351788 0.000 -0.2461837 -0.2241739 big4 -0.0892052 0.000 -0.0933782 -0.0850322
The results of FGLS regression (CASH_ETR) (Appendix 6) show that P-value is 0.0000, which is less than 0.05 This led to the following result shown in Table 4.8:
• About Earning management, when P>|t| = 0.000 < 0.05 and coefficient is negative, the relationship between Earning management and Tax avoidance (CASH_ETR) is negative and significant
• About Company size, when P>|t| = 0.000 < 0.05 and coefficient is positive, the relationship between Company size and Tax avoidance (CASH_ETR) is positive and significant
• About Leverage, when P>|t| = 0.000 < 0.05 and coefficient is negative, the relationship between Leverage and Tax avoidance is (CASH_ETR) negative and significant
• About Capital intensity, when P>|t| = 0.000 < 0.05 and coefficient is positive, the relationship between Capital intensity and Tax avoidance (CASH_ETR) is positive and significant
• About Inventory intensity, when P>|t| = 0.011 < 0.05 and coefficient is negative, the relationship between Inventory intensity and Tax avoidance (CASH_ETR) is negative and significant
• About ROA, when P>|t| = 0.000 < 0.05 and coefficient is negative, the relationship between ROA and Tax avoidance (CASH_ETR) is negative and significant
• About GDP growth, when P>|t| = 0.000 < 0.05 and coefficient is negative, the relationship between GDP growth and Tax avoidance (CASH_ETR) is negative and significant
• About Inflation, when P>|t| = 0.000 < 0.05 and coefficient is negative, the relationship between Inflation and Tax avoidance (CASH_ETR) is negative and significant
• About Big 4 audit, when P>|t| = 0.000 < 0.05 and coefficient is negative, the relationship between Big 4 audit and Tax avoidance (CASH_ETR) is negative and significant
BTD Coefficient P>z [95% conf interval] em -4.55e-07 0.813 -4.23e-06 3.32e-06 size -0.000286 0.749 -.0020383 0014662 lev 0.002162 0.016 0004104 0039137 capint -0.0034342 0.670 -.0192485 01238 invint 0.0011193 0.883 -.0138174 0160559 roa -0.054788 0.000 -.0814895 -.0280864 growth 0.0526561 0.393 -.068271 1735831 inf -0.045516 0.856 -.5369699 4459378 big4 -0.0002695 0.918 -.0054271 0048881
The results of FGLS regression (BTD) (Appendix 6) show that P-value is
0.0099, which is less than 0.05 This led to the following result shown in Table 4.9:
• About Earning management, when P>|t| = 0.813 > 0.05 and coefficient is negative, the relationship between Earning management and Tax avoidance (BTD) is negative and not significant
• About Company size, when P>|t| = 0.749 > 0.05 and coefficient is negative, the relationship between Company size and Tax avoidance (BTD) is negative and not significant
• About Leverage, when P>|t| = 0.016 < 0.05 and coefficient is positive, the relationship between Leverage and Tax avoidance is (BTD) positive and significant
• About Capital intensity, when P>|t| = 0.670 > 0.05 and coefficient is negative, the relationship between Capital intensity and Tax avoidance (BTD) is negative and not significant
• About Inventory intensity, when P>|t| = 0.883 > 0.05 and coefficient is positive, the relationship between Inventory intensity and Tax avoidance (BTD) is positive and not significant
• About ROA, when P>|t| = 0.000 < 0.05 and coefficient is negative, the relationship between ROA and Tax avoidance (BTD) is negative and significant
• About GDP growth, when P>|t| = 0.393 > 0.05 and coefficient is positive, the relationship between GDP growth and Tax avoidance (BTD) is positive and not significant
• About Inflation, when P>|t| = 0.856 > 0.05 and coefficient is negative, the relationship between Inflation and Tax avoidance (BTD) is negative and not significant
• About Big 4 audit, when P>|t| = 0.918 > 0.05 and coefficient is negative, the relationship between Big 4 audit and Tax avoidance (BTD) is negative and not significant.
DISCUSSION
The impacts of Earnings Management on Tax Avoidance
The FGLS regression model results reveal a statistically significant negative impact of earnings management on tax avoidance when assessed through the cash effective tax rate Conversely, no significant relationship is found between earnings management and tax avoidance when evaluated using the book tax difference.
The impact of earning management on tax avoidnae, as evaluated by CASH_ETR, is evident in the negative and statistically significant coefficient (-0.0000176) for the
The relationship between earnings management (EM) and cash effective tax rate (CASH_ETR) indicates that companies engaging in aggressive financial statement manipulation often experience lower tax rates on actual cash flows, reflecting a higher degree of tax avoidance Research by Owusu et al (2023) supports this, analyzing 1,095 studies from 1992 to 2022 through bibliometric methodologies Their findings suggest that, according to agency theory, managers implement tax avoidance strategies alongside environmental management practices to boost organizational value, aligning with long-term business objectives Thus, it can be inferred that increased levels of earnings management correlate with reduced tax burdens relative to pre-tax income.
EM are linked to an escalation in corporate tax dodging This conclusion is supported by prior studies conducted by Dyreng et al (2008), Geraldina (2013), and Guenther et al (2017)
The negative coefficient observed on the earnings management (EM) variable for CASH_ETR (Income Taxes Paid/Pretax Income) suggests that companies practicing higher earnings management tend to report a lower ratio of cash taxes relative to pretax income In response to the COVID-19 pandemic, the Vietnamese government introduced a tax relief package in 2021, which included a significant 30% reduction in taxes (Clause 1, Article 1, Resolution 406/NQ-UBTVQH15).
The temporary tax reduction strategy has likely contributed to lower cash effective tax rates for corporations employing aggressive profit management techniques Even companies that did not engage in explicit tax avoidance tactics benefited from the tax relief policy, resulting in decreased cash tax payments and a reduced CASH_ETR.
The inverse relationship between earnings management and CASH_ETR is not necessarily a result of companies intentionally using earnings management to avoid taxes Instead, changes in tax policy during the pandemic may have significantly reduced the cash taxes paid by these firms, regardless of any earnings manipulation efforts.
Evaluating the impact of the tax relief policy is essential, as it introduces a variable that may affect the relationship between earnings management and tax avoidance, as measured by CASH_ETR The negative correlation observed in the EM variable for CASH_ETR could be influenced by this temporary tax reduction, rather than solely reflecting corporations' deliberate use of earnings management to minimize tax liabilities.
The p-value reveals no significant relationship between Earnings Management and Tax Avoidance as measured by Book-Tax Discrepancy (BTD) Supporting previous research, Kałdoński and Jewartowski (2020) found no correlation between accruals earnings management and tax avoidance in a high book-tax conformity context, suggesting that companies may not prioritize tax considerations when employing earnings management Additionally, a study conducted across Germany, the United Kingdom, France, Italy, and Spain from 2006 to 2015, analyzed the effect of discretionary accruals on BTD using artificial neural network regressions Delgado et al (2023) concluded that discretionary accruals do not significantly impact BTD, indicating that companies are not manipulating taxes to lower their tax liabilities, and thus, the relationship between earnings management and tax avoidance remains statistically insignificant.
The pandemic's tax relief program, which led to a 30% tax reduction, may have altered the relationship between earnings management and book-tax differences (BTD) This temporary tax cut likely narrowed the gap between taxable income and reported book income for companies engaged in earnings manipulation, as lower taxable income aligned more closely with reported figures Consequently, the incentive for aggressive profit manipulation may have diminished, explaining the observed lack of correlation with BTD Many companies might have found the tax benefits sufficient without resorting to overly aggressive financial strategies.
The BTD measure may not accurately reflect the true extent of tax avoidance methods during this period, as changes in tax policy could have artificially reduced the book-tax difference, regardless of the companies' earnings management strategies.
The impact of Company size on the tax avoidance
Research shows that business size significantly influences Effective Tax Rates (ETR) but not Book-Tax Differences (BTD), aligning with Delgado et al.'s 2023 study This aligns with political cost theory, which posits that larger firms face higher ETRs and are less likely to engage in tax avoidance due to increased scrutiny and visibility Larger corporations risk political backlash, including regulatory changes and reputational damage, if perceived as using aggressive tax strategies Consequently, the potential costs of negative attention often outweigh the benefits of tax savings, prompting larger businesses to adopt more conservative tax planning approaches.
The impact of Leverage on Tax Avoidance
The analysis reveals a negative relationship between leverage (LEV) and cash effective tax rate (CASH_ETR), with a coefficient of -0.0246, suggesting that companies with higher debt levels tend to make fewer cash tax payments relative to their pre-tax income In contrast, leverage shows a positive relationship with book-tax differences (BTD), indicated by a coefficient of 0.00216, which suggests that these companies exhibit larger discrepancies between their book and tax records Such discrepancies may indicate a heightened effort to minimize tax liabilities.
The inverse relationship between leverage and CASH_ETR indicates that companies with high debt levels are likely to engage in tax avoidance strategies to protect their cash flows and reduce tax liabilities, aligning with the trade-off theory By minimizing cash outflows for taxes, these firms can improve their financial flexibility and ability to service debt.
A positive coefficient for BTD suggests that companies with higher debt levels are more likely to engage in tax planning strategies that create differences between their accounting income and taxable income These discrepancies can arise from various tax avoidance tactics, such as aggressive deductions, the use of tax credits or incentives, and income shifting schemes.
The research by Devereux et al (2018) reveals that corporate income taxes positively influence companies' capital structure, particularly regarding leverage By analyzing confidential tax returns from numerous UK corporations, the study shows that higher corporation tax rates lead to increased debt levels among firms This relationship stems from the ability of companies to enhance their leverage to take advantage of the tax-deductibility of interest expenses As firms issue more debt, they can reduce their overall tax liability by deducting interest payments from taxable income, thereby incentivizing increased leverage in response to higher marginal tax rates.
The impact of Capital Intensity on Tax Avoidance
Higher capital intensity requires considerable investments in fixed assets, enabling companies to benefit from substantial tax deductions and depreciation allowances These financial advantages can effectively reduce a company's taxable income and lower its overall tax liability.
In the manufacturing sector, capital intensity shows a significant positive effect on effective tax rates (ETR), with a coefficient of 0.404 This indicates that the current strategies may not be as efficient as expected, as the tax deductions and incentives linked to fixed assets might not be as substantial or accessible While these tax benefits can reduce taxable income in the short term, they may not guarantee long-term savings, as future increases in taxable income could offset these deductions, leading to higher cash tax payments over time.
The temporary tax cut of up to 30% may have diminished the effectiveness of tax incentives designed to encourage capital expenditures in the manufacturing sector As a result, companies might have felt less motivated to pursue aggressive tax planning strategies related to their fixed assets, since the overall tax advantages from these tactics could have been less significant due to the broader tax relief policy in place.
The impact of Inventory Intensity on Tax Avoidance
The analysis indicates a negative correlation between inventory intensity (INVINT) and cash effective tax rate (CASH_ETR) of -0.00135, supporting the hypothesis that manufacturing firms with higher inventory levels generally experience lower CASH_ETR This suggests that effective inventory management can help these companies reduce their cash tax liabilities, aligning with findings from previous research by Delgao et al (2023) and Nugrahadi and Rilnadi (2020).
During the Covid-19 outbreak in Vietnam's industrial industry, there was a rise in inventory In response, the Government chose to decrease the Corporate Income Tax
(CIT) by up to 30% as a result of the pandemic The average inventory turnover rate of Vietnam's manufacturing industry for the period 2019-2022 was as follows:
Figure 2: The average inventory rate of Vietnam’s manufacturing industry from 2019-2022
During the COVID-19 pandemic, many manufacturing companies faced supply chain disruptions and shifts in demand, leading them to accumulate larger inventories to mitigate potential shortages or prepare for increased demand This rise in inventory levels can lead to higher carrying costs and reduced profitability, ultimately affecting the companies' tax liabilities and cash tax payments Consequently, this situation has resulted in an increased inventory intensity ratio.
The simultaneous rise in inventory levels and reduction in corporate income tax rates could exacerbate the negative impact on CASH_ETR Manufacturing companies with elevated inventory levels may experience a more significant decline in their effective tax rates due to temporary tax relief measures This situation arises as their overall profitability and taxable income may decrease due to the heightened costs associated with maintaining inventory.
The impact of Return on Asset on Tax Avoidance
Our analysis reveals that return on assets (ROA) negatively impacts both CASH-ETR and BTD, with coefficients of -0.115 and -0.0548, aligning with the findings of Fonseca-Díaz et al (2019) Unlike most prior studies, we observe a discrepancy in the ETR-ROA relationship Konečná and Andrejovská (2020) also found that ROA adversely affects ETR in their analysis of the European Union from 2008 to 2016 This suggests that more profitable enterprises with lower tax administration costs can allocate additional resources to tax planning, thereby reducing their ETR, a conclusion that our findings corroborate.
A study conducted in 2018 on European and American datasets revealed that an increase in Return on Assets (ROA) was consistently linked to heightened tax avoidance efforts, leading to a reduced Effective Tax Rate (ETR) This highlights a nuanced relationship between profitability and the strategies employed for tax management across different contexts.
The impact of GDP growth on Tax Avoidance
The research indicates a negative correlation between GDP growth and the effective tax rate (ETR), highlighted by a coefficient of -0.0553 In times of robust economic expansion, companies are likely to invest more and expand operations, leading to increased deductible expenses that can lower their effective tax rates Conversely, during slower growth periods, businesses may cut back on operational spending, which could cause a rise in the effective tax rate as deductible expenses diminish.
The impact of Inflation on Tax Avoidance
The inflation rate has a negative impact on the measure of CIT, with a coefficient of -0.235, suggesting that higher inflation leads to a decrease in taxable income This occurs because rising inflation increases the costs associated with goods sold (COGS) and operational expenses, which can be deducted from taxable income Consequently, as these expenses rise, the effective tax rate may decline.
The impact of Big4 role on Tax Avoidance
The Big4 accounting firms play a crucial role in the auditing process, evidenced by a negative correlation coefficient of -0.0892 This suggests that companies audited by these firms tend to exhibit a higher compliance level with tax laws and regulations By employing rigorous auditing standards, the Big4 enable businesses to benefit from legitimate tax planning strategies, which are thoroughly assessed by reputable auditors This advantage is particularly significant as companies effectively utilize the government's ongoing policy of reducing corporate income tax (CIT) during the pandemic, leading to substantial reductions in CIT for industrial businesses.