Defying the tone at the top : an analysis on the effects of board characteristics on the level of tax avoidance across Philippine publicly listed firms

Abstract:

Over the years, the growing culture of tax avoidance among multinational companies around the world has shed light on the importance of improving corporate governance mechanisms. In the Philippines, poor tax collection due to tax leakages has contributed to chronic fiscal deficits in the country. The literature argues that good corporate governance mechanisms (e.g., the structure of the board of directors) play a significant role in ensuring that the management acts in the best interest of the firm and shareholders, thus eventually helping to mitigate the incidences of corporate tax avoidance. Specifically, agency theory argues that the presence of more independent- and female-dominated boards lead to lesser corporate tax avoidance because such directors are stricter in monitoring management. On the other hand, the resource dependency theory posits that firms with boards having more independent, older, and business-educated directors are more likely to engage in tax avoidance because such directors have the experience, expertise, and know how to engage in tax avoidance strategies. This paper examines the impact of various board characteristics on the incidence of tax avoidance across non-financial and publicly-traded Philippine firms during the period 2013-2015. We use the residual book-tax gap, the cash-effective tax rate, and the long run effective tax rate to measure corporate tax avoidance, whereas board characteristics include board size, board age, board independence, CEO-Chair duality, gender diversity, and the educational background of directors. We employ the two-step Blundell-Bond System Generalized Method of Moments (GMM) estimation technique to address endogeniety issues that may confound the relationship between board composition and structure and the level of of tax avoidance within the firm. Overall, we find no significant relationship between board characteristics and tax avoidance, as measured by the long-term cash effective tax rates. However, consistent with the agency and resource dependency theories, we find that board age is positively related with corporate tax avoidance, as measured by the residual book-tax gap, whereas board independence and proportion of board members with post-graduate degrees in Business and Economics have a negative and positive relationship, respectively, when corporate tax avoidance is proxied by the cash effective tax rate. These findings suggest that the case for increasing the number of independent directors and reducing the number of older directors in boards of Philippine publicly listed firms may help reduce incidences of corporate tax avoidance.