The Relationship Between Ownership Structure and Tax Avoidance of Companies Listed at the Nairobi Securities Exchange

Abstract

Taxes are a significant cost to a firm. Therefore, tax avoidance is beneficial to shareholders (Chen, Chen, Cheng and Shevlin 2010). However, in state owned enterprises (SOEs), taxes are an implicit dividend to the controlling shareholder. Thus, less tax avoidance actually benefits the controlling shareholder. Ownership structure may therefore affect the level of tax avoidance. Further, a recent report by the KRA claims that most of the multinational firms in Kenya, some of which are listed at the NSE, collude with the large accounting firms in Kenya to avoid paying some taxes (Irungu, 2013). Thus, tax avoidance is a subject of interest for this study given the claims by the KRA. This study examined whether variation in firms’ corporate governance mechanisms, more specifically the ownership structure, explains differences in their level of tax avoidance in Kenya. The study aimed at establishing the relationship between ownership structure and tax avoidance of companies listed at the Nairobi Securities Exchange. In order to do this, the research was designed as a descriptive study where relationships were tested. The population comprised of all the 61 companies listed at the NSE. All the 61 listed firms formed the sample of the population. Secondary data collected from the NSE Secretariat, respective company websites and the Africa Financials website was used in the study. Data was then analysed using descriptive analysis and regression analysis. The findings of the study are that ownership structure does not significantly influence tax avoidance as the effects of state ownership, foreign ownership and institutional ownership on tax avoidance were insignificant at 5% level. On the other hand, ROA positively influences tax avoidance while Tobin q and previous year’s loss has a negative influence on tax avoidance. The model accounts for 13% of the variance in tax avoidance and it was fit to explain the relationship between ownership structure and tax avoidance. The study makes a number of recommendations for both policy and practice. The study recommends that in terms of policy, ownership structure is irrelevant in explaining tax avoidance and therefore it should not be considered by policy makers in the quest to reduce instances of tax avoidance. Instead, policy makers should focus on the financial performance of firms as the best indicator of tax avoidance. From the results, firms that had higher ROAs were likely to record higher effective tax rates. Lastly, the results of the study also have important implications to listed firms and any other companies in Kenya that pay corporate taxes. In their quest to pay lower effective tax rates, they should understand that their ownership structure is irrelevant and therefore concentrate on legal avenues to manage their tax burdens.