The Effect of Tax Avoidance on the Financial Performance of Listed Companies at the Nairobi Securities Exchange

Abstract

The revenue authorities world over have continued to show keen interest in firms listed at the stock exchanges due to the complexity of their operations and the tendency for them to come up with complex tax avoidance mechanisms. This has also been complicated by the transfer pricing models adopted by multinational companies. Tax avoidance may be motivated by a number of factors but the consequences of such actions can either be positive or negative This study is therefore motivated by the importance to not only understand the tax avoidance strategies but to also link tax avoidance to the financial performance of these companies. The objective of the study was to establish the effect of tax avoidance on financial performance of firms listed at the Nairobi Securities Exchange (NSE). Descriptive research design was used in the study .The population of interest in the study consisted of all the 61 listed at the NSE. The data comprised of the size, institutional shareholding government shareholding, age, and intangible assets of the firms. The results show that tax avoidance positively impacts on the financial performance of the companies. Further, Size of the company has a positively contribute to company’s profitability, Leverage ratio has a negative impact on the financial performance of the companies, Age of the firm has a positive influence on the performance and there exists a positive relationship between intangible assets and the financial performance of companies. Though tax avoidance has positive impact on the financial performance of the companies, it is not always in the best interest of both the companies and the statutory authority. Companies which fail to remit tax face the risk of tax penalty and even receivership. Central government loses revenue through tax avoidance and this negatively impact on the economic growth of the country. Therefore companies should be aggressive in improving their financial performance. In the event that companies are reporting financial losses which are largely attributed to tax burden, they should negotiate with the tax authority to be offered tax incentives. While this study focuses on the companies listed at the NSE, the study suggests that similar studies should be done on other firms/companies that are not listed in the NSE. This might help the tax authority in increasing the revenue collection to the central government