The Effect of Corporate Tax Planning on the Financial Performance of Listed Companies in Kenya

Abstract

According to Ogundajo and Onakoya (2016), the tax liability of a firm is positively linked to the firm’s profitability. The achievement of wealth maximization goal of the firm through the many ways of increasing profitability worsens the ability of the firm to pay high taxes leading to the reduction of its tax liability. They further noted that though tax planning has positive impact on organization cash flow, it can have negative effects on the economy since the government is unable to collect enough taxes. These negative effects on the economy will translate to reduced financial performance of firms. The aim of this study was to ascertain the effect of corporate tax planning on financial performance of listed companies in Kenya. The population for the study was all the 64 companies listed in Kenya. The independent variables for the study were tax planning as measured by current income tax expense divided by profit before tax, liquidity as measured by current ratio, firm size as measured by natural logarithm of total assets and leverage as measured by long term debt divided by (shareholders equity + long term debt). Financial performance was the dependent variable and was measured by Return on Assets (ROA). Secondary data was collected for a period of 5 years (January 2012 to December 2016) on an annual basis. The study employed a descriptive cross-sectional research design and a multiple linear regression model was used to analyze the relationship between the variables. Data analysis was undertaken using the statistical package for social sciences. The results of the study produced R-square value of 0.175 which means that about 17.5 percent of the variation in financial performance of listed companies in Kenya can be explained by the four selected independent variables while 82.5 percent in the variation of financial performance was associated with other factors not covered in this research. The study also found that the independent variables had a weak correlation with financial performance (R=0.418). ANOVA results show that the F statistic was significant at 5% level with a p=0.000. Therefore the model was fit to explain the relationship between the selected variables. The results further revealed that corporate tax planning and liquidity produced positive and statistically significant values for this study. Leverage produced negative but statistically significant values while firm size was found to be a statistically insignificant determinant of financial performance of listed companies in Kenya. This study recommends adequate measures to be put in place by managers of listed firms to improve and grow their financial performance through corporate tax planning. Listed firms and all firms in general should practice corporate tax planning that will lead to an increase in financial performance because this translates to improved shareholder wealth which is the main goal of a firm.