Corporate tax aggressiveness is an ongoing practice in several corporations both in Nigeria and globally. The unsettled area in the literature is the debate regarding what the determinants of tax aggressiveness are and what factors precipitate the practice of tax aggressiveness by quoted companies in Nigeria. The aim of the study is to examine the impact of corporate governance on tax aggressiveness in listed nonfinancial firms in Nigeria. The specific objectives were to examine the effect of board independence, board size, board gender diversity, board Ownership, CEO age, CEO tenure and CEO ownership on tax aggressiveness. Secondary data gotten from annual reports and accounts of the sampled companies in Nigeria from 2005-2009 were used. A sample size of 80 non-financial firms purposively selected was used for the study. The longitudinal research design was used in the study. Panel and threshold regression were used for the analysis. The findings of the study revealed that an increase in the number of independent directors on the board results in an increase in tax aggressive practices. An increase in the board size resulted in an increase in tax aggressiveness. Also, an increase in the board gender diversity implies less tax aggressiveness activity, though, the outcome is not significant at 5%. An increase in the level of board equity ownership resulted in an increase in tax aggressive practices. The presence of older CEO’s resulted in less tax aggressiveness activity. CEO tenure has a negative impact though not significant at 5%. Finally, an increase in CEO ownership results in an increase in tax aggressiveness. The study concludes that corporate governance is instrumental in influencing tax aggressiveness in quoted companies in Nigeria. Hence, variables like the board independence, board size, boar gender diversity ownership structure and CEO characteristics can define the extent to which firms become tax aggressive. Based on this study, the following are the recommendations for corporate governance in non-financial firms. First, that increasing the number of independent directors is not sufficient to curtail tax aggressiveness. This may be so especially when aggressive tax strategies represent a firm's value maximizing activity. There will be the need to rely largely on the role of external auditors. Second, there is the need for boards to include representatives of tax authorities who will protect the interest of the tax authorities. The study contributes to knowledge by shedding light on the extent to which firm level governance can impact on tax aggressiveness.

CHAPTER ONE: INTRODUCTION

1.1       Background to the Study

Tax aggressiveness, from its origin as a practice associated with large multinational firms seeking avenue for profit repatriation has now grown into a strategic cost saving approach employed by corporations of all shapes and sizes globally, and no country appears to be immune   from its growing practice. Taxes represent a significant cost to the firm and its shareholders and, as a result, a reduction in the cash flow available to them. Therefore, it is generally accepted that shareholders prefer tax aggressive activities in an effort to increase not only after-tax earnings per share but also the cash available for shareholders. 
Slemrod (2004) and Frank, Lynch and Rego (2009) defined tax aggressiveness as tax planning that consists of a great variety of transactions with the aim of reducing taxable income and a subset of tax avoidance activities more generally, which may or may not violate income tax law. According to Chen, Chen, Cheng and Shevlin (2008), tax aggressiveness is a downward management of taxable income through tax planning with respect to reducing the tax paid to tax authorities. Furthermore, in the view of Khurana and Moser, (2013), tax aggressiveness refers to all those activities that are designed solely to minimize corporate tax obligations which legality may be under doubt, including; (i) tax evasion, which can be defined as intentional illegal behaviours such as a direct violation of tax laws in order to escape payment of taxes, (ii) tax avoidance which can be defined as all 'illegitimate' but not necessarily illegal behaviours in order to reduce tax liabilities and (iii) legitimate saving of taxes which can be defined as commonly accepted forms of behaviours which are neither against the law nor the spirit of the law. 
The link between corporate governance and tax aggressiveness is the focal point of this study. By way of definition, the Organization for Economic Cooperation and Development (OECD, 2006) opined that corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation such as the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. 
An emerging paradigm that emphasizes the link between firms' corporate governance mechanisms and their responses to taxes arose from this strand of literature (Desai & Dharmapala, 2009; Desai, Dyck & Zingales, 2007; Desai, Dharmapala & Fung, 2007) which pointed out that corporate governance plays an important role in affecting firms' responses to changes in corporate tax rates. The studies found out that the underlying governance arrangements constitutes the major driver for tax aggressive behaviour of management. Those studies argued that when governance is weak, tax aggressiveness will tend to occur but will be reduced if governance is strong. 
In addition, the link between corporate governance and tax aggressiveness was hypothesized by two key perspectives. Firstly, in terms of the traditional view, aggressive tax strategies represent a firm's value maximizing activity as it entails a wealth transfer from the government to the shareholders of a firm (Khurana & Moser, 2013). Therefore, shareholder value should increase with the efficacy of corporate tax strategies as so long as the expected marginal benefit exceeds marginal cost (Desai & Dharmapala, 2009). Thus, in this regard, tax aggressiveness activity will be allowable by corporate governance because it results in shareholder wealth maximization. On the other hand, from the perspective of agency theory, the role of agency costs arising from tax aggressiveness is put on the front burner (Khurana & Moser, 2009). The issue here is whether tax aggressiveness will create the scope for managerial opportunism. If the free cash flow from aggressive behaviour induces the threat of opportunism by managers, the stance of corporate governance will be to mitigate such practices.  The role of aggressive tax behaviour by managers within an agency framework of the firm poses a new set of issues which are related to the alignment of their interests with those of the shareholders.  By studying how corporate governance is related to tax aggressive behaviour, this study provides insight into the efficacy of corporate governance arrangements in both short and long term within the context of shareholders’ wealth maximization, on the one hand and the possibility of managerial opportunism, on the other hand.

 

1.2       Statement of the Problem 

Tax aggressiveness has become very pervasive amongst Nigerian quoted companies. Specifically, a recent study by Ogbeide and Iyafekhe (2018) found out that for a sample of nonfinancial companies totaling, eighty-five (85), about 64.71% of the companies were found to be tax aggressive to some extent. Similarly, evidence of tax aggressiveness of Nigerian quoted firms has also been established by other studies such as those by Oyeleke Oyenike, Erin, and Emeni (2016), Ogbeide (2017), Salaudeen and Ejeh (2018), Salawu and Adelabu (2017), Ilaboya, Obasi, and Izevbekhai (2016) and Uniamikogbo, Atu and Atu (2017). 
Although it is possible that the extent of tax aggressiveness can be industry specific and exhibit considerable heterogeneity across firms, however, the unsettled area in the literature is the debate regarding what the determinants of tax aggressiveness are and what factors precipitate the practice of tax aggressiveness by quoted companies in Nigeria. The research in this area is bedeviled with paucity of studies paying attention to the search for corporate determinants of tax aggressiveness in Nigeria although this is not the case with   studies in developed economies where a good number of the dominant studies in the area of tax aggressiveness have come from.  To the best of the researcher’s knowledge, a high proportion of the available studies exploring the causative factors of tax aggressiveness in Nigeria focused on the role of firm characteristics such as firm size, leverage, profitability, amongst others, on tax aggressiveness in Nigeria (Ogbeide, 2017; Uniamikogbo, Atu and Atu, 2017; Ilaboya, Obasi & Izevbekhai, 2016) and the findings in this regard have been quite mixed and inconclusive.  
But in the area of corporate governance, a few studies such as those by Onyali and Tochukwu (2018) and Oyeleke, Oyenike, Erin and Emeni (2016) focused on this area. For example, Onyali and Tochukwu (2018) looked at the relationship between board size and tax aggressiveness and found a positive but an insignificant effect. Oyeleke et al (2016) examined, amongst other variables, the role of board independence and found a negative and significant relationship. The gender of the firm’s directors was suggested to affect corporate polices and outcomes (Arun, Almahrog & Aribi, 2015; Srinidhi, Gul & Tsui, 2011). However, the empirical evidence on the nature and direction of the relationship has also been conflicting as shown in studies (Boussadi, & Hamed 2015; Francis, Hasan, Park & Wu 2013; Oyeleke, Erin & Emeni, 2016; Richardson, Taylor & Lanis, 2016). 
This study took a different approach from previous studies by looking at an aspect of corporate governance in relation to tax aggressiveness that had been very insufficiently examined by foreign studies and probably never been examined by researchers in Nigeria to the best of the researcher’s knowledge, and that is the role of Chief Executive Officer (CEO) governance attributes. This is important because CEOs strongly influence whether stakeholder groups are considered salient (Delmas & Toffel, 2008; Eesley & Lenox, 2006) and hence ignoring the potential effect of CEOs’ personal characteristics is a gap. As observed earlier, although much information exists on the empirical side giving an insight into the relationship between other corporate governance variables, the elusiveness of similar empirical verboseness identifying CEO related governance dimension was very much apparent, especially for developing economies. This shields a critical understanding of the impact of the CEO because of the powerful influence that the CEO wields in directing corporate strategy. This study fills this gap and thus to the best of our knowledge, our study is the first to investigate the combined impact of both board and CEOs’ characteristics on tax aggressiveness. 
Furthermore, the study also proceeds to ascertain if that there exists an optimal governance composition and, in this regard, employed the threshold model to estimate this. The method of threshold model with the individual effect minimizes the sum of residuals squares to determine the threshold value and tests the prominence of the threshold value. The specific idea is to select a certain variable as the threshold variable, and divide the regression model into multiple intervals according to the searched threshold. The regression equations of each interval are expressed differently, and the other sample values are classified according to the interval divided by the threshold. Therefore, beyond determining the impact of both board and CEOs’ characteristics on tax aggressiveness, the study also uncovers if there is a threshold effect in the relationship. 

 

1.3       Research Objectives

The broad objective is to examine the effect of corporate governance on tax aggressiveness of quoted non-financial firms in Nigeria. The specific objectives are to; 

1. examine the extent to which board independence impact tax aggressiveness in quoted firms in Nigeria;
2. determine the extent to which board size impact tax aggressiveness in quoted firms in Nigeria;
3. determine the extent to which board gender diversity impact tax aggressiveness in quoted firms in Nigeria;
4. investigate the extent to which board ownership affects tax aggressiveness in quoted firms in Nigeria;
5. examine the impact of CEO age on tax aggressiveness in quoted firms in Nigeria;
6. evaluate the impact of CEO tenure on tax aggressiveness in quoted firms in Nigeria; and
7. investigate the effect of CEO ownership on tax aggressiveness in quoted firms in Nigeria.

 

1.4       Research Questions

In order to perform this study, the following research questions are necessary to be address:

1. To what extent does board independence impact tax aggressiveness in quoted firms in

Nigeria?

1. What is the impact of board size on tax aggressiveness in quoted firms in Nigeria?
2. What is the impact of board gender diversity on tax aggressiveness in quoted firms in

Nigeria?

1. To what extent tax does board ownership affect tax aggressiveness in quoted firms in

Nigeria?

1. What is the impact of CEO age on tax aggressiveness in quoted firms in Nigeria?
2. What is the impact of CEO tenure on tax aggressiveness in quoted firms in Nigeria?
3. What is the impact of CEO ownership on tax aggressiveness in quoted firms in Nigeria?

 

1.5       Research Hypotheses

The null hypotheses were stated in the null form below;
H01: Board independence has no significant impact on tax aggressiveness in quoted firms in Nigeria
H02:  Board size has no significant impact on aggressiveness in quoted firms in Nigeria.
H03. Board gender diversity has no significant impact on tax aggressiveness in quoted firms in Nigeria.
H04. Board ownership has no significant impact on tax aggressiveness in quoted firms in Nigeria.
H05. CEO age has no significant impact on tax aggressiveness in quoted firms in Nigeria.
H06. CEO tenure has no significant impact on tax aggressiveness in quoted firms in Nigeria.
H07: CEO ownership has no significant impact on tax aggressiveness in quoted firms in Nigeria.

 

1.6       Significance of the Study

The study provides useful information to the tax authorities in understanding more about tax aggressive corporations. In Nigeria, tax audit is performed by the tax authorities to improve tax compliances and on the other hand to detect tax evasion or tax avoidance. Various audit programs are implemented to ensure that the taxpayers comply with the legal provisions and the current tax regulations within the Self-Assessment System. In connection with that, this study could help the tax administration to organize an efficient enforcement task as well as redesign and revamp an effective tax system especially in certain crucial sectors or industries.
Furthermore, corporate governance mechanisms are seen as significant indicators that influence tax aggressiveness. Taxes are part of the operating costs of a corporation, and its shareholder’ s governance directly plays a role in tax management as the board of directors are responsible for resource allocation, performance and increase shareholder wealth. It might be possible that tax aggressiveness is desired by shareholders to improve corporate value. In connection with that, corporate governance is viewed as an important factor that influences tax aggressiveness.
Thus, this study provides a greater understanding of the role of corporate governance in tax matters. In addition, since the tax department is an important financial statement user, this study would provide them a better understanding of the information stated in the annual report.
Besides that, corporate information such as board of directors, shareholders, statements on corporate governance and others can be used as a new channel to run the risk analysis in detecting tax avoidance and performing tax audit.

 

1.7       Scope of the Study

The study examined corporate governance and tax aggressiveness of quoted non-financial companies in Nigeria. The study focused on corporate governance variables such as board size, board independence, board gender diversity, board ownership, CEO age, CEO tenure and CEO ownership. The period for the study covers 2005-2019 which is a fifteen-year period. 

 

1.8       Limitation of the Study

Like every research effort, limitations were encountered and observed. For this study, several limitations were identified. Firstly, the study focused on non-financial firms listed on the Nigerian exchange group (NEX) and therefore, to that extent, the findings could not be generalizable to financial sector firms. Secondly, the study limited itself to providing empirical evidence on the impact of corporate governance on tax aggressiveness. Other non-governance variables which could be equally crucial were not considered. Finally, the challenge of historical cross-sectional data for listed companies in Nigeria was also another limitation. Although the study adopted a 15 years period data which were robust for a cross-sectional statistical analysis, the desire to further extend the period was met with the difficulty in obtaining historical and complete cross-sectional data for listed companies in Nigeria.

 

1.9       Definition of Operational Terms

Corporate Governance: Corporate governance is defined as a system of checks and balances, both internal and external in companies, which ensures that companies discharge their accountability to all their stakeholders and act in a socially responsible way in all areas of their business activities
Tax Aggressiveness: Tax aggressiveness is defined as the effort of the company to minimize tax payments using aggressive tax planning activities and tax avoidance.  
Effective Tax Rate: The firms’ effective tax rate (ETR) is defined as some measures of tax liability divided by income.
Board Size: Refers to the number of individuals on the board. Board size which is proxied by the number directors on the board is considered to be an important element in monitoring the effectiveness of the board. 
Board Independence: The independence of the board refers to the number of non-executive directors on the board.   
Board Gender Diversity: Refers to the ratio of females on the board of directors
Ownership Structure: This is defined as the shareholding structure of the company
CEO ownership: This refers to the percentage of shares owned by the CEO
CEO Tenure: This refers to the number of years the CEO has been at the helm of affairs.  CEO-Age: The disclosed age of the CEO.