The effect of board characteristics on tax aggressiveness: the case of listed entities in Sri Lanka

Abstract

Purpose – This study examines the effect of board characteristics on the tax aggressiveness of listed companies on the Colombo Stock Exchange in Sri Lanka. Design/methodology/approach – The sample consists of 264 firm-year observations of non-financial listed companies in Sri Lanka from 2014 to 2019. The dynamic panel system GMM technique was used to test the hypotheses, and further analyses were performed using the propensity score matching technique. Findings – All four effective tax rate measures’ mean values were lower than the statutory tax rate, indicating the likelihood of tax planning. Whether board attributes are likely to mitigate tax aggressiveness is uncertain because the results are inconsistent and depend on the ETR measure. Similarly, the logistic regression results derived using the PSM approach are inconsistent, suggesting that board characteristics may have a limited effect on tax aggressiveness. Hence, the corporate governance-tax aggressiveness nexus is limited in the case of Sri Lanka. Research limitations/implications – This investigation is limited to non-financial listed companies in Sri Lanka and incorporates only four tax aggressiveness measures. Findings are imperative for policymakers, regulators, and professional bodies to improve corporate governance codes and rules to enhance organizational transparency toward corporate tax payments. Social implications – Aggressive tax planning by companies will reduce government tax revenue, hinder social progress, and cause public mistrust of large corporations and institutions. Originality/value – This study provides insight into the nexus between corporate governance and tax aggressiveness in a middle-income economy in South Asia hit by an economic crisis where tax revenue has fallen and tax enforcement is weak.