EFFECT OF CORPORATE TAX PLANNING ON FINANCIAL PERFORMANCE OF FIRMS LISTED AT NAIROBI SECURITIES EXCHANGE, KENYA

Abstract

Corporate tax planning relates to the utilization of the loopholes in the tax system to reduce tax liability. According to the Tax Justice Network-Africa, Kenya’s corporate sector leads Africa in tax avoidance with the tax avoided each year being estimated at Ksh 106 billion. However, despite enormous tax savings generated through tax planning, there exists mixed evidence about the effect of corporate tax planning on financial performance of firms. This study therefore sought to evaluate the effect of corporate tax planning on financial performance of firms listed at the Nairobi Securities Exchange. The specific objectives were to analyze the effect of corporate tax compliance, capital investment allowances and debt tax shield on the financial performance of firms listed at the Nairobi Securities Exchange. The study used a casual research design to establish the effect of corporate tax planning on financial performance of firms. The target population was the 64 firms listed at the NSE and purposive sampling was used to select 55 firms that had complete data and that were consistently listed within the period of study 2010 to 2015. Secondary data was collected using a checklist from the NSE website, individual company’s website and from NSE reports. A multiple regression analysis was used to analyze the cause-effect relationship between dependent variable and independent variables. Data analysis was done with aid of SPSS version 21.0. T-test and F-test were used to test the significance of regression coefficients and overall significance of the model respectively at 5% significance level. The study established statistically significant positive effect of tax compliance and capital investment allowances on return on assets with coefficients of 0.238.and 0.076, and P-values of 0.009< 0.05 and 0.042<0.05 respectively. Further, it was established that debt tax shield had a negative significant effect on return on assets with a coefficient of -0.142 and p-value of 0.038<0.05. The study concluded that corporate tax planning has a significant effect on financial performance of NSE listed firms and recommends that firms should increase their tax compliance, increase expenditure that qualifies for capital investment allowances and reduce use of debt as the cost of debt may have negative effect on return on assets. The findings of this study would be of importance to policy makers such as the Nairobi Securities Exchange, capital market authority and national treasury in formulating policies on tax planning activities and more importantly it would guide management in decided on their tax planning practices and the expected benefits