Proceedings of 8th Asia-Pacific Business Research Conference
9 - 10 February 2015, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-71-9
The Effect of Corporate Governance on Book-Tax Differences
in Tehran Security Exchange
Hejazi Rezvan1, Abouhamzeh Mina2 and Mirzaee Mohammad Mahdi3
Corporate governance is a mechanism to reduce agency costs and
improving corporate reporting quality. Also it helps wide spread
stockholders’ rights including governments to be considered and in
result, it is expected to improve tax compliance. This paper investigates
the effects of corporate governance on book-tax differences in Tehran
Security Exchange. To measure corporate governance level, we used 3
equity-base indexes (1) share held by main stock holders (2)
institutional ownership percent (3) number of main stock holders. To
measure tax compliance we used an index based on book-tax
differences. Results showed companies with high institutional
ownership and higher ownership concentration had more tax
compliance. Also companies with higher leverage had more tax
compliance.
JEL CODES: Corporate governance, Book-tax differences, Tax compliance, Size,
Leverage.
1. Introduction
Development of cooperatives caused appearance and increase in the number of some
investors that without direct cooperation in controlling the companies, they supervise on
companies affairs by selecting the board of directorate. For many years, it seemed that
all groups of a cooperative having activity for common objective, however during last
years, there have been discussed many cases of conflict of interest between groups
and how companies interfere with such kind of conflicts (Johnson and McLing, 1976).
According to Agency Theory, by separating the ownership from management and
forming a representative relation, there was occurred conflict of interest between
managers, shareholders and other stakeholders (such as government).
Today, according to authorities the best solution for representative issue is improving
the corporate governance. Desirable corporate governance ensures that institutes
effectively apply their capital and attend wide range of stakeholder groups such as
government as well as whole community and board of directors is responding against
stockholders and company. Therefore, it must be ensured that institutes can generally
have activity for their community and may make the confidence of investors and attract
long-term investments. Supplying the government benefits as one of the stakeholder
groups with tax compliance may increase the tax incomes of the country.
Tax income is a safe source for supplying the government costs in the countries.
However, examining the incomes of Iranian state indicates that tax incomes comparing
1 Prof. Of Accounting, Alzahra University, Tehran, Iran.
2 Ph.D. Student of Accounting, Alzahra University, Tehran, Iran.
3 Ph.D. Student of Accounting, Allameh Tabatabaee University, Tehran, Iran.
Proceedings of 8th Asia-Pacific Business Research Conference
9 - 10 February 2015, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-71-9
to other state income sources (such as oil incomes) are in low level (Shemirani &
Asadzadeh Bali, 2007). According to the importance of the subject, development plan is
also highly stress on it and determined specific objectives for increasing the reliance of
state to tax incomes.
Attempt to increase the tax compliance is one of the most important ways of increasing
the tax incomes because during collecting the tax, tax payers are considered as
effective elements. Studies indicate that the more is the percentage of tax compliance in
a tax system, the more the income from tax part increases with increase in the
macroeconomic indicators such as ratio of tax to GDP, ratio of actual tax income to
predicted tax income in the budget and ration of tax incomes voluntarily paid to total
collected tax incomes (Kamali & Shafiei, 2011).
Considering above subjects, should a company possesses the corporate governance
measures, it is ensured that such company observes the rights of wide group of
stakeholders such as government and observing the state rights means observing the
tax regulation and observing the tax regulations means tax compliance of taxpayer
(Kamali & Shafiei, 2011).
Corporate governance is a mechanism that by applying it the representative issues will
be rectified (Fernandes, 2007) and quality of providing the information by companies will
be increased and rights of stockholders and wide groups of stakeholder such as state
will be observed followed by increased tax compliance. This study aims to investigate
the influence of corporate governance on tax compliance in Iran.
Statement of Problem
We initially investigate the concepts of corporate governance and tax compliance
separately and then deal with theoretical bases for influence of corporate governance
on tax compliance.
Corporate Governance
Since early 1980s, corporate governance turned to a controversial issue internationally
and now in 21th century such controversies continue. Corporate governance is not a
newly emerged phenomenon and occurred together with appearance of business
(Vinten, 2003). Identifying the centrality of large enterprises for allocating the sources in
economy underlies discussions and controversies about corporate governance.
However, the term “Corporate Governance” was introduced for the first time on 1980s
(Terkir,2000) and reviewing the last common texts indicate that the first and oldest
concept of corporate governance adapted from a Latin word called “Guidance” and
indicates that the first definition for corporate governance focuses on governance not
control.
Fundamental of corporate governance is based on a limited and old view only deals
with relation between corporate and stockholders and this view is discussed in term of
“Representative Theory”; however, in the wider view, corporate governance is defined
as a network of relations comprising wide spectrum of stakeholders besides
stockholders including board of directorate, CEOs, employees, sellers, clients,
accountants, auditors, financial analysts, exchange agents, bankers and creditors,
social institutes, lawyers, judges, society and of course government; this view is
expressed in term of stakeholders’ theory (Hassas Yeganeh, 2006).
Proceedings of 8th Asia-Pacific Business Research Conference
9 - 10 February 2015, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-71-9
Organization for Economic Cooperation and Development(OECD) defined corporate
governance as below: a set of relations between management, board, shareholders and
other stakeholders of the company. Corporate governance is along with promoting the
justice, clarity, responsiveness and observing the rights of stakeholders in a company.
Financial performance of companies has a direct relation with applying appropriate
corporate governance and better managers may provide more effective corporate
governance and attend to their stakeholders and finally produce higher financial
efficiency. This organization has also published some principles in different areas of
corporate governance such as increasing the responsibilities of board including internal
controls, internal auditing,…
Generally, current definition of corporate governance includes: rules, regulations,
structures, processes, cultures and systems that provide the field for accessing to
responsiveness objectives, clarity, justice and observing the rights of stakeholders (such
as government) (Hassas Yeganeh, 2006).
Rights of Stockholders and Corporate Governance
Stockholders are considered as main owners of the corporate with given ownership
rights. Any share provides the stockholder with this right that participate in the benefits
of company however its responsibility is limited based on its investment. Holding the
share provides the stockholders with this right to access the information of corporate
and penetrate in the company by voting in the general meetings.
Stockholders of any corporate comprised from individuals and different groups with
different interests, objectives and different capabilities. The company management must
additionally be able to quickly make commercial decisions. By such facts as well as
complexities in controlling the corporate affairs in very dynamic and quick changing
markets, shareholders expected to have responsibilities in managing the corporate.
Board and group of managers who are appointed by decision of this board, encouraged
and replaced if necessary are responsible for determining the strategy and operation of
any corporate.
The right of penetration of stockholders in company concentrates on a few fundamental
subjects such as appointing the members of board or other ways for applying the
penetration in determining the combination of mentioned board, modifying the
fundamental documents of company, approving the extraordinary transactions and
fundamental issues determined in the Corporates Law as well as Articles of Association
and internal documents of company. This section indicates the most fundamental rights
of shareholders that are recognized almost in all countries a member of Organization for
Economic Cooperation and Development. Other rights such as confirming or appointing
the auditors, direct candidacy of members of board, authority for mortgaging the shares,
approval of dividend, etc… could be seen in different nations.
Here, we have used three following ownership measures for evaluating the level of
corporate governance:
The percentage of shares held by major stockholders: here major stockholders include
those who are the owner of more than 5% of shares in the corporate;
Number of stockholders who each one are the owner of more than 5% of the shares of
the corporate;
A percentage of shares in the corporate possessed by institutional owners: institutional
owners according to what indicated in Bourse and Securities Law include following
groups:
Proceedings of 8th Asia-Pacific Business Research Conference
9 - 10 February 2015, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-71-9
1) Institutional investor, subject of clause 27 of Article one of Securities Market Law
of Islamic Republic of Iran include:
2) Banks and insurance companies;
3) Holdings, investment companies, retirement fund, Capital Supply Company and
investment funds registered by Burse and Securities Organization;
4) Any real or legal person who purchases more than 5% or more than 5 billion
Rials of nominal value of securities publishing by publisher;
5) Public organizations and institutes;
6) Public corporates;
7) Members of board and publisher managers or individuals with similar function.
Tax Compliance
The behavior of taxpayers against tax Act is determined in a wide spectrum from
compliance to non-compliance. Tax compliance is one of the main objectives of any tax
system moving to attain it and indeed one can state that the degree of tax compliance in
any country is the measure for assessing the efficiency of tax system of that country
(Talebnia, 2007). Tax compliance means that to what extent taxpayers observe the tax
rules of the country. Such observance include registration in tax system, delivering the
tax statement, maintaining and providing the documents, proper report and paying for
tax debts in due date; therefore tax compliance means observing the tax law by
taxpayer (Shemirani & Asadzadeh Bali, 2007).
According to Article 105 of IRI Direct Taxes Act, “total income of companies and income
from profit activities of other legal persons obtained from different sources in Iran or out
of Iran, after enacting the losses from non-exempted sources and reducing the
exemptions except cases having separate rate according to regulations of this law
included in tax with rate of 25%”. Therefore, equal to 25% profit of legal persons must
be paid to the government. Observing the right of government by company means
observing the tax regulations and more compliance with stated tax (that is determined
according to regulations and by company inserted in tax statement subject of Article 110
of Direct Taxes Act) with absolute tax ( that is determined and finalized by tax officers of
national tax affairs based on tax auditing subject of Direct Taxes Act) and this is the
same as tax compliance by taxpayer.
Non-compliance is another side of the spectrum of taxpayers’ behavior. Tax avoidance
and tax evasion both are evidences of non-compliance; however their fundamental
difference is that tax avoidance is the legal non-compliance (using legal paths for not
paying for tax) while tax evasion is illegal non-compliance (using illegal ways such as
hiding the income, book cooking,…. for evading from paying the tax).
Corporate Governance and Tax Compliance
Development of cooperatives resulted in separating the ownership from management
and forming the representative relation. Due to the conflict of interest between manager,
stockholders and other stakeholders (such as government), the representative issues
discussed. Today, according to authorities, the best solution for representative issue is
improving the corporate governance. Desirable corporate governance has main
principles such as principle of attending the benefits of stockholders, principle of
attending to the benefits of stakeholders, principle of revealing and clarity as well as
establishing internal auditing and internal controls system and observing the desirable
Proceedings of 8th Asia-Pacific Business Research Conference
9 - 10 February 2015, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-71-9
corporate governance system may observe the regulations such as tax regulations and
observing the tax regulations is the same as tax compliance.
Generally, corporate governance indicates the way that companies are managed and
governed. As stated, corporate governance is defined by Organization for Economic
Cooperation and Development as below:
A set of relations between corporate management, board, shareholders and other
stakeholders (such as government) and it provides a structure in which the objectives of
company and ways for attaining them has been determined and performance
assessment has been defined. Internal auditing is a part of corporate governance
structure helping the organization to attain its objectives and goals. Internal controls are
also a part of internal auditing applied based on guidelines, procedures and rules. The
internal controls in an organization is designed and implemented to ensure the
efficiency of system, accuracy of financial statements as well as adapting to regulations.
Therefore, should the main role of internal controls system is managing different risks
encountered to the company and performs along with the objectives of organization, it
could be considered as a part of corporate governance.
There are many definitions of internal controls; however, the definition developed by
Committee of Sponsoring Organization of Treadway Commissions (COSO) is more
useful. The report of this committee prepared on 1991 follows previous report about
fraud financial reporting in USA recommending that in American companies a set of
general principles must be enacted to promote the level of corporate governance. This
committee defines it as below:
“Internal control is a process influenced by board, managers and other employees and
is designed and implemented for reasonable assurance to attain following objectives:
Efficiency of operation;
Reliability of financial reports;
Adapting to irrevocable regulations.
According to above mentioned cases and considering this point that tax act is one of the
irrevocable regulations for companies, one can conclude that increasing level of
corporate governance may improve the internal control system of the company and
such improvement based on the declaration of above mentioned committee may adapt
the internal operation of company with irrevocable regulation such as Taxes Act.
Therefore, under such conditions it is expected that the output of internal operation of
company (tax statement, stated profit and finally stated tax) is according to Direct Taxes
Act and considerably adapted to what determined by tax officers of Tax Affairs
Organization (absolute tax) and this means increased tax compliance as a result of
corporate governance (Ohms & Eslon, 2011).
2. Literature Review
Blovin et al (2012) investigated the relation between corporate governance, incentives
of managers and tax evasion. For testing their hypotheses, they used of regression in
distribution quarters of tax evasion and perceived that tax evasion is positively related to
the independency of board in the first quarter and negative relation in the last quarter. In
this case, they concluded that corporate governance and tax evasion are significantly
correlated.
Proceedings of 8th Asia-Pacific Business Research Conference
9 - 10 February 2015, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-71-9
Jang et al (2011) studied the influence of tax supervisions as a corporate governance
mechanism. Their results indicate that tax supervisions mostly result in lower agency
costs followed by improving the company’s performance in the market.
Minic & Noga (2010) studied the correlation between multiple measures of corporate
governance and various measures discussed for evaluating the tax evasion; therefore,
they found that there is little correlation between them. In their paper, they looked at the
corporate governance by managerial approach and used of variables such as size of
board and for evaluating the tax compliance they also used the effective tax rate
(resulted from dividing the tax expense by income before taxes).
Sartori (2008) concluded that corporate governance and tax behavior of companies is
an interaction. It means that both corporate governance influences on tax behavior of
companies and tax regulations of government considerably influences on corporate
governance.
Dasaei et al (2007) indicated that low tax rates may improve the corporate governance
and increase the tax incomes and vice versa, high tax rates may deteriorate the
corporate governance and reduce the tax incomes.
Tomas et al (1996) defined the rate of non-compliance than gross tax gap to total tax
debt and compliance rate to size of voluntary collections of tax by taxpayers and
concluded that tax compliance is equal to one minus tax non-compliance.
Khanjan (2004) presented the potential tax gap level as an indicator in Mashhad tax
affair. He introduced deferred taxes that have been attained to the stage of diagnosing
the tax; however, their collection has been deferred. He has examined the tax on
corporate and persons in two parts by calculating the indicators of Rial portion and
percentage portion together with significance level of results on fulfilling the income
objectives of Khorasan Province.
Seyed Nourani (2009) equalizes the non-compliance with tax gap and tax gap includes
tax evasion, deferred taxes (taxes stated however not paid), error of taxpayers in stating
and paying for tax, error of auditors for diagnose and perception causing tax noncompliance of taxpayers.
Kamali & Shafiei (2011) while studying different concepts of tax compliance provided a
clear and accurate definition of it and finally calculated the tax compliance level and its
barriers in Iranian tax system.
3. The Methodology and Model
Hypotheses of Study
To attain the objectives of study, hypotheses detailed as below:
Hypothesis 1: Percentage of stocks held by major stockholders may influence on tax
compliance of companies.
Hypothesis 2: Number of stockholders that are owner of more than 5% shares each
may influence on tax compliance of companies.
Hypothesis 3: Percentage of company’s stocks possessed by institutional owners may
influence on tax compliance of companies.
Population and Sample
Population of this study includes all companies accepted in Tehran Stock Exchange.
Companies who had following conditions simultaneously selected as a sample:
1) Their required financial information is accessible;
Proceedings of 8th Asia-Pacific Business Research Conference
9 - 10 February 2015, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-71-9
2) They aren’t financial intermediary;
3) Their financial period ended to Mar 21 of each year and their fiscal year hasn’t
been changed during years;
4) Their tax has been certain.
According to above limitations, 40 companies during five years from 2008 to 2012 were
selected as population and due to limited number of members of population, 100% of
that population was considered as sample size.
Methods of Data Collection
In order for collecting the data related to corporate governance, there was used of
Rahavard Novin and Tadbir Pardaz software as well as bourse information sharing site
and Stock Exchange Organization and data related to tax compliance also obtained
from tax files of sample companies. For data processing, there has been used of
combine data analysis model by using Excel and Eviews7.
Preparing the Model and Method of Testing the Main Hypothesis
General model of study for testing the study hypothesis include:
TCig= C + α1 LEV + α 2 SIZE + α 3 LSHOW + α 4 NOLSH + α 5 INSTIT + ɛit
More, we define the variables of the model.
Operational Definition of Variables of Study
Dependent Variable: Tax Compliance Indicator
For calculating the tax compliance indicator, TAig, we initially reduce the tax stated by
taxpayer from certain tax diagnosed by tax auditor; the obtained number indicates the
rate of tax evasion of taxpayer.
Then we calculate the average rate of tax evasion for sample companies and reduce it
from tax evasion of any taxpayer and then negative values reduced from mean tax
evasion indicating complete compliance of related taxpayer equal with zero and positive
values are considered the same as calculated. Then we normalize these new values
obtained to one; on the other hand we arrange these data between zero and one. We
normalize the data to one because the scale of data become smaller and we also have
a clearer image of taxpayers’ tax non-compliance. Thus, for taxpayers with indicator
figure for non-compliance is zero are among the category of taxpayers who have
completely compliance and those with their non-compliance indicator figure between
zero and one, the more it is closer to zero, the more is their compliance level and the
more it closer to one the less their compliance level is. Finally, 1-TAig will be the tax
compliance indicator (TCig) (Zanganeh, 2010).
Independent Variable, Measures of Corporate Governance
Here, according to factors influencing on tax compliance as mentioned above, there
have been more used of variables related to the ownership dimension for evaluating the
corporation governance level and these variables defined as below:
Proceedings of 8th Asia-Pacific Business Research Conference
9 - 10 February 2015, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-71-9
1) LSHOW: a percentage of stock held by major stockholders (Owners of more than
5% of shares)
2) NOLSH: Numbers of stockholders each are the owner of more than 5% of
corporate shares;
3) INSTIT: it is equal to the percentage of corporate stock held by institutional
owners.
4) Control Variables
Ratio of debt and size of the corporate that indicated by LEV and SIZE symbols
respectively. Variable ϵit is the unknown part (error).
4. The Findings
Descriptive Statistics
Table 1 displays descriptive statistics of study variables.
Mean
Median
Max
Min
SD
Skewness
coefficient
Stretch
factor
Table 1: Descriptive Statistics
Shares% of
Rate of
Tax
No. of Major
major
Institutional
compliance
Stockholders
stockholders
Ownership
0.96
75.95
3.01
68.48
1.00
80.34
3.00
76.55
1.00
97.90
6.00
99.30
0.00
35.84
1.00
0.00
0.12
15.42
1.21
29.54
leverage
Degree
Size
1.71
1.29
8.91
0.25
1.57
13.60
13.24
18.19
10.98
1.54
-6.26
-0.47
-0.02
-1.19
2.41
0.76
47.68
2.13
2.36
3.13
9.64
3.46
Results of Test
For analyzing the combined data, initially it is necessary to test the presence of cross
sectional fix effects for possibility of using this model. For this reason, we use additional
test for cross sectional fix effects and its results indicated in table 2.
Table 2- Results of Additional test for fix effects
Effects Test
Statistics
Degree of freedom
Local F
1.72
-39.44
Local Kai Square
82.45
39
Error
0.0409
0.0001
Results indicate that H0 hypothesis is rejected (based on lack of any invariable effect).
According to the result of above-mentioned test, we must examine to perceive which
Proceedings of 8th Asia-Pacific Business Research Conference
9 - 10 February 2015, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-71-9
model is more suitable, cross sectional fix effects or random effects. For this reason, we
use of Housman test. Results of this test indicated in table 3.
Test summary
Cross-section
random
Table 3- Results of Houseman Test
Kai Square
Degree of Freedom
22.17
5
Error
0.0005
Results indicate rejecting H0 (based on suitability of random effects model) and using
cross sectional fix effects model is suitable for testing the hypotheses of this study.
According to lack of information about certain tax sheet for some years, total number of
observation was 89 years- company and this requires using uneven pattern of
estimation for model.
For testing the main hypothesis by Panel analysis, its results indicated in table 4.
Table 4- Analysis Results for Panel Model
Variable
Coefficient
SD
Constant
1.08849
1.0061
Percentage of stocks held by major
0.00247 0.00133
stockholders
Number of major stockholders
0.01234 0.01779
Percentage of institutional ownership
0.00802 0.00419
Leverage degree
-0.14709
size
-0.01990
t-test
1.08189
Error
0.2852
1.85268
0.0706
0.69379
1.91494
0.05933
2.47926
0.07148
0.27847
0.4915
0.0620
0.0171
0.7820
cross sectional fix effects
Determination Coefficient
0.7525
Modified Determination Coefficient
F Statistics
0.5051
3.0411
Residual squares
sum
Watson Camera
F statistics error
0.3196
1.6995
0.000172
According to above results, in significance level of 10%, whole model (using F statistics)
is significant. According to the possibility of t statistics of hypothesis for variables, the
percentage of institutional ownership and percentage of stocks held by major
shareholders is confirmed.
5 Summary and Conclusions
Statistical results obtained indicate that companies with higher institutional ownership
level and higher ownership concentration have higher tax compliance. The companies
with lower financial leverage ratio have higher tax compliance. This means that the less
is the ratio of debt to equity (higher role of stockholders) the more tax compliance is.
Proceedings of 8th Asia-Pacific Business Research Conference
9 - 10 February 2015, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-71-9
According to results, one can generally conclude that promotion of level and role of
stockholders in the company may increase the tax compliance and this result is in
agreement to the results of Dasaei et al (2007) who indicated that a strong tax authority
may have double supervision on managers, therefore, incentives of foreign stockholders
is in parallel to incentives of tax authority for reducing the misuse of company sources
by managers; they also indicated that by a strong corporate governance, increase in the
tax rates of company may increase the tax included incomes of the company.
The ownership structure could be also important. As long as the tax policies used could
have main outcomes for improving the patterns of corporate ownership (Dasaei et al,
2007), ownership models could have main effect on tax evasion (Dasaei & Darmapala,
2008). Companies with concentrated ownership, as if family corporates studied by Chen
et al (2010) might more evade from tax (lower tax compliance) because controlling
owners benefit from higher tax savings. On the other hand, these companies might
evade from lower taxes (higher tax compliance) because these long-term concentrated
stockholders follow higher horizon and might be sensitive to total costs for tax evasion
resulted from influence on their reputation and suspicion to misuse by minor
stockholders. Chen et al indicated that family companies evade less than non-family
corporates from tax paying and their results is conformed to results of Dasaee and
Darmapala (2006). Because companies with family ownership prefer ignoring the tax
benefits due to worries of minor stockholders resulted from family benefits in term of tax
evasion activities. Anyway, this result is conformed to the most fundamental model in
the literature of tax evasion that attributes the bold tax reporting to the risk averse
people with innate incentives. Generally, companies with high family ownership more
possibly treat like individuals.
For future studies, the interested researchers may investigate the relation between
corporate governance and tax compliance of companies who use allocating the official
auditors for determining their tax-included income while executing Article 272 of IRI
Direct Taxes Act.
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