Tax planning, corporate governance and performance of banks in Ghana

Abstract

Tax planning is increasingly becoming an area of interest to many organizations including banks due to the potential benefits that firms and shareholders could derive from it. The problem militating against tax planning is the agency cost and other non-tax costs associated with it. To mitigate the agency problem between shareholders and managers, shareholders rely on corporate governance mechanisms in ensuring that managers carry out tax planning to enhance their wealth. This study examined the relationship between tax planning and performance of banks in Ghana in the presence of good governance structures. The study used panel data generated from the annual reports of 18 sampled commercial banks for a ten-year period, 2004 2014. The study employed fixed effect model of regression via GLS based on the outcome of the Hausman (1978) specification test. The results reveal that, on average, banks in Ghana have high effective tax rate. But foreign owned banks have higher effective tax rate than Ghanaian owned banks, suggesting that Ghanaian owned banks, for the period of study were more effective in managing their tax burden than foreign owned banks. The results also show a significant negative relationship between tax planning and performance. Regarding corporate governance, the results reveal that corporate governance moderate the relationship between tax planning and performance. The study recommends that, banks in Ghana must maintain a system to ensure that management is given monetary incentives for effective tax planning. The study has direct policy relevance for shareholders in monitoring and controlling banks tax planning activities.