Tax Planning and Performance of Insurance Companies in Ghana

Abstract

Many firms, including the insurance companies, in their bid to improve upon their financial soundness and contribute to shareholders’ value maximization include tax planning in the overall financial management decisions. Thus, within such firms, tax managers learn to take advantage of the tax planning opportunities to mitigate their firms’ tax liabilities and improve upon their after-tax returns. To what extent, therefore, is tax planning by firms related to firms’ performance? It is in this bid that this study examined the relationship between tax planning and performance of insurance firms in Ghana. The study employed panel data for the period of 2012 to 2017 of 40 insurance companies in both the life and non-life insurance industries in Ghana. Based on the results of the Hausman (1978), fixed and random effects model of regression were used to analyse both models of the panel data. The study revealed that, on the average, insurance firms in Ghana have low effective tax rate (ETR). However, non-life insurance firms have higher ETR than the life insurance firms, implying that life insurance firms were better tax managers than the non-life firms. The study also revealed that tax planning was positively and significantly related to performance of insurance firms, but only at lower ETRs from 0% up to maximum thresholds of 20.36% and 19.7% computed for ROE and ROA models employed, and beyond these optimal levels of ETR, tax planning assumed a significant negative relationship with firm performance. The study recommends that managers of insurance companies must be incentivised to undertake more aggressive tax planning aimed at managing their ETRs within the boundaries of the computed optimal ETR levels. The study is relevant to tax planning managers in maximizing returns by managing ETR within the computed optimal ETR levels.