10,000.00 3,000.00



1.1       Background to the Study

Taxes are fundamental revenue sources for governments the world over. They represent a recognized compulsory contribution by individuals and corporate entities towards governance, development and maintenance of physical infrastructure as well as a tool of bridging income inequities. They are also a means by which the social contract between the State and the citizenry is being nourished and facilitated (Christensen & Murphy, 2004). Taxes also happen to be the most important, sustainable and predictable source of public finance for almost all countries (Action Aid, 2013). Thus properly harnessing amounts collected via taxes is a major concern for governments.

In assessing the extent to which a country has harnessed and financed its economy through taxation, an often used measure is the tax to GDP ratio. Scholars have however noted that the tax to GDP ratio for the developing world as a whole is relatively low when compared to what obtains in the developed economies. For instance, according to Fuest and Riedel (2009) the tax to GDP ratio for developing economies was on average approximately 12-15% as at 2005. Conversely, for the developed economies, the average for the same year was quoted as approximately 35%; a figure more than twice what obtained in the developing climes. More recent reports show some improvement in the ratio but given the potential the region has for increased tax revenue, the improvement has not been found to be impressive. For instance, a report by the International Tax Compact, ITC (2010), noted that while tax revenues in Organization for Economic Cooperation and Development (OECD) countries amounted to almost 36% of gross national income in 2007, the share in selected developing regions was estimated to be around 23% for Africa (in 2007) and 17.5% for Latin America (in 2004). Specifically focusing on Nigeria, as at January 2014, tax revenue to GDP ratio stood at 20% (Premium Times, 2014). However with the rebasing of Nigeria’s GDP in 2014, which saw the country’s GDP increase from N42.3 trillion to N80.3 trillion, making Nigeria Africa’s largest economy, Nigeria’s tax revenue to GDP ratio fell from 20 % to 12 %. Out of the said 12 %, only 4% was attributable to non-oil revenue. This led to a call by the then Minister of finance on the need for the taxing authorities to redouble their revenue generation efforts (Premium Times, 2014). This call by the minister as well as the assertion by Oxfam (2014) that widening income disparities are the second greatest worldwide risk in 2014, underscore the need to look deeper into the various sources of development finance, especially taxation. The highly volatile nature of oil revenue- which the Nigerian economy depends on to a large extent should, arguably, also serve as an added impetus towards looking for ways to better harness other revenue sources such as taxes.

In exploring how to better harness tax revenues, it has been documented world over that, two major activities; perpetrated by both individuals and corporations, have continued to represent a great threat to amounts of revenue collected through taxes. In addition, the said issues feature prominently in equity and efficiency related discourse. The duo of issues are tax evasion and tax aggression. While both are aspects of tax non-compliance, the delineating feature between the two lies in the fact that tax evasion is deemed out rightly illegal while by definition tax aggression is not. However notwithstanding the delineating line between the two, in advanced economies, the duo have been given serious consideration by their governments, through the relevant agencies. Furthermore, the two issues have sparked much research; ranging from investigating their determinants- both for individuals and for corporations examinations of the attendant consequences engendered by their continued flourish.

The question of what factors explain the ability of firms and corporations to avoid taxes is of particular interest to researchers. The reason for much of the focus on tax aggression as opposed to tax evasion is because evasion as a criminal act has to be proven by court. Thus using the term avoidance is seen as less dyslogistic. In however considering corporate tax aggression as a research issue, researchers such as Shackelford and Shevlin (2001) have earlier questioned the applicability of models of individual tax evasion and avoidance such as the Allingham and Sandmo (1972) framework in explaining and predicting corporate tax aggression. They argued that the separation of ownership and control, a hallmark of corporate entities, means that existing individual tax non-compliance frameworks cannot adequately explain same for corporations. In furtherance of the argument, Slemrod (2004) stated that this same separation of ownership and control means that shareholders need the corporation to engage in some level of avoidance.

Thus, in investigating what factors explain tax aggression by firms and corporations, earlier studies on corporate tax aggression focused primarily on examining whether firm-specific characteristics such as size, leverage, growth, profitability,amongst others could explain the tax aggression phenomenon for business entities (e.g., Gupta & Newberry, 1997). These earlier studies however failed to consider agency issues in their analyses. Pointing out why failing to do so is an anomaly, Desai and Dharmapala (2006, 2007) argued that since decisions about corporate tax aggression are made by firm managers, then the analysis of such decisions is thus embedded in an agency framework.

The agency framework is one that argues that managers are risk averse and self-serving in nature and that this risk averseness as well as self-serving nature means that managers will not typically act or make decisions in the best interest of owners. To ensure goal congruence between management and shareholders or owners, the framework suggests that managers should be both incentivized and monitored. Corporate governance mechanisms represent the means by which monitoring managers can be achieved.

Corporate governance mechanisms can however be internal or external. The internal mechanisms are those that have to do with the efficacy of the board of directors in appropriately advising on and overseeing the design and implementation of business strategies that will ensure that managers maximize shareholder wealth. In addition, such internal mechanisms include the role that shareholders themselves play in ensuring goal alignment. Prescriptions that have to do in particular with size, independence, remuneration and financial expertise of the board have therefore featured prominently in the various codes of corporate governance that have been issued both nationally and internationally as guides to what constitutes “best practice” in oversight. On the other hand, external governance mechanisms include all other stakeholder monitoring. Therefore mechanisms such as government regulation, debt covenants, takeovers, financial analysts and the like are all aspects of external governance.

Internal governance mechanisms have, in particular, been touted to be foremost amongst the monitoring mechanisms that can ensure goal alignment between owners and managers. This is thought to be so because the board of directors is responsible for the strategic direction of the company. Charting a course for effective tax management is one of such strategic direction. Therefore, like any other board room stratagem, managing taxes requires a laid down philosophy which is usually determined by the board; documented, communicated and implemented as overall corporate strategy (Erle, 2007). Thus, board related governance mechanism such as size, independence, and ownership, amongst others can arguably play a key role in determining a company’s tax planning.

This study is motivated by the fact that even though several studies abound on the corporate tax aggression phenomenon, only a handful are on developing countries. In addition, only few present evidence from Nigeria. Furthermore, of the studies which examine the issue for Nigeria, to the best of the researchers‟ knowledge only Ekoja and Jim-Suleiman (2014) examined the issue for banks. Their study however only provided evidence as to how an external governance mechanism; competition, plays a role in determining Nigerian banks‟ tax aggression. Major failures in internal corporate governance mechanisms are thought to be one of the principal factors that have continually undermined bank performance (Sanusi, 2012).

The Nigerian banking sector tends to be a key driver of activities in the corporate sector. This it achieves primarily through its principal role in financial intermediation. An OECD (2009) report also suggests that banks are particularly creative in structuring tax aggression schemes both for themselves and their clients. These features of banks as well as differing arguments in the literature (e.g. Adams & Mehran, 2003; Becher & Frye, 2008) as to whether internal corporate governance mechanisms are actually effective in regulated entities such as banks, serve as motivation for this study to examine to what extent corporate governance mechanisms- specifically internal ones- determine tax aggression for Deposit Money Banks in Nigeria.

1.2       Statement of the Problem

Tax aggression has, especially in the last decade or so, come under increased scrutiny and criticism by governments, the media, aid groups as well as the general public. The reason for this is because even though tax aggression in itself is not an illegality, as the law has not made it so, the amounts of revenue thought to have been lost through various ingenious avoidance activities world-wide have become an issue of concern. For instance, the Task Force for Financial Integrity and Economic Development, a global coalition of non-profit groups that campaign for transparency in the financial system, put the global foreign aid budget at $1 billion per year  while it estimated that the developing world loses $1 trillion every year through evasion and/ avoidance, corruption as well as money laundering (Reuters, 2013). The Global Financial Integrity (GFI), another advocacy group, in its 2012 report, estimated that $5.86 trillion moved from developing countries to tax havens over the period from 2001 to 2010 with outflows from Nigeria alone amounting to a princely $129 billion. This princely sum earned the nation seventh spot on the GFI‟s top ten list of developing countries with the highest illicit outflows. A further breakdown of the components of the illicit outflows shows that the greatest part (i.e. 60% – 65%) was as a result of tax aggression(Philippines Star, 2013).

Research on corporate tax aggression in comparison with that of tax aggression by individuals could however be said to be of relatively recent focus. The said recent focus of research on the phenomenon has also tended to be conducted principally in developed climes. The earlier empirical studies on corporate tax aggression such as Gupta and Newberry (1997) had focused more on the interplay between firm-specific characteristics such as size, leverage, profitability, capital intensity, amongst others in determining corporate tax aggression. Given that the results on the association between the studied firm-specific characteristics and tax aggression turned out to be far from consistent (e.g., Richardson&Lanis, 2007 and Hsieh, 2012); researchers further broadened the scope of investigation, on the determinants of corporate tax aggression, to include other factors such as corporate transparency (Wang, 2010), CEO/manager effects (Dyreng, Hanlon &Maydew, 2010; Chyz, 2010), ownership structure (Badertscher, Katz &Rego, 2009; Chen, Chen, Cheng &Shevlin, 2010), external auditor effects (Mcguire, Omer & Wang, 2010; Huseynov&Klamm, 2012), incentives (Philips, 2003; Armstrong, Blouin&Larcker, 2012) and a host of other characteristics.

The focus of this research was therefore on furthering study on the agency theory perspective of tax aggression. In order to achieve this the association between corporate governance mechanisms and tax aggression in Nigerian DMBs was examined. The research focused on banks because differing regulation meant their exclusion from analysis by several past international studies on corporate tax aggression (e.g., Zimmerman, 1983; Taylor & Richardson, 2011; Abdul Wahab, 2011) while in Nigeria, to the best of the researchers‟ knowledge only Ekoja and Jim-Suleiman (2014) have previously studied tax aggression  by banks. It seems therefore that the financial sector has not been adequately covered by researchers in relation to tax aggression. Studying the sector is important because Minnick and Noga (2010), have earlier posited that different companies with different governance structures are likely to choose different tax management strategies. Given this assertion, it may therefore be misleading to assume that the empirical results of studies of some corporate sectors will hold for other sectors. Providing sector-specific contexts to show the interplay between governance and tax aggression is therefore necessary.

Consequently, the study sought to fill the gap on the determinants of corporate tax aggression in DMBs in Nigeria. In particular, this was done by examining the extent to which internal corporate governance mechanisms play a role in determining corporate tax aggression in DMBs in Nigeria. To realize this board size, ownership and independence as well as high block ownership concentration were studied. The interactions between concentrated ownership and board size as well as board independence were also examined. In addition the study sought to fill the gap on available research from the developing world; more so, with specific reference to the literature gap on corporate tax aggression in Nigeria. The study also covered the banking sector, a part of the financial services sector that has been relatively understudied in relation to the tax aggression phenomenon.

1.3       Research Questions

To facilitate inquiry the following research questions were raised:

  1. Does board size have a significant effect on corporate tax aggression among DMBs in Nigeria?
  2. Does board independence have a significant effect on corporate tax aggression among DMBs in Nigeria?
  3. Does board ownership have a significant effect on corporate tax aggression among DMBs in Nigeria?

1.4       Objectives of the Study

The overall objective of this study is to determine the relationship between corporate governance and tax aggression in Nigerian banking sectors using Deposit Money Banks. The specific objectives of the study are to:

  1. Assess whether board size has a significant effect on corporate tax aggression among DMBs in Nigeria.
  2. Ascertain whether board independence has a significant effect on corporate tax aggression among DMBs in Nigeria.
  3. Evaluate whether board ownership has a significant effect on corporate tax aggression among DMBs in Nigeria.

1.5       Research Hypotheses


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