International Journal of Research in Business Studies and Management

Volume 6, Issue 5, 2019, PP 1-6

ISSN 2394-5923 (Print) & ISSN 2394-5931 (Online)

Determinants of Corporate Tax Avoidance Strategies among

Multinational Corporations in Malaysia
Fazliza Mohd Kasim, Natrah Saad*
Inland Revenue Board Malaysia, Tunku Puteri Intan Safinaz School of Accountancy, Universiti Utara
Malaysia, Malaysia
*Corresponding Author: Natrah Saad, Tunku Puteri Intan Safinaz School of Accountancy, Universiti
Utara Malaysia, Malaysia Email: [email protected]

ABSTRACT
‘This study examines the determinants of multinational corporations’ (MNCs) tax avoidance strategies by
looking at their effective tax rates (ETRs). This study utilized the tax return form data from the Inland
Revenue Board Malaysia (IRBM) to model ETRs of the MNCs in Malaysia, as a proxy of the tax avoidance.
The findings suggest that MNCs in Malaysia can be associated with the tax avoidance since their ETRs are
below the statutory tax rates (STRs) as stipulated under the Income Tax Act 1967. The results also suggest
that firm’s size, profitability, extensiveness of foreign operation, capital intensity and leverage are the
determinants of the tax avoidance of MNCs in Malaysia.
Keywords: Corporate Tax Avoidance, Effective Tax Rate, Multinational Corporations, Malaysia.

INTRODUCTION around the shifting of income from a higher tax

country to a lower or no tax country [16]. As a
Multinational corporations (MNCs) are seen as
result, the issue has been brought up to the top
having better opportunities to avoid income tax
of the international policy agenda particularly in
and therefore, they are often associated with the
the G201 countries as well as the Organisation
tax avoidance activities. MNCs that engage in
for Economic Co-operation and Development
tax avoidance will employ aggressive tax
(OECD). The governments of developed and
planning techniques such as exploiting any
developing countries are working together with
loopholes in the tax legislation to gain tax
the OECD to address the issues under a project
advantage from the mismatch between the
known as the Base Erosion Profit Shifting
country’s tax rules in order to minimise their tax
(BEPS).
burden and subsequently, avoid from paying
their fair share of taxes [4].This is achieved by Based on the above facts, it is crucial to
locating their business operations in a lower tax investigate whether MNCs in Malaysia are also
jurisdictions, shifting income to low-tax associated with the tax avoidance activities.
jurisdictions, exploiting differences in the tax Hence, this study is undertaken to examine the
rules of different countries and also, taking level of tax avoidance of the MNCs and the
advantage of the tax incentives provided by host determining factors of such activities. It is
countries [22]. Previous studies indicated that important to note that tax avoidance, in this
MNCs have greater chances to avoid taxes on study, is identified by examining the ETRs of
the cross-border investments as compared to the MNCs. The gap between the firm’s financial
strictly domestic investments and thus, resulting accounting and the taxable incomes resulted
in the differences between the effective tax rates from the tax avoidance activities is reflected in
(ETRs) of the MNCs and domestic-only the firms’ ETRs as a proxy to the corporate tax
companies [1, 10]. Furthermore, the reports on avoidance and the firm’s actual tax burden [14].
the tax avoidance activities by the MNCs such This study contributes to the existing literature
as Google, Apple, Starbuck Coffee, eBay and
other highly reputable MNCs have triggered 1
G20 is an international forum that brings together
intense public discussions at the international the world's leading industrialised and emerging
level. Those MNCs are reported to drastically economies. The group accounts for 85 per cent of
reduce their tax burden on worldwide income by world GDP and two-thirds of its population – The
engaging tax avoidance method that revolves Telegraph Business.

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Determinants of Corporate Tax Avoidance Strategies among Multinational Corporations in Malaysia

in several ways. This study is hoped to better opportunities and possibilities to avoid
contribute to the existing literature on the and reduce taxes and frequently associated with
corporate tax avoidance in Malaysia as well as the tax avoidance activities There is also a
to the other developing countries because the tendency that the MNCs will minimise the
studies on this issue are limited and largely worldwide ETRs since the tax incentives, which
conducted in developed countries such as in the lower the cost of operations in transacting in
U.S., United Kingdom, and Australia. Besides, favoured or promoted industry, can be hidden
this study utilises IRBM’s tax returns database within the complexity of the tax laws [17]. The
to calculate the ETR as an empirical proxy for MNCs are able to reduce their tax burden by
the tax avoidance by utilizing the actual tax taking advantages of the tax system and increase
payable in order to provide a robust measure on their shareholder values through the earnings
the tax avoidance strategies as compared to the per share. Therefore, the MNCs are induced to
measure used by re-grossing the current tax continuously avoid taxes which may implicate a
expense by the standard tax rate (STR); based lower tax collection of a particular country.
on the assumption that a firm’s current tax
expense is the tax liability of the particular ETR as a Measure of Tax Avoidance
financial period. The assumption may not true The main purpose of tax avoidance is to reduce
because there are differences between the or minimise the tax burden. Tax researchers try
current tax expense and the actual amount of the to establish inferences about a firm’s tax policy
tax liability owed to the tax authority as using proxies which are selected from the
evidenced in the studies by [5] and [8]. Lastly, financial statements. This is because the firm’s
the study may enhance the understanding of the tax strategies and practices are proprietary
firm’s ETRs characteristics particularly on the information to the company and the tax returns
effect of those ETRs’ variables by focussing information is not publicly available. Hence,
only on the MNCs in Malaysia. ETR is commonly used by the researchers as a
LITERATURE REVIEW AND HYPOTHESIS proxy of the tax avoidance [3, 19 and 20].
DEVELOPMENT The ETR is defined as a ratio of income tax
payable to pre-tax accounting income and is a
Tax Avoidance among MNCs
measure of the average tax rate that a company
Tax avoidance is associated with the intention of is taxed on its pre-tax profits [12]. The ETR
a taxpayer to minimize tax by adopting tax measurement is vital for the policymakers all
planning mechanisms. Previous literature over the world to assess the consequences of a
defines tax avoidance as the difference between country’s tax policy on the corporate business.
the STRs and ETRs (for examplesin [3], [11] In addition, the ETR is also a key measurement
and [20]). The difference is due to the firms’ in the past’s academic researches to study the
ability to reduce its tax burden below STR by tax policies in certain countries.
taking advantage of the tax incentives and
various tax provisions under the tax legislations. The Determinants of ETRs

The MNCs have global business operating The variability of ETR is influenced by various
factors such as the firm’s size, capital structure,
models and their business operations are well
firm’s performance, investment in fixed assets
structured with an integrated logistics, supply
and inventory. The previous studies suggested
chains and functions that are centralised whether
that ETR may also be influenced by other
at regional or an international level. In a digital
variables such as leverage, capital intensity,
economy for example, the business activities for
sector effect and tax domicile.
both products and processes are distant from
their actual customers. As a result, the MNCs The association between ETRs and the size of
may be subjected to the corporate income taxes the firm can be established on two opposing
of multiple countries because their operations views, namely, the political cost theory [16, 22]
have cross-border business activities in various and political power theory[3, 12, 19]. Some
tax jurisdictions which is not necessarily in the studies documented that the MNCs would lower
country where the businesses are incorporated. their tax burden because of their larger size. The
They are subjected to taxes in many tax MNCs are considered as large business
jurisdictions, and hence have the abilities to corporations in terms of assets or turnover and
shift their business operations and profits to have the economies of scale to engage in the tax
countries that have favourable tax provisions planning strategies and thus, giving them better
and lower STRs. Therefore, the MNCs have opportunities to pay lesser or even avoid income

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Determinants of Corporate Tax Avoidance Strategies among Multinational Corporations in Malaysia

taxes. As such, large firms particularly the higher ETRs [6 and 20]. This suggests the
MNCs are able to avoid paying higher income following hypothesis as H4: There is a
taxes by using variety of tax avoidance schemes significant relationship between capital intensity
such as transfer pricing for inter-company and ETR.Previous studies provide an evidence
transactions, financing or debts arrangements, on the negative relationship between ETRs and
tax-advantaged leasing and, as well as the the level of leverage due to the treatment on the
complex hybrid entities in order to take interest expense in reducing computing taxable
advantage of any tax loopholes [17]. Based on income [11]. The inverse relationship between
the literature reviews, the relation between leverage and ETR is because of the tax shield
ETRs and firm’s size is hypothesized as H1: theory that was introduced in the study by
There is a significant relationship between firm Modigliani and Miller (1963), as cited in the
size and ETR study by [21]. This is due to a tax deduction of
having higher interest tax shield of debt
Profitable firms are efficient in applying tax
financing as highly leveraged companies have a
deductions, tax credits, and tax exemptions as
higher interest tax shield which consequently,
compared to less profitable firms. As a result,
reduces the ETR[3]. Therefore, it is expected
profitable firms have greater book-tax
that MNCs with higher levels of leverage will
differences and thus have lower ETRs. The
have higher engagements in the tax avoidance
negative relationship between ETRs and pre-tax
activities and will report lower ETRs. This
income is because firms with higher income
suggests the following hypothesis stated asH5:
after tax have more incentives and the ability to
There is a significant negative relationship
allocate resources for tax planning and to
between leverage and ETR.
engage more in tax strategies [18].Based on the
literature review, the hypothesis is stated as H2: METHODOLOGY
There is a significant negative relationship
between pre-tax profit and ETR. For the purpose of this study, 1,187 MNCs
which are categorized as high risk (in respect of
The study by [21] suggested that companies transfer pricing issues) were selected. In line
with extensive foreign operations have better with the sample selection procedure, data are
avenues to lower their ETRs. Those companies filtered by only accepting ETR in between
are capable to avoid taxes by locating their 100% and -100% (-100% < ETR < 100%). The
business operations in a lower tax jurisdiction; final sample comprises of 830 tax entity
shifting income from high-tax jurisdictions to observations is summarised in Table 1.Each
lower tax jurisdictions; taking advantage of tax sample of tax entity, the following information
benefits agreements with the host countries and is extracted and computed: tax payable, total
exploiting differences of the tax legislation sales, total assets, pre-tax income, debt, equity,
between countries. Therefore, it is expected that fixed assets, foreign sales or purchases, ETR,
companies with extensive foreign activity will firm’s size, profitability, leverage, capital
take advantage of tax minimisation strategies in intensity, and foreign activity.
more aggressively manner as compared to their
Table1. Summary of Sample Selection Procedure
counterparts with lesser extensive foreign
activity companies thus report lower ETRs. This No. of
leads to the hypothesis stated as H3: There is a MNC
significant negative relationship between No. of taxpayers that are categorized as 1,187
extensive foreign operation and ETR. The high risk
capital intensity hypothesis is that the firms that Less:
Taxpayers with incomplete or missing data 19
have substantial investment in capital are
Taxpayers in financial sector 14
expected to gain tax savings and thus, have a
Taxpayers with zero tax payable 173
lower ETR. Previous studies suggested firms
Taxpayers with negative ETR 93
that have huge investment in depreciable assets Taxpayers with ETR of non-negative equal 58
can minimize tax liabilities by utilising higher or exceed one
investment tax credits (ITC) as well as Number of taxpayers – years available for 830
accelerated capital allowance thus reporting ETR analysis
lower ETRs[11].However, there are studies that
provide support on the inverse relationship Based on the hypotheses, the research model is
between ETR and capital intensity that reported stated as follows:
firms with heavy capital concentration (highly ETR = β0+β1SIZE+β2PTI+β3FO+β4CAPINT+
capitalised) pay higher income tax thus reported β5LEV+ϵ

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Determinants of Corporate Tax Avoidance Strategies among Multinational Corporations in Malaysia

The dependent variable is the corporate ETR size (0.029), profitability (-0.079), foreign
which is a proxy to the tax avoidance. The operation (-0.061), capital intensity (0.005) and
independent variables are firm’s size (SIZE), leverage (-.156) as factors influencing the
profitability (PTI), foreign operation (FO), corporate tax avoidance.
capital intensity (CAPINT) and leverage (LEV). Table4. Regression Results of the Model
Detail explanation on the variable definition is
set out in Table 2. Unstandardized
Statistic
Coefficients
Table2. Measurement and Definition of Variables B Std. Error T Sig.
Variable Definitions Measurement (Constant) ***0.587 0.075 7.777 0.000
ETR Effective Ratio of tax payable to pre- Ln10SIZE **0.029 0.014 2.031 0.043
tax rate tax income Ln10PTI ***-0.079 0.012 -6.577 0.000
SIZE Firm size Natural log of total assets FOROPER ***-0.061 0.016 -3.833 0.000
PTI Profitability Natural log of pre-tax CAPINT *0.005 0.002 1.360 0.012
income (PTI) LEV ***-0.156 0.029 -5.360 0.000
FO Foreign Ratio of total foreign sales / Observations 830
operation purchases to total sales R2 0.227
CAPINT Capital Ratio of tangible fixed assets Adjusted R2 0.217
intensity divided by total assets *Significant at the 90% confidence level;
LEV Leverage Ratio total debts divided by **Significant at the 95% confidence level;
total assets *** Significant at the 99% confidence level

FINDINGS AND DISCUSSIONS A positive relationship between firm’s size and

ETR denotes larger MNCs pay higher taxes and
The results suggest that the ETRs for MNCs in thus, less associated with the tax avoidance
Malaysia are lower than the STR with mean activity. The relationship is consistent with prior
ETR of 21.4% as compared to STR of 25% in researches, thus concludes larger MNCs face
year 2015. This figure denotes that the MNCs in political costs which increase their ETRs. The
Malaysia pay 3.6% lower tax as compared to finding supports the political cost theory where
STR in year 2015. T-test result indicates that the larger companies are supervised and
difference between ETR and STR is significant controlled by the government and the public so
with value of 6.921 at 99% confidence level, as that the large companies pay more taxes [7, 14,
shown in Table 3. 16, and 22]. Meanwhile, a negative relationship
Table3. One Sample Test between profitability and ETR denotes that
highly profitable MNCs will pay lesser taxes
Mean T-Test P-Value
ETR 21.4
and thus, have lower ETRs.
STR 25 6.921 0.000*** Therefore, the study supports the tax shield or
***Significant at 99% Confidence level tax strategies theory in which highly profitable
Therefore, this finding provides the answer for companies have more incentives and resources
the first research objective and thus, provides to engage in tax avoidance strategies and reports
support on the existence of tax avoidance lower ETR. The results supports the assertation
activities among MNCs in Malaysia. The results that the MNCs have lower ETR by utilizing tax
of the regression analysis are presented in Table deductions and credits efficiently as compared
4. The adjusted R2 value of 0.217 indicates that to less profitable firms, resulting in greater
21.7% of the variation in ETR can be explained book-tax differences [7, 9, 17 and 21]. In
by the independent variables. The magnitude of addition, MNCs in Malaysia have the
the impact of the independent variables is within opportunities to reduce their tax burden with a
the range of the results reported in the previous wide range of incentives thus able to engage
studies, for example the adjusted R2 value within with effective tax planning. This is because
the range of 13.1% to 16.1% in [2] and 11.1% to MNCs with greater pre-tax income have more
16.3% in [15]. However, there are studies that incentives and resources to engage in effective
report better results for example the value of tax planning to reduce their tax liabilities which
adjusted R2 more than 40% in [13]. will result in lower ETRs. Besides, profitable
MNCs are able to utilise efficiently tax
The findings from the regression analysis reveal deductions such as the double deductions in
that all five variables are significantly associated terms of research and development expenditure,
with tax avoidance activity. In particular, the promotion of export, brand promotion activity,
results support H1, H2, H3, H4and H5: firm’s freight charges and employee training programs

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Determinants of Corporate Tax Avoidance Strategies among Multinational Corporations in Malaysia

as well as tax credits and exemptions, as are significant factors influencing the corporate
compared to less profitable companies. Similarly, tax avoidance of the MNCs. The findings would
a negative relationship between foreign operation provide a valuable insight and empirical
and ETR also implies that MNCs with higher evidence for the Malaysian tax authority, the
ratio of foreign operation in terms of sales, IRBM in addressing the issue of aggressive tax
purchases or other payment to (from) foreign planning among the MNCs. The selection
affiliates will have lower tax burden and thus criteria of audit cases by the tax authority can be
report lower ETRs. The finding is consistent based on the level of ETRs as suggested in the
with the previous studies, for example the study. Currently, the tax authority does not
studies by [5], [7] and [17]. MNCs with select highly profitable companies for audit
extensive foreign operations are able to reduce because the selection criteria are usually for
their tax burden through tax planning activities companies which report profit below the
because they have better economies of scale and industry average.
scope to tax planning that is by exploiting the
differences in the tax rules of different countries Therefore, as suggested in this study, high
as well as taking advantage of the tax incentives profitability should be also be considered as a
provided by host countries. The MNCs have criteria besides ETR, in a risk assessment for
better opportunities to engage in the tax case selection particularly for MNCs that enjoy
variety of tax incentives. On the other hand, the
avoidance activities are due to their nature of
IRBM should not solely rely on the tax return
business operations which involve cross-border
transactions. Besides, MNCs with extensive database submitted by the MNCs but can further
intensity the enforcement activities by focusing
foreign activities have higher risks associated
on MNCs which have lower ETRs. Moreover,
with the tax avoidance in transfer pricing.
the tax enforcement can be implemented
A positive relationship between ETR and capital efficiently by using analytics as described in this
intensity denotes that highly capital intensive study which could reduce the administrative and
MNCs face higher ETRs which means the compliance costs of the tax authority.
MNCs in Malaysia do not utilise tax saving
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Citation: Fazliza Mohd Kasim, Natrah Saad, “Determinants of Corporate Tax Avoidance Strategies
among Multinational Corporations in Malaysia", International Journal of Research in Business Studies and
Management, 6(5), 2019, pp.1-6.
Copyright: © 2019 Natrah Saad. This is an open-access article distributed under the terms of the Creative
Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any
medium, provided the original author and source are credited.

6 International Journal of Research in Business Studies and Management V6 ● I5 ● 2019