The impact of tax avoidance on firm’s profitability empirical evidence from real estate firms in vietnam

BANKING ACADEMY FACULTY OF FINANCE - GRADUATION THESIS TITLE: THE IMPACT OF TAX AVOIDANCE ON FIRM’S PROFITABILITY: EMPIRICAL EVIDENCE FROM REAL ESTATE FIRMS IN VIETNAM Student Class : Ha Ngoc Tung : K20CLCE Student ID : 20A4050411 Supervisor : Assoc.Prof.Dr Le Thi Dieu Huyen Hanoi, May 2021 Tai ngay!!! Ban co the xoa dong chu nay!!! 17014129033761000000 BANKING ACADEMY FACULTY OF FINANCE - GRADUATION THESIS TITLE: THE IMPACT OF TAX AVOIDANCE ON FIRM’S PROFITABILITY: EMPIRICAL EVIDENCE FROM REAL ESTATE FIRMS IN VIETNAM Student Class : Ha Ngoc Tung : K20CLCE Student ID : 20A4050411 Supervisor : Assoc.Prof.Dr Le Thi Dieu Huyen Hanoi, May 2021 DECLARATION I hereby declare that this submission is my own work in design and execution under the supervision of Ass.Prof Dr Le Thi Dieu Huyen The thesis has not been applied for any degree and it is not concurrently submitted in candidate of any other similar titles elsewhere Hanoi, May 2021 The author Ha Ngoc Tung ACKNOWLEDGEMENTS First and foremost, I offer my sincerest gratitude to all of my lecturers in Banking Academy of Vietnam who have guided and inspired me throughout the unforgettable four-year process I would like to express my gratitude and appreciation to my supervisor, Assoc.Prof.Dr Le Thi Dieu Huyen for her patience, knowledge and dedication Without her profound academic knowledge, I could not receive from many constructive comments and valuable suggestions she has given me, which I found very helpful to not only complete this thesis but also to improve my research-related skills and cognition The author Ha Ngoc Tung i TABLE OF CONTENTS INTRODUCTION CHAPTER 1: LITERATURE REVIEW AND THEORETICAL FRAMEWORK 1.1 Literature review of the impact of tax avoidance on firm’s profitability 1.1.1 Foreign studies 1.1.2 Domestic studies 1.2 Theoretical framework of firm’s profitability 1.2.1 Definition 1.2.2 Measurements 1.3 Theoretical framework of tax avoidance 11 1.3.1 Definition 11 1.3.2 Measurements 13 1.4 Theories about the relationship between tax avoidance and firm’s profitability 19 CHAPTER 2: METHODOLOGY AND MODEL 21 2.1 Data 21 2.2 Methodology 22 2.2.1 Pooled OLS 22 2.2.2 Fixed-effects method (FEM) 23 2.2.3.Random-effects method (REM) 23 2.2.4 GeneralizedLeast Squares method (GLS) .24 2.2.5 Tests 24 2.3 Regression model 26 CHAPTER 3: EMPIRICAL RESULTS AND DISCUSSION 32 3.1 Data description 32 3.1.1 Descriptive statistics 32 3.1.2 Pearson correlation coefficient 33 3.1.3 Multicollinearity test 34 3.1.4 Wooldridge test 34 3.2 Regression results 35 3.2.1 Results of Pool OLS, FEM & REM 35 3.2.2 Result of GLS model 36 ii CHAPTER 4: CONCLUSION AND RECOMMENDATION 41 4.1 Conclusion 41 4.2 Recommendation 42 4.2.1 For firm’s management 42 4.2.2 For further studies 45 REFERENCES 46 iii LIST OF ABBREVIATION ABBREVIATION MEANING ASEAN Association of Southeast Asian Nations BTD Book-tax difference CFO Cash flows from operations CIT Corporate income tax COGS Cost of goods sold EBIT Earnings before interest and taxes ETR Effective tax rate FEM Fixed-effects method GAAP Generally Accepted Accounting Principles GLS Generalized least squares method GMM Generalized method of moments HOSE Ho Chi Minh Stock Exchange IRS Internal Revenue Service OCF Operating cash flow OLS Ordinary least squares PIT Personal income tax PM Philip Morris (Financial Ratios) iv REM Random-effects method ROA Return on assets ROE Return on equity ROIC Return on invested capital SEC U.S Securities and Exchange Commission VAT Value added tax VECM Vector error correction mode v LIST OF TABLES AND FIGURES TABLE/ FIGURE Table 2.1: Relationship between independent variables and firm’s profitability in previous studies PAGE 31 Table 3.1: Statistical description 32 Figure 3.2: Correlation coefficient result 33 Figure 3.3: Multicollinearity test’s result 34 Figure 3.4: Wooldridge test’s result 34 Table 3.5: Regression results from OLS, FEM and REM 35 Table 3.6: Regression results from GLS 37 INTRODUCTION Rationale Taxation has played as a crucial instrument of fiscal policy in not only regulating country’s economy but also implementing tons of investments to produce sustainable growth to several sectors as well as infant industries (Nwaobia, Kwarbai, & Ogundajo, 2016) Notably, there exists an inevitable conflict that the government always seeks to optimizing the tax revenues, whereas firms as taxpayer always try to minimum the amount of tax they must pay Traditional theory claims tax avoidance as a magical tool in profit-maximizing activity without violating the tax laws, and so is firm’s mindset In the quest to reduce the costs of taxation, all means can be employed as long as they are not illegal in the country to raise efficiency, thereby reducing their Effective Tax Rate (ETR) The relationship between tax avoidance and firm’s profitability has been a controversial topic which draws great attention to the general public researchers from the majority of developed nations but carrying such ignorance among those of developing nations over the past decades As a rising country with robust economic growth rates in ASEAN region, Vietnam has witnessed itself as one of the most time-consuming and complex tax systems (Brown, 2020) Missing tax deadlines such as late report submission, under-declare liabilities or on-time payment failure can push firms into heavy penalties and reputational damage In recent years, tax violations in Vietnam is quite common not only in multinational corporations, but also in state-owned and private domestic firms towards different types of tax like corporate income tax (CIT), value added tax (VAT), personal income tax (PIT),… Globalization pose an opportunity for Vietnamese businesses to expand and integrate rapidly into both regional and international markets, from which tax avoidance and evasion becomes bigger in scale, unpredictable and sophisticated in conspiracy According to the Vietnam General Department of Taxation, over the period of 2010-2018, tax inspection has proceeded and detected a total of 642,423 businesses violating CIT with recollected tax revenue of 35,922.09 billion VND As