Impact Of Reducing Corporate Taxation Rates On Corporate Governance Of Organizations In Australia

Background on Corporate Taxation in Australia

The Problem 

The amount which is paid by the Australian companies with respect to corporate tax has been a hot topic since the last few years. The idea that any person has to be made to pay tax which is more than absolutely required had been thrashed three decades ago by Kerry Packer. It has been further argued by Taylor and Richardson (2012) that there is nothing wrong in relation to minimizing the tax liabilities when they are not required. It has been further argued by Overesch and Wamser (2010) that if the tax rates for businesses are reduced they would be able to use the money for the purpose of enhancing investments and subsequently wages and jobs. Thus an intention to reduce the tax of corporations’ form 30% to 25 by 2026-27 have been expressed by the Turnbull government. This research proposal proposes to conduct research in relation to the impact of reducing corporate taxation rates on corporate governance of organizations in Australia.. There are several ways in which corporate taxation and corporate governance interact. Where the tax rates are higher the managerial diversion level is increased and lower tax reduces such level. The proposal also intends to show that when the corporate governance system is not effective, tax revenues can actually be reduced by an increase in tax which generates an alternative “Laffer-curve. The paper provided a background in relation to the contemporary situation of corporate Taxation in Australia and the proposed amendments. The paper conducts a probable literature review in relation to the topic followed by the development of a hypothesis which shows that corporate taxation and corporate governance interact. The paper further purposes a methodology and a conclusion which emphasizes on potential implications.

Background 

The Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 had been proposed on 1 September 2016 which purports to reduce the rate of corporate tax for those companies which carry out a business in Australia and whose total turnover is not equal to or more than $25 million for the income year 2017-18 and not equal to or more than $50 million for the income year 2018-19 which are generally called the base rates companies. Royal assent had been provided to the bill on 19^th may 2017. This will make sure that corporate tax rates which is presently uniform of 30% are reduced to 25% for the base rates entities. In addition the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017 had been introduced by the government on 18 October 2017. Where such law will be assented companies meeting the threshold for aggregate turnover and also not having base rate entity passive income more than 80% would be entitled to claim lower corporate tax rate. Thus those companies which  do not have more than 80% base rate entity passive income such as non share dividends, rent and royalties, net capital gains, interest income (subjected to exceptions), dividends rather than non-portfolio dividends, franking credits of these dividends, qualifying securities gains and income from partnerships and trusts which is a base rate entity passive income.

Proposed Amendments to Corporate Taxation Rates

Introduction 

This section of the research will conduct a review of the available literature in relation to the research topic which is the impact of reducing corporate taxation rates on corporate governance of organizations in Australia. This section of the research will through light upon corporate taxation in Australia as well as the structure of corporate governance in the country.

Corporate taxation in Australia

According to the Australian Taxation Office the profits which are earned by the companies in Australia is subjected to a flat rate of taxation which is 30% since 2001. The members of those companies who provide dividends are also subjected to gain tax credits also known as franking credits where the company had paid corporate tax. In addition as stated by Lanis and Richardson (2011) the companies are able to carry forwards the losses which have been incurred by them in the past for the purpose of claiming tax offsets in the future. The rate of taxation in relation to “small business entities” having a total turnover of less than $2 million had been reduced to 28.5%. Further the rate of taxation in relation to “small business entities” having a total turnover of less than $10 million had been reduced to 27.5%. The definition of “small business entities” was ever since fixed at having a total turnover of less than $10 million. However it had been announced by the government in 2017/18 that the companies which would be able to claim the lower tax rates would be known as “base rate entities“. The threshold in relation to the “base rate entities” is subjected to continues rise and as of now it is $25 million. It has been provided Gravelle (2013) that an essential role is played by taxation both in corporation as well as in the country.

Corporate tax issues in Australia 

It has been argued by Lanis and Richardson (2012) that the income tax rate of the corporation in Australia has to be brought down for the purpose of encouraging investments and specifically foreign direct investment. The incomes for Australians will be increased in the long run as a bigger and more productive capital stock will be created and also knowledge and technology spillovers will be generated enhancing the productivity of Australian businesses (Gravelle 2009). In addition in the long run a more productive and larger capital stock would lead to higher wages and higher growth. It has been further argued by Donohoe and Robert Knechel (2014) that where the productivity within the market is enhanced it also leads to the strengthening of corporate governance within the market.

Literature Review: Impact of Corporate Taxation on Corporate Governance

Corporate governance 

Armstrong et al (2015) has defined corporate governance as a system of practices, processes and rules by which the firm is controlled and directed. In its essence the principles of corporate governance are put in place to balance the interest of the stakeholders of the company like the management, suppliers, customers, financers, community and the government. The principles also provide a structure through which the company many attain its primary objective of making profit. Practically all spheres of management of a corporation is encompassed by the principles of corporate governance from internal control and action plans to corporate disclosure and performance management. It has been argued by — that where corporate tax are high the management has very limited resources available in relation to others spheres of corporate governance such as addressing the needs of the employees and indulging into the broader aspect of corporate social responsibility to help the community which is affected by the operations of the organization.  Jiraporn, Kim and Kim (2011) has stated that high rate of  taxes imposed on the corporations are against the basic principles of taxation and by imposing such rates the government is asking the companies to indulge in good corporate governance without providing them the resources to do so. As per the recommendations made by the Australian Securities exchange in relation to the corporate governance there are various principals which an organization has to follow. These include the necessity to act ethically, structuring the board to add value, laying solid foundation for management, managing risks, remunerating responsible and fairly, and safeguarding the integrity of corporate reporting. In order to comply with all such principles the organizations require adequate funding and high taxes deprive the companies access to such funds. This also leads to corruption and tax evasion scandals which is against the principles of corporate governance.

Interaction of Taxation and Corporate Governance Interact

According to Huseynov and Klamm (2012) the fundamental institution in relation to the interaction between corporate governance and taxation is that the avoidance of taxation asks for obfuscation of preventing detection and complexity. In turn these features can act as a protection to managerial opportunism. In order to understand this proposition an example has also been provided by Balakrishnan, Blouin and Guay (2018). Where managers of a firm create special propose entities in Tax havens, the rationale behind such enterprises is the means of reducing taxation. The wide explication in relation to the information about the structures and transactions cannot be done as provided by the management as it may be detected by the tax system and such benefits may be revoked. The structures may provide opportunities to the managers to indulge in actions which may not be in the best interest of the shareholders. It has been further agued by Hoi, Wu and Zhang (2013) that the use of such entities may lead to manipulation of earning, concealment of obligations and outright diversions.

Summary of Literature Review

Summary 

This section the research will summarize the literature review which has been conducted. The section provides that previous researches signify that the rate of taxation has a direct connection with the way in which corporate governance is carried out within a company.

H0- There no impact of reducing corporate taxation rates on corporate governance of organizations in Australia

The null hypotheses operates to establish that There no impact of reducing corporate taxation rates on corporate governance of organizations in Australia. Corporate tax rate is imposed by the government based on the financial demands of the country. This rate is usually fixed and is changed when required. The rate of taxation for corporations in Australia is fixed at 30%. On the other hand corporate governance is a system of practices, processes and rules by which the firm is controlled and directed. In its essence the principles of corporate governance are put in place to balance the interest of the stakeholders of the company like the management, suppliers, customers, financers, community and the government. the principles also provide a structure through which the company many attain its primary objective of making profit. Practically all spheres of management of a corporation is encompassed by the principles of corporate governance from internal control and action plans to corporate disclosure and performance management. Corporations are separate legal entity which means that they have an individual existence in the society and are liable to pay tax. This is because a corporation being an artificial legal person uses the resources of the society to carry out its functions. For the use of such resources it is totally ethical and justified to impose corporate tax at a rate which the government deems fit. In addition the it is the responsibility of the companies to act in an ethical manner like any other natural person in the society. Any natural person is not allowed to indulge in unethical conduct due to the rate of taxation imposed on them. Thus there is no connection between reducing corporate taxation rates and corporate governance of organizations in Australia

H1- there is impact of reducing corporate taxation rates on corporate governance of organizations in Australia

Gravelle (2009) has stated that high rate of  taxes imposed on the corporations are against the basic principles of taxation and by imposing such rates the government is asking the companies to indulge in good corporate governance without providing them the resources to do so. As per the recommendations made by the Australian Securities exchange in relation to the corporate governance there are various principals which an organization has to follow. These include the necessity to act ethically, structuring the board to add value, laying solid foundation for management, managing risks, remunerating responsible and fairly, and safeguarding the integrity of corporate reporting. In order to comply with all such principles the organizations require adequate funding and high taxes deprive the companies access to such funds. This also leads to corruption and tax evasion scandals which are against the principles of corporate governance. The initiative of reducing the rate of taxation can actually enhance corporate governance. It has been further stated Jiraporn, Kim and Kim (2011) when the corporate governance system is not effective, tax revenues can actually be reduced by an increase in tax which generates an alternative “Laffer-curve. When the mangers do not have the resources available to indulge into good corporate governance they would either not be able to meet the criteria or indulge into unethical activities. Thus when the tax rates are reduced corporate governance would be enhanced.

Hypothesis

Data collection Method 

As stated by Taylor, Bogdan and DeVault (2015) there are two ways in which data is to be collected for the purpose of carrying out a research. The first way is that of primary data collection and the second way is that of secondary data collection. In case of primary collection of data the researcher used methods like interviews and surveys. On the other hand in case of a secondary data collection method the researcher collects the data from books and journal articles. The data collection method to be used by the researcher has to be selected based on the type of research to be carried out. The researcher may also use both types of data collection for the research. In the given situation the researcher will use both primary and secondary data for the purpose of this research. The primary data will be collected form managers of few selected organizations by the use of close ended questionnaires. The secondary data will be collected form journal articles and government websites such as the ATO.

Data sampling 

As per Sullivan-Bolyai, Bova and Singh (2014) data sampling techniques are the methods which are used to collect the data samples for the research.  When it comes to the sampling of the population there are two types of sampling which are used namely random sampling and stratified random sampling.  Palinkas et al (2015) has defined random sampling as the method through which all members of a specific population are provided with an equal opportunity to be selected. This methods is not applicable in relation to processes which requires static population. In situation where the sample size is adequate the process of random sampling is appropriate. Stratified random sampling is the process n which the population is divided into strata containing data elements of their own. Each data element is provided equal opportunity of being selected. There are predetermined numbers of elements of every strata. In the given situation the researcher will use random probability sampling techniques for the purpose of this research. The participants will be selected randomly and every one will be provided equal opportunity without any form of discrimination.

Variables of interest 

There are two primary variable in relation to a research which are dependent and independent variables. Taylor,  Bogdan and DeVault (2015) has defined independent variable as exactly what it sounds like and is a variable which stands alone and is not altered by other variables which are attempted to be measured. On the other hand a dependant variable is variable which depends upon the independent variable. When the independent variable is altered it changes the measure of the dependant variable. In the given situation the independent variable is that of corporate taxation rate and the dependant variable is that of corporate governance. Corporate taxation rate is the rate at which the companies are taxed and corporate governance are the principles based on which the organizations are managed ethically. There is no effect of the way in which corporations are managed through the use of principals of corporate governance on the tax rates imposed on the corporations. On the other had the tax which is imposed on the corporation may have a significant impact on the way in which corporations are managed.

Model for establishing Hypotheses

Source: Created by Author

Conclusion  

From the above discussion a possible implication which may be derived would be that there is a significant impact of increased tax rates on the way in which corporations are managed and by reducing the rate of taxation on corporation the way in which corporations are managed can be enhanced. . As per the recommendations made by the Australian Securities exchange in relation to the corporate governance there are various principals which an organization has to follow. These include the necessity to act ethically, structuring the board to add value, laying solid foundation for management, managing risks, remunerating responsible and fairly, and safeguarding the integrity of corporate reporting. In order to comply with all such principles the organizations require adequate funding and high taxes deprive the companies access to such funds. This also leads to corruption and tax evasion scandals which are against the principles of corporate governance. Further through the reduction of corporate taxes the incomes for Australians will be increased in the long run as a bigger and more productive capital stock will be created and also knowledge and technology spillovers will be generated enhancing the productivity of Australian businesses. Where the productivity within the market is enhanced it also leads to the strengthening of corporate governance within the market.

References 

Armstrong, C.S., Blouin, J.L., Jagolinzer, A.D. and Larcker, D.F., 2015. Corporate governance, incentives, and tax avoidance. Journal of Accounting and Economics, 60(1), pp.1-17.

Arnold, J.M., Brys, B., Heady, C., Johansson, Å., Schwellnus, C. and Vartia, L., 2011. Tax policy for economic recovery and growth. The Economic Journal, 121(550).

Balakrishnan, K., Blouin, J. and Guay, W., 2018. Tax Aggressiveness and Corporate Transparency. The Accounting Review.

Donohoe, M.P. and Robert Knechel, W., 2014. Does corporate tax aggressiveness influence audit pricing?. Contemporary Accounting Research, 31(1), pp.284-308.

Gravelle, J., 2013. Corporate tax incidence: review of general equilibrium estimates and analysis. National Tax Journal, 66(1), p.185.

Gravelle, J.G., 2009. Tax havens: International tax avoidance and evasion. National Tax Journal, pp.727-753.

Hoi, C.K., Wu, Q. and Zhang, H., 2013. Is corporate social responsibility (CSR) associated with tax avoidance? Evidence from irresponsible CSR activities. The Accounting Review, 88(6), pp.2025-2059.

Huseynov, F. and Klamm, B.K., 2012. Tax avoidance, tax management and corporate social responsibility. Journal of Corporate Finance, 18(4), pp.804-827.

Jiraporn, P., Kim, J.C. and Kim, Y.S., 2011. Dividend payouts and corporate governance quality: An empirical investigation. Financial Review, 46(2), pp.251-279.

Lanis, R. and Richardson, G., 2011. The effect of board of director composition on corporate tax aggressiveness. Journal of Accounting and Public Policy, 30(1), pp.50-70.

Lanis, R. and Richardson, G., 2012. Corporate social responsibility and tax aggressiveness: An empirical analysis. Journal of Accounting and Public Policy, 31(1), pp.86-108.

Overesch, M. and Wamser, G., 2010. Corporate tax planning and thin-capitalization rules: evidence from a quasi-experiment. Applied Economics, 42(5), pp.563-573.

Palinkas, L.A., Horwitz, S.M., Green, C.A., Wisdom, J.P., Duan, N. and Hoagwood, K., 2015. Purposeful sampling for qualitative data collection and analysis in mixed method implementation research. Administration and Policy in Mental Health and Mental Health Services Research, 42(5), pp.533-544.

Richardson, G., Taylor, G. and Lanis, R., 2013. The impact of board of director oversight characteristics on corporate tax aggressiveness: An empirical analysis. Journal of Accounting and Public Policy, 32(3), pp.68-88.

Sullivan-Bolyai, S., Bova, C. and Singh, M.D., 2014. Data-collection methods. Nursing Research in Canada-E-Book: Methods, Critical Appraisal, and Utilization, p.287.

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Taylor, S.J., Bogdan, R. and DeVault, M., 2015. Introduction to qualitative research methods: A guidebook and resource. John Wiley & Sons