Effect of International Tax Planning on the Financial Performance of Multinational Corporations in West Africa

Abstract

The globalization process and, within the African framework, the implementation of the West African Single Market have led numerous corporations to overstep the national boundaries either to conduct phases of their economic process where it is more convenient or to expand their business abroad. Hence, the involvement of the diverse tax regulations of the countries, whose territories host such businesses, cannot be avoided. Thus, the lack of neutrality of taxation has brought the managers of Multinational corporations to take more and more into consideration of tax issues in their decision making process. The multinationals can pursue the aim of optimizing their fiscal burden by exploiting the legal options that the countries involved have given to their taxpayers, which constitute, de facto, the tax competition among the governments. Such planning of the cross-border activities of a business, taking into consideration the different tax laws of the concerned states, is known as international tax planning. This phenomenon is becoming increasingly concrete even within the West African borders, as companies located in one of the Member States of the West African Countries are entitled to take advantage of the numerous West African directives issued in order to guarantee the West Africa trade freedoms. Taxes on corporate profits are mandatory and usually constitute a large outflow for firms that, if not planned, lead to disproportionate and unwilling transfer of corporate resources to the government with its negative impact on the operating capacity and performance (firm value). The study which is anchored on the political cost theory on one hand and the managerial opportunism theory which is an extension of Agency theory examined the effect of international tax planning on performance of multinational corporations. The overall value of the firm is used as a yardstick to determine the bottom line performance of the multinational corporations. Ex-post facto research design was adopted. The study covered 5 firm-year observations for the period, 2015-2020. Data were drawn from the published financial statements of the sampled companies and analyzed using descriptive and inferential statistics centered on specified panel regression model. The joint effect of the considered tax planning proxies on the firm value was significant (F-stat. =2.580; P-value = 0.032) . While Effective tax rate (ETR), Dividend (DIV) and Firm age (FAG) are positively and significantly related to firm value, firm size, leverage and tangibility exert negative effect on firm value. The Adj. R2 value of 20.6% was not sufficiently strong in explaining the variation in firm value. The study concluded that holistic approach to tax planning and optimal mix of tax planning strategies are important determinants and has a positive contributory effect on firm value(bottom line performance).