Effect of corporate tax planning on the financial performance of listed companies at the Nairobi Securities Exchange in Kenya

Abstract

Financial performance is a critical aspect of organizational operations, as companies constantly explore strategies to minimize costs, enhance profitability, and foster economic growth. Financial performance reflects ability of organization to effectively utilize financial and production factors to generate revenue for shareholders. However, in the recent decades, there has been an increasing collapse of global and local companies hence has attracted a lot of attention and interests from financial experts, researchers and management of corporate entities. This study aims to investigate the effect of corporate tax planning strategies on the financial performance of companies listed at the Nairobi Securities Exchange (NSE) in Kenya. The study sought to specifically determine the effect of capital deductions, tax credit and tax exemption on financial performance of listed firms in NSE. The theoretical framework for the study was anchored on signaling theory, efficient tax planning theory and Hoffman’s tax planning theory. To achieve the objectives, the study adopted both explanatory and longitudinal research designs. Secondary data for the period between 2013 -2022 were extracted from annual financial statements of 57 firms listed on the NSE targeted for analysis. A total of 570 observations were made and data sheets were used to collect and organize the data. Data was analyzed using a combination of descriptive and inferential statistical techniques. All analyses was conducted using STATA version 13.0.Further, Multiple Linear regression model was employed to analyze relationships and the effect of the study variables. The findings of the regression analysis established that capital deductions (β = 0.844, p-value = 0.000, <0.05) have a positive and significant effect on financial performance. Similarly, tax credits also have a positive and significant effect on financial performance (β = 0.005, p-value = 0.000, <0.05). The regression results also revealed that tax exemptions have a positive and significant effect on financial performance (β = 0.061, p-value = 0.000, <0.05). The study contributes to the existing body of knowledge by revealing that tax planning plays a crucial role in improving the financial performance of listed firms in Kenya. Specifically, it was established that capital deductions, tax credits and tax exemptions are key tax planning strategies in positively impacting the financial performance of listed firms. The study recommends that company management should strive to have an in-depth understanding of tax laws so as to take advantage of every opportunity that will reduce their tax liability thereby increase their returns and value. In the Kenyan context, the study encourages managers of Companies listed at the NSE to be more proactive in corporate tax planning in order to improve the financial performance. Future researchers should explore the use of control variable such as firm size and industry type to understand the effect of corporate tax planning strategies on financial performance. Researchers are also encouraged to investigate the impact of Indirect tax incentives on the financial performance of listed firms in Kenya.