Corporate tax avoidance or corporate responsibility?: An examination of the NZX 50 companies

Abstract

This article provides an empirical analysis to see whether New Zealand companies in the NZX 50, between 2015 and 2017, have effective tax rates that are close to the statutory tax rate or whether they reduce their effective tax rates through corporate accounting tax avoidance. The results indicate, after removing the property and retirement and aged care (PRAC) companies from the analysis, the remaining companies listed on the NZX 50 have effective tax rates that are close to the corporate statutory tax rate. For the PRAC companies, their effective tax rates are much lower than the corporate statutory tax rate. However, this is not due to tax avoidance. Their lower effective tax rates are due to the manner in which they account for investment properties. NZ IAS 40 Investment Property allows companies to measure their investment properties at cost or fair value. If the PRAC companies choose the cost model, accounting income would not include the fair value adjustments and their effective tax rates would be close to the corporate statutory tax rate. If they choose the fair value model, accounting income would include the fair value adjustments and because they are non-taxable capital gains, like any company’s capital gains, there is an accounting-induced reduction in the effective tax rates. This is an accounting choice idiosyncrasy caused by the mismatch between the fair value model and the cost model used in the tax law. However, this begs the question why NZ IAS 40 allows companies to choose the fair value model and why all the PRAC companies choose it. The accounting choice literature argues that the cost model is inefficient for contracting between managers and shareholders (eg, executive compensation agreements), and for contracting between shareholders and debtholders (eg, debt covenants). In contrast, the fair value model is an efficient contracting technology for the organisation and governance of PRAC firms. Overall, this article shows that, adjusting for the subsample of PRAC companies, the remaining NZX 50 companies have effective tax rates close to the statutory tax rate.