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1.Trends, issues and justification for the study are explained.
2.The theoretical framework serves as the anchor or basis for the study.
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Background of the study The COVID-19 pandemic brought a significant impact on the global economy, leading to BACKGROUND OF THE STUDY
widespread uncertainty and economic distress. The outbreak prompted strict public health
measures, causing people to isolate and businesses to face financial difficulties. The stock ● The COVID-19 pandemic bore a significant
market indices experienced a rapid decline, resulting in a global economic collapse and impact on the global economy leading to
pushing many firms into financial distress. Financial distress refers to the deteriorating financial distress.
financial status of a company preceding bankruptcy or liquidation. During such difficult ● The profitability of industrial firms were
times, companies try to maintain their cash flow by limiting expenses, including tax negatively affected due to workforce reduction
payments. Tax aggressiveness, which involves managing taxable income to lower tax and shifts in supply and demand.
burdens, becomes a strategy for reducing expenses. Companies engage in tax aggression ● Tax aggressiveness as a strategy to reduce tax
to decrease expenses and maximize shareholder wealth. burden during financial distress

The pandemic caused a severe impact on various sectors, particularly the industrial sector.
Strict COVID-19 measures affected output, decreased demand, and disrupted supply
chains. The profitability of publicly listed industrial firms in the Philippines was affected by
the pandemic due to workforce reduction and shifts in supply and demand, negatively
affecting profitability. Tax aggressiveness can contribute to profitability and value
maximization when managed competently.

Most existing research on tax aggressiveness focuses on Western countries and various
periods of financial distress, with limited studies on the COVID-19 pandemic and
developing countries like the Philippines. There are few to no studies on tax
aggressiveness during times of financial crisis brought by the COVID-19 pandemic in the
Philippines. Understanding tax aggressiveness during the pandemic can aid policymakers
in establishing effective tax systems and policies to support struggling businesses. This
study aims to fill this gap by examining tax aggression among publicly listed industrial firms
in the Philippines during the COVID-19 pandemic.
Theoretical framework The study is anchored on the following theories: Theoretical Framework

First is the Agency Theory of Jensen and Meckling in 1976, wherein the shareholders Theories adopted in the study:
entrust their assets to the managers to achieve wealth maximization. This theory is useful 1. Agency Theory (Jensen and Meckling, 1976)
in determining the effect of management's decision to employ tax aggressiveness on the 2. Tax Planning Theory (Hoffman, 1961)
profitability of the firm. 3. Value Maximization Theory (Jensen, 2000)

Second is the Tax Planning Theory of Hoffman in 1961, wherein a taxpayer pays their
taxes to reduce tax burden however this does not reduce their tax liability. This theory helps
in determining the significance of being able to meet tax obligations to achieve positive
effects on profitability.

And lastly, Value Maximization Theory of Jensen in 2000, where all managers are expected
to make all the decisions to increase the market value of the firm as years pass by. The
study is anchored on this because of the effects of financial distress on profitability.

Conceptual framework In this study, Financial Distress served as the INDEPENDENT VARIABLE, measured using
the Altman Z-Score Plus Model which was adapted from da Fonseca (2019) which he
revised and adapted from Altman. It gauges the likelihood of a company going bankrupt
within 2 years by utilizing various elements found in an entity’s FS.

The DEPENDENT VARIABLE profitability was solely measured using the Return on Equity
ratio, this was done to minimize the presumed relation with other measures such as those
present in the Z-Score.

Tax Aggressiveness was chosen to be the MEDIATING VARIABLE since various studies
showed that financial distress may affect the level of tax planning engaged by a company.
It is measured using the Accounting Effective Tax Rate (3yr sum of total income tax
expense divided by 3 yr sum of pre-tax income) which has been extensively used in foreign
studies, and was adapted by the studies of Aggabao, Chen, and dos Santos.

Lastly, to minimize bias and ensure fairness of the results, 3 CONTROL VARIABLES were
implemented, the firm size, firm age, and leverage. These variables were held constant to
ensure that the changes found in the dependent variable were solely from the effects of the
independent and mediating variable.
Research questions Moving on with the statement of the problem. This study explores the effect of financial Research Questions
distress on the profitability of publicly listed industrial firms with tax aggressiveness as the
mediating variable during periods of financial crisis such as the COVID-19 pandemic. The 1. What are the characteristics of financial
study aims to answer the specific research questions presented in the following slides: distress in terms of the Altman Z-Score Plus
1. What are the characteristics of financial distress in terms of the Altman Z-Score model (ALT)?
Plus model (ALT)? 2. What are the characteristics of profitability in
2. What are the characteristics of profitability in terms of the Return on Equity (ROE) terms of the Return on Equity (ROE) ratio?
ratio? 3. What are the characteristics of tax
3. What are the characteristics of tax aggressiveness in terms of the Accounting ETR aggressiveness in terms of the Accounting
(AETR) ETR (AETR)
4. Does financial distress affect tax aggressiveness in terms of the Accounting ETR 4. Does financial distress affect tax
(AETR) aggressiveness in terms of the Accounting
5. Does tax aggressiveness affect profitability in terms of the Accounting ETR (AETR) ETR (AETR)
6. Does tax aggressiveness mediate the effect of financial distress on profitability? 5. Does tax aggressiveness affect profitability in
terms of the Accounting ETR (AETR)
6. Does tax aggressiveness mediate the effect of
financial distress on profitability?

Hypotheses RESEARCH HYPOTHESES

The hypotheses for this study are divided into four sections in order to thoroughly discuss
Effect of Financial Distress on Profitability
the following research problems: (1) the effect of financial distress on profitability, wherein
the Altman Z-score Financial Distress has a significant effect on Profitability (2) the effect of Ha1: ALT has a significant effect on ROE.
financial distress on tax aggressiveness, (3) the effect of tax aggressiveness on profitability,
Effect of Financial Distress on Tax Aggressiveness
and (4) the effect of financial distress on profitability as mediated by tax aggressiveness.
Ha2: ALT has a significant effect on AETR.

Effect of Tax Aggressiveness on Profitability

Ha3: AETR has a significant effect on ROE.

 Effect of Financial Distress on Profitability as Mediated
by Tax Aggressiveness

Ha4: AETR has a significant mediating role in the

relationship between ALT and ROE.

Relevant RRL It is shown that the present study is supported by numerous empirical studies. Related
literature used several proxies to assess a firm's financial performance, tax
aggressiveness, financial distress, and the control variables. The financial metrics utilized
by the researchers are widely used and validated as effective measures by different
studies. However, there is limited local literature about financial distress and tax
aggressiveness, little to no studies have been conducted that use tax aggressiveness as a
mediator.

Research design The study took a non-experimental, correlational, and linear quantitative approach to RESEARCH DESIGN
quantify the effect of financial distress on the profitability of publicly listed industrial firms as ● Non-experimental, Correlational, and Linear
mediated by tax aggressiveness. Spearman Rho and Panel Data Regression were utilized Quantitative Approach
to determine the effect of financial distress on profitability, as well as the mediating effect of ● Spearman Rho and Panel Data Regression
tax aggressiveness. The research mainly used numerical data coming from 5 years-worth
of financial statements to determine the values of the chosen variables.

Sample selection The study mainly focused on the publicly listed industrial firms of Philippine Stock SAMPLE SELECTION TECHNIQUE AND SAMPLE
technique and sample Exchange Electronic Disclosure Generation Technology (PSE EDGE). According to the SIZE
size study of Aggabao…, these publicly listed firms are expected to present financial statements
to adhere with widely accepted accounting standards, thereby financial information is ● Purposive sampling
accessible for analysis. For this study, purposive sampling will be utilized as the sampling ○ 28 out of 73 publicly listed industrial
technique. The researchers established a specific set of criteria to ensure that the gathered companies of PSE EDGE.
data is in accordance with the objectives of the study.
● The following are the criteria utilized in deriving
From the 73 industrial companies, the study included: at the samples:
1. Firms that are publicly listed during the
First, to effectively assess the impact of financial distress on the profitability of industrial period of 2019, 2020, and 2021
 firms during COVID-19 pandemic, the study included those firms that are publicly listed 2. Firms that are not Philippine Economic
during the period of 2019, 2020, and 2021. Zone Authority (PEZA) registered
3. Firms whose trading of stocks was not
Second, firms that are not Philippine Economic Zone Authority (PEZA) registered. These suspended between 2019-2021
companies have different taxation systems as they are given special tax rates in place of 4. Firms operating on a calendar year
other taxes and frequently utilize the benefit of the income tax holiday. Thus, to avoid 5. Firms with available and complete
inconsistencies in the result, the researchers excluded these companies from the sample financial statements and information
from 2017 to 2021
of the study.
6. ​Firms with a Z-score of less than 1.8
Third, those firms whose trading of stocks was not suspended between 2019-2021. calculated from the Altman Z-score
plus model
Fourth, firms operating on a calendar year, and exclude those companies reporting on a
fiscal year basis. *INSERT SAMPLE ELIMINATION PROCESS
TABLE*
Fifth, firms with available and complete financial statements and information for the year
2017-2021, the researchers gather data from the financial statements during 2017-2018 for
the computation of AETR.

Lastly, those companies with a Z-score of less than 1.8 calculated from the Altman Z-score
plus model, which implies a high likelihood of financial distress; firms that fall below the
threshold in any one year, from 2019-2021, will be included.

Accordingly, 28 out of 73 companies will be the sample of the study. Presented in

Appendix A/screen is the summary of the sample elimination process done by the
researchers to arrive at the sample size.

Data collection method This study utilized secondary data from the audited financial statements from 2019 to 2021 Financial Distress
of the publicly-listed industrial firms. Financial ratios were calculated using established
formulas from previous research to measure different variables of interest. Financial ● Altman Z-Score Plus Model:
distress was assessed using ratios such as return on assets (ROA), capital turnover,
solvency, liquidity, and profitability. The formula for the Altman Z-score Plus Model was 𝐴𝐿𝑇 = ALT1 ∗ 3,107 + ALT2 ∗ 0,998 + ALT3 ∗ 0,420 +
used to determine the level of financial distress based on these ratios. Only companies ALT4 ∗ 0,717 + ALT5 ∗ 0,847
scoring below a threshold of 1.8 were considered to be in financial distress. Profitability
was evaluated using the return on equity (ROE) formula, and tax aggressiveness was Where:
 measured using the accounting effective tax rate (ETR) formula. Control variables, ● ALT1 :
including firm size, firm age, and leverage, were also considered to account for external ROA = EBIT/Total Assets
factors that could impact the relationship between the variables studied.
● ALT2 :
Capital turnover = Net Sales/Total Assets

● ALT3 :
Solvency = Book Value of Equity/Total
Liabilities

● ALT4 :
Liquidity = Working Capital/Total Assets

● ALT5 :
Profitability = Retained Earnings/Total Assets

Profitability

● Return on Equity (ROE) = Net Income/Total

Shareholder’s Equity

Tax Aggressiveness

● Accounting ETR (AETR) = Sum of 3-year

total income tax expense/3-year sum of pre-tax
income

Data analysis The study shall use descriptive and inferential statistics in analyzing the collected data.

For the descriptive aspect, the computed ALT, ROE, and AETR of the 28 publicly listed
industrial firms was examined using selected descriptive statistical measures—which are
the mean, median, minimum and maximum values, and standard deviation.
 And moving on to the inferential aspect, the Spearman correlation coefficients between
independent and control variables were obtained using the Spearman Rho correlation
measure to determine the presence of possible high collinearity between these variables
before conducting panel data regression analysis.

Panel data regression using the Fixed Effects Method was used to test if profitability (ROE)
is significantly affected by financial distress and tax aggressiveness (AETR), respectively.
And in contrast, panel data regression using Ordinary Least Squares (OLS) Method was
employed to identify if tax aggressiveness has a significant effect on profitability based on
the 2019 to 2021 financial statements of the chosen publicly listed firms in the industrial
sector. In conducting the panel data regression, the Hausmann test was also employed to
examine endogeneity in the panel model, while the Wooldridge test was used to check
unbalanced panel data’s autocorrelation. Lastly, the White test was also used to detect
heteroscedasticity in the gathered data.

The chosen regression analysis method by the researchers is aligned with the methods
employed by Aggabao et al. (2022).

Results and discussion

Result and discussion: To test the hypothesis that “Financial Distress has a significant effect on ROE”, First, the Effect of Financial Distress on Profitability
Hypothesis 1 Jarque Bera Test showed that the dataset had a departure from normality. This led to the Ha1: ALT has a significant effect on ROE
usage of the Spearman Rho correlation which showed that gross sales and total assets,
which were both initially considered for control variable “Firm Size” were highly correlated Findings: The hypothesis that financial distress has a
and only 1 should be used within the study. significant effect on ROE is supported

Following this, 2 separate panel data regression analysis were done using the Fixed *Table*
Effects Method which rejected that Ordinary least Squares and random effects model
would be adequate and consistent. The Fixed Effects Regression showed that 67.61% of Madhushani & Hirindu Kawshala (2018) - Colombo
the variation found in ROE can be attributed to the values of financial distress and the 3 Stock Exhange (Non-Banking Institutions)
control variables. Specifically indicating the for every 1 unit increase in financial distress,
 the ROE increases by 0.0639 (High altman is good) The results also indicated a z-value of Moch et al. (2019) - Indonesia Stock Exchange
6.673 which rejects the null hypothesis and supports that ALT or Financial distress has a (Manufacturing)
significant effect on ROE.
Egbunike et al. (2019) - Nigerian Stock Exchange
This finding is congruent with the results of Madhushani and Kawshala (2018), and Moch (Manufacturing)
et al. (2019) who conducted similar studies in Sri Lank and Indonesia with the use of
Publicly listed Non-Banking institutions. Basovníková et al. (2018) - Prague Stock Exchange
(Building Sector)
Moch et al. (Indonesia) referred to the 2008 economic crisis which caused sudden
disruptions in company operations leading to a significant drop in spending power due to a
decrease in income generating activities, rendering maturing financial obligations left
unpaid. This applies to both publicly listed firms and SMEs, which composes 99.5% of
businesses in the country which were affected by the Covid 19 Pandemic. ROEs are also
critical during times of economic instability as creditors use it as a benchmark of ability to
generate profits by using their own capital. This is in line with Jensen and Meckling’s
Agency Theory which is defined as principals entrusting their assets to agents with the goal
of wealth maximization, a financially distressed company will suffer from a Low ROE which
affects a firms capability to borrow funding or loans. Lastly, Nugroho also supports this
finding when he discovered the financial distress effects the inherent risks and profitability
of firms.

Result and discussion: As presented in Table 5, financial distress yields a coefficient of -0.0024 and a p-value of *TABLE*
Hypothesis 2 0.9480. Since the p-value is greater than 0.05, the null hypothesis is not rejected.
Therefore, these results indicate that financial distress has no significant effect on tax Effect of Financial Distress on Profitability
Ha2: ALT has a significant effect on AETR.
aggressiveness based on the accounting effective tax rate (AETR).
Findings: There is no sufficient evidence that financial
These results are in-line with the findings of the studies conducted by Dhamara and Violita distress significantly affects tax aggressiveness,
based on AETR.
(2018) and Ahdiyah and Triyanto (2021).

It is important to note that companies facing financial distress do not necessarily

resort to aggressive tax planning strategies in order to minimize their expenses. This
result may be influenced by alternative ways employed by corporations to reduce their
 expenditures, such as saving on raw materials, cutting off employees, and optimizing
property, plant, and equipment, instead of solely aiming to minimize their tax liabilities, as
suggested by a study conducted by Nugroho and Firmansyah (2018).

Furthermore, these results may also be affected by the high risk associated to tax
aggressiveness for companies who are experiencing financial distress. According to
a study conducted by Hartoto in 2018, a financially distressed company’s primary
focus is to resolve their financial difficulties and stabilize their operations. Thus, they
may need to prioritize generating enough cash flows to meet its immediate liabilities, such
as operating expenditures, employee compensation, and paying off loans, instead of
coming up with ways to lessen their tax burden.

Therefore, financial distress leaves companies with limited opportunities and resources to
fund extensive tax aggressiveness strategies, thus proving the negative relationship
between financial distress and tax aggressiveness as proxied by AETR.

Result and discussion: The research findings presented a p-value of 0.4082, which is greater than 0.05; therefore, Effect of Tax Aggressiveness (AETR) on
Hypothesis 3 null hypothesis is accepted. This indicates that the tax aggressiveness, as quantified by Profitability (ROE)
accounting effective tax rate (AETR) has no significant impact on profitability, as measured
by return on equity (ROE). Furthermore, the results suggest a positive relationship where *Insert TABLE 6*
an increase in AETR corresponds to a proportional increase of 0.9% in ROE.
Ha3: AETR has a significant effect on ROE
It is important to note that the relationship between AETR and ROE can vary depending on
factors including industry dynamics, company-specific characteristics, and economic Accounting effective tax rate (AETR), as a measure of
conditions. The AETR showing no significant effect on the ROE can be linked to the tax aggressiveness, has no significant effect on
firm-specific characteristics of the companies in the industrial sector. Firms classified under profitability, determined using return on equity (ROE).
the industrial sector exhibit varying features, such as capital structure, business models,
and profitability drivers. For instance, manufacturing firms may have significant investments
in physical assets like machinery and facilities, while construction companies rely more on
human capital. Furthermore, manufacturing firms may have distinct cost structures, such
as raw material costs, labor charges, and overhead costs, which can impact their
profitability and tax burden, affecting the relationship between AETR and ROE.
 The introduction of R.A. No. 11534 also known as the CREATE Law, aimed to provide tax
relief to businesses, including a reduction in Regular Corporate Income Tax (RCIT) rates
and Minimum Corporate Income Tax (MCIT) rates. Lower tax rates may impact the
prevalence of tax avoidance activities and alter the tax burden for industrial firms,
potentially influencing the relationship between AETR and ROE.

In addition, through various strategies, companies can effectively manage their tax
liabilities without directly affecting their operational performance. This enables them to
reduce their AETR, which may not have an impact on ROE. Additionally, differences in
financial reporting practices, treatment of tax-related items, and specific regulations can
introduce variations in reported AETR, making it challenging to establish a significant effect
on ROE across industrial firms.

Result and discussion: To test the hypothesis that “AETR has a significant mediating role in the relationship
Hypothesis 4 between ALT and ROE, it is necessary to conduct mediation analysis.

According to Lucos (2022), prior to performing mediation analysis, a. the effect of financial
distress on ROE must be significant, and the effect of financial distress on AETR (the
mediating variable) must also be significant. The second condition is necessary for
computing the indirect effect in the subsequent analysis. Based on the results on Table 4,
financial distress has a significant effect on ROE. However, based on Table 5, the effect of
financial distress on AETR is not significant. Hence, mediation analysis cannot be
performed. There is no mediation effect, only direct effect between financial distress and
ROE and direct effect between AETR and ROE.

H4: AETR has a significant mediating role in the

Hypothesis 4 (H4): AETR has a significant mediating role in the relationship between ALT relationship between ALT and ROE, it is necessary to
and ROE. conduct mediation analysis.
To test this hypothesis, a mediation analysis should be conducted. Before performing the
analysis, the guidelines provided by Lucos (2022) were followed. Two conditions were Findings: AETR has no significant mediating role in
required for mediation analysis. First, the effect of financial distress on ROE needed to be the relationship between ALT and ROE,
significant, and second, the effect of financial distress on AETR (the mediating variable)
must also be significant. The results presented in Table 4 showed a significant effect of It is necessary to conduct mediation analysis
financial distress on ROE, complying with the first condition for mediation analysis. Mediation Analysis
However, Table 5 revealed that the effect of financial distress on AETR was not significant,
thus failing to meet the second condition. Consequently, mediation analysis could not be Criterion for conducting mediation analysis:
performed, indicating that there was no mediating effect of AETR in the relationship a) The effect of financial distress on ROE must
between ALT and ROE. be significant
The findings from this study do not support Hypothesis 4 (H4), which suggested that AETR b) The effect of financial distress on AETR (the
plays a significant mediating role between ALT and ROE. Although financial distress was mediating variable) must also be significant
found to have a significant direct effect on ROE, the lack of a significant effect between
financial distress and AETR indicates that AETR does not mediate the relationship Results:
between ALT and ROE in this study. Hence, tax aggressiveness is rather a predictor than a 1. First criteria is met. Financial distress has a
mediator. significant effect on ROE
The non-significant relationship between financial distress and AETR suggests that 2. Second criteria is not met. Financial distress
changes in financial distress do not lead to variations in AETR. This could be due to has no significant effect on AETR.
several factors. It is possible that the specific context of the study, such as the 3. No mediation analysis was performed.
characteristics of the sample or the regulatory environment, influenced the relationship
between financial distress and AETR. An example of the characteristics of the regulatory Discussion:
environment is the loopholes found in the Internal Revenue Code which caused a variety of - The findings do not support Hypothesis
tax applications and interpretations as mentioned by Hoffman (1961) in his discussion of 4
Tax Planning Theory. Additionally, other unobserved variables or external factors may have - Financial distress was found to have a
a stronger influence on AETR, masking the potential mediating effect in this research significant direct effect on ROE, the
context. lack of a significant effect between
The relationship between financial distress and profitability is complex and influenced by financial distress and AETR indicates
various factors. In the context of examining the mediating role of the accounting effective that AETR does not mediate the
tax rate (AETR) between financial distress and profitability, it becomes apparent that AETR relationship between ALT and ROE.
does not act as a mediator. Several reasons support this conclusion such as: first, financial - Tax aggressiveness is a predictor
distress can stem from diverse causes such as declining sales, high debt levels, economic rather than a mediator.
downturns, or industry-specific issues (Gordon, 1971; Frederick, 2019; and Nugroho et al.,
2020). Tax aggressiveness, represented by AETR, primarily focuses on managing tax Factors that influence the results:
liabilities and may not directly address the underlying factors contributing to financial - Characteristics of the sample or regulatory
distress (dos Santos and de Oliveira, 2020; Aggabao et al., 2022; and Xavier et al, 2022). environment
Consequently, it is unlikely to act as a mediating factor between financial distress and
profitability. Second, while tax aggressiveness strategies can reduce a company's tax 1. Financial distress can stem from diverse
burden, their influence on overall profitability might be limited. Profitability is influenced by causes such as declining sales, high debt
various aspects including revenue generation, cost management, operational efficiency, levels, economic downturns, or
market conditions, and competition (Fatihudin et al., 2018; Hada & Mihalcea, 2020; and industry-specific issues (Gordon, 1971;
Aggabao et al., 2022). The tax savings achieved through aggressive tax planning may not Frederick, 2019; and Nugroho et al., 2020).
outweigh the impact of other factors on profitability, particularly during periods of financial 2. Tax aggressiveness primarily focuses on
distress. Third, engaging in aggressive tax planning carries regulatory and reputational managing tax liabilities and may not directly
risks. Tax authorities might challenge or disallow such strategies, leading to potential legal address the underlying factors contributing to
disputes, penalties, and reputational damage. In times of financial distress, companies are financial distress (dos Santos and de Oliveira,
often more cautious about adopting aggressive tax planning approaches to mitigate 2020; Aggabao et al., 2022; and Xavier et al,
additional risks and potential negative consequences, which diminishes the mediating role 2022).
of AETR. Fourth, during financial distress, companies typically prioritize financial 3. While tax aggressiveness strategies can
restructuring efforts such as debt renegotiation, cost-cutting measures, asset divestitures, reduce a company's tax burden, their influence
or seeking on overall profitability might be
36 limited.(Fatihudin et al., 2018; Hada &
Mihalcea, 2020; and Aggabao et al., 2022).
additional financing (Indarti et al., 2021). These measures aim to improve the company's - The tax savings achieved through
financial position and stabilize operations. While tax planning is important, it may not be the aggressive tax planning may not
central focus or have a direct impact on these restructuring initiatives, further diminishing outweigh the impact of other factors on
the mediating effect of AETR. profitability, particularly during periods
of financial distress.
In summary, although tax aggressiveness, as indicated by AETR, can influence a 4. Engaging in aggressive tax planning carries
company's profitability, it does not act as a mediator in the relationship between financial regulatory and reputational risks
distress and profitability. Financial distress involves a broader range of challenges that 5. During financial distress, companies typically
require comprehensive solutions extending beyond tax planning strategies alone. By prioritize financial restructuring efforts such as
recognizing these factors, researchers and practitioners can gain a better understanding of debt renegotiation, cost-cutting measures,
the complexities associated with financial distress and its impact on profitability. asset divestitures, or seeking additional
financing (Indarti et al., 2021).
While the absence of a significant mediating effect may be seen as a limitation, it is
important to acknowledge the significant direct effects observed. The direct relationships Summary:
between financial distress and ROE, as well as AETR and ROE, provide valuable insights Although, tax aggressiveness, as proxied by AETR,
into the influence of these variables on profitability. These findings contribute to the can impact a company's profitability. It does not
understanding of the factors impacting profitability and present opportunities for further mediate the relationship between financial distress
exploration. and profitability. Financial distress involves various
challenges that go beyond tax planning strategies.
In conclusion, the results indicate that the accounting effective tax rate does not mediate Recognizing these complexities helps researchers
the relationship between financial distress and profitability, as proxied by ROE. The and practitioners better understand the impact of
non-significant relationship between financial distress and AETR suggests that other financial distress on profitability.
mechanisms or factors may be at play in influencing the relationship between financial
distress and profitability. Future research should consider incorporating additional variables Although there is no significant mediating effect found,
or exploring different contexts to gain a deeper understanding of the dynamics between it's crucial to recognize the significant direct effects
financial distress, AETR, and profitability. observed. The direct relationships between financial
distress and ROE, as well as AETR and ROE, offer
SCRIPT: valuable insights into how these variables influence
profitability.
To better understand and simplify the process conducted in answering the fourth
hypothesis, please refer to the illustration.

There are three main variables at play, First, financial distress, second is the profitability
and lastly is tax aggressiveness.

Prior to conducting a mediation analysis, there are criterions needed to be met. First, the
effect of financial distress on ROE must be significant, and the effect of financial distress on
AETR (the mediating variable) must also be significant. Based on the results, financial
distress has a significant effect on ROE. However, the effect of financial distress on AETR
is not significant. Hence, mediation analysis cannot be performed. There is no mediation
effect, only direct effect between financial distress and ROE and direct effect between
AETR and ROE.

The study revealed that financial distress has a significant direct effect on ROE, indicating
its impact on profitability. However, there was no significant relationship between financial
distress and AETR, suggesting that AETR does not mediate the relationship between
financial distress and ROE.

There could be several reasons for these findings. The specific characteristics of the
sample and the regulatory environment might have influenced the relationship between
financial distress and AETR. Additionally, other unobserved variables or external factors
may have a stronger influence on AETR, masking its potential mediating effect.

Moreover, tax aggressiveness, represented by AETR, primarily focuses on managing tax

liabilities and may not directly address the underlying factors contributing to financial
distress. Profitability, on the other hand, is influenced by various factors such as revenue
generation, cost management, and market conditions.

Engaging in aggressive tax planning carries regulatory and reputational risks, and
companies in financial distress are often cautious about adopting such strategies. During
these times, companies prioritize financial restructuring efforts to stabilize their operations.
 Tax planning may not be the central focus or have a direct impact on these restructuring
initiatives, further diminishing the mediating effect of AETR.

In conclusion, the results indicate that AETR does not mediate the relationship between
financial distress and profitability. Future research should explore additional variables or
different contexts to gain a deeper understanding of the dynamics between financial
distress, AETR, and profitability.

Conclusions The widening impact of the pandemic had an effect on the supply, demand, and production
chains that are essential to the overall operation of industrial firms. It contributed to the
global economic crisis, which has caused a lot of companies to have financial difficulties
that may affect their profitability. Firms are forced to utilize other approaches in order to
respond to unanticipated operational changes within the market. Reducing their tax burden
through tax aggressiveness can be one of the outlined techniques to decrease the impact
of the financial crisis and boost the profitability of the sectors. However, there is limited to
no local literature that explores the three variables simultaneously. Consequently, there
have been studies conducted during the financial crisis but only a few focused on
COVID-19. The researchers believed that the basis for certain claims must be tested out
firsthand. So, it was revealed that financial distress has a significant effect on the
profitability, leading to the conclusion that the economic downturn has increased the risk of
their cash-generating operations which makes it challenging for them to generate profit.
However, the lack of a significant effect between financial distress and tax aggressiveness
indicates that tax aggressiveness does not mediate the relationship between financial
distress and profitability in this study. With this, it can be concluded that financial distress
covers a broader spectrum of concerns that need more complex alternatives apart from tax
planning. Moreover, it implies that further variables that affect profitability will offset the tax
savings obtained through tax planning as the findings revealed that tax aggressiveness has
no significant effect on the profitability.

Recommendations The following are recommendations of the researchers for the beneficiaries of this study RECOMMENDATIONS:
namely:
a) Management of Publicly Listed Industrial Firms:
● Focus on comprehensive solutions beyond tax
planning to address financial distress.
Ladies and gentlemen, in light of the findings from our study, I would like to present the
following recommendations to the target beneficiaries of our research. These
recommendations are based on the results and conclusions drawn from our analysis. Let's
delve into each recommendation:
Recommendations:
1. Management of publicly listed industrial firms:
● Shift focus beyond tax planning strategies alone to address financial
distress.
● Consider factors such as revenue generation, cost management, and
market conditions to improve profitability.
● Develop comprehensive strategies for financial restructuring, debt
renegotiation, and cost-cutting measures.
● Recognize the complexities associated with financial distress and address
them effectively.
2. Existing and potential investors and creditors:
● Consider a wider range of factors impacting profitability and financial
stability when making investment decisions.
● Analyze a firm's capability to generate revenue, manage costs, balance
market conditions, and undertake financial restructuring efforts.
● Make informed decisions about potential risks and returns associated with
investing.
● Evaluate a company's ability to meet its financial obligations before
committing resources.
3. Government and regulatory bodies:
● Consider our study's findings when formulating policies related to financial
distress and tax planning strategies.
● Adopt a broader perspective when addressing financial distress issues.
● Promote comprehensive approaches to financial distress that go beyond tax
considerations.
● Collaborate with regulatory bodies and stakeholders to develop initiatives
aimed at stabilizing companies in financial distress.
● Utilize the positive effect of relevant laws, such as the Corporate Recovery
and Tax Incentives for Enterprises (CREATE) Law, to improve the Tax Code
and its implementation.
● Consider factors like revenue generation, cost
management, and market conditions to
improve profitability.
b) Creditors, and existing and/or potential investors:
● Consider factors beyond tax aggressiveness
when evaluating a firm's profitability and
financial stability.
● Analyze the firm's ability to generate revenue,
manage costs, and adapt to market conditions.
● Evaluate the implementation of financial
restructuring efforts.
c) Government and Regulatory Bodies:
● Promote comprehensive approaches beyond
tax considerations for tackling financial
distress.
● Encourage collaboration between regulatory
bodies and stakeholders to stabilize financially
distressed companies.
● Utilize the positive effect of relevant laws, such
as the Corporate Recovery and Tax Incentives
for Enterprises (CREATE) Law, to improve the
Tax Code and its implementation.
d) Future researchers
● Study a larger sample size to enhance the
generalizability of the findings.
● Inclusion of additional proxies that can
represent each variable.
● Explore other potential moderating and/or
mediating variables.
 4. Areas for future research:
● Study a larger sample size to enhance the generalizability of findings.
● Explore other sectors beyond the industrial sector or expand the study to
cover the entire spectrum of industries.
● Include additional proxies such as Return on Assets (ROA), Book-Tax
Difference (BTD), Henry and Sansing measure (HNS), and Cash Effective
Tax Rate (CETR) to measure variables more accurately.
● Investigate the involvement of moderating and mediating variables to gain a
deeper understanding of the relationships under investigation.
● Overcome limitations and address existing gaps to provide more
comprehensive insights and strengthen the validity of findings.
Conclusion:
In conclusion, these recommendations aim to guide management, investors, creditors, and
regulatory bodies in navigating the complexities associated with financial distress and tax
aggressiveness. By implementing these suggestions and addressing the limitations
outlined in our study, we can improve our understanding of the relationship between
financial distress, tax aggressiveness, and profitability. This will lead to more informed
decision-making, better policies, and ultimately contribute to the growth and stability of
publicly listed industrial firms.

The results and findings of the study further ought the researchers to recommend the following to the target beneficiaries of the study. First, it is recommended that management
of publicly listed industrial firms should shift their priority on finding solutions to address financial distress beyond tax planning strategies alone. They should also consider other
factors such as revenue generation, cost management, and awareness on market conditions to improve profitability. It is crucial for management to understand the complexities
associated with financial distress and from there be able to develop effective strategies for financial restructuring, debt renegotiation and cost-cutting measures.
Second, creditors and existing or potential investors should consider a wider list of factors that could impact the profitability of a firm and its financial stability status when making
investment decisions. Firm’s capability to generate revenue, manage costs, balance market conditions and come up with financial restructuring efforts must be analyzed. By
considering these factors, investors can make more informed decisions about the potential risks and returns associated with investing in publicly listed industrial firms and
creditors will be aware of the company’s ability to meet its financial obligations.

Third, Government and regulatory bodies should consider the study's findings when formulating policies related to financial distress and tax planning strategies. It is important for
regulatory bodies to adopt a broader perspective when addressing financial distress issues. In addition, given that tax planning strategies alone may not effectively address
financial distress, tax regulatory agencies and the government should promote comprehensive approaches to financial distress that go beyond tax considerations. This may entail
collaboration between regulatory bodies and stakeholders to resort to various solutions and other initiatives that are aimed at stabilizing companies in financial distress.

Through consideration of these recommendations and overcoming the gaps and limitations, future studies can provide more detailed and comprehensive insights, strengthen the
validity of findings, and contribute to the existing literature in understanding the relationship between financial distress, tax aggressiveness, and profitability.

MOCK QUESTIONS (feel free to edit the questions & answers)

1.) What was the rationale behind selecting the specific variables and measures used in your study?
2.) How did you define and operationalize the following on your research:
a.) Financial Distress - deteriorating financial status that usually precedes bankruptcy making the company unable to pay obligations which fall due (Altman Z-Score)
b.) Tax Aggressiveness - minimization of tax payable through engaging in tax planning activities. Indistinguishable between what is legal and illegal. (AETR)
c.) Profitability - ability to generate profit while operating in a constrained environment brought about by the pandemic (ROE)
3.) What was the research methodology used in your study?
4.) How did you collect and analyze data?
5.) Can you describe the statistical techniques used to examine the relationship between Tax Aggressiveness and Financial Distress, and Financial Distress and Profitability,
and the possible mediation of Tax Aggressiveness?
6.) What were the findings of your study?
7.) Were the results consistent with your initial expectations or prior research in the field?
8.) Did you encounter any limitations or challenges during the data collection process?
9.) How did you address and mitigate these limitations?
10.) Can you discuss the theoretical underpinnings of your research?
11.) Why did you choose the industrial sector?