KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY

COLLEGE OF HUMANITIES AND SOCIAL SCIENCES

SCHOOL OF BUSINESS
DEPARTMENT OF ACCOUNTING AND FINANCE

TAX PLANNING AND FINANCIAL PERFORMANCE OF LISTED

MANUFACTURING COMPANIES IN SUB-SAHARAN AFRICA: THE

MODERATING ROLE OF BOARD FINANCIAL EXPERTISE.

BY:

RICHMOND OPOKU

BORGOR AVENYA WILLIAM

EMMANUEL ARKO DADZIE

OBED OPPONG AMPAH

CHAPTER ONE
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INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The manufacturing sector around the world contributes significantly to the global Gross

Domestic Product (GDP). According to a World Bank Report, over the last 65 years, of the

13 countries that sustained growth for 25 years or more, 10 did so through manufacturing-led

growth, underscoring the importance of the manufacturing sector in the proper functioning of

most economies. Again, the manufacturing sector contributes about 8 percent of GDP in Sub-

Saharan Africa (World Bank Report, 2012). Manufacturing companies engage in a wide

range of business activities including exports, imports and production, which creates jobs,

feeds the population and more importantly pay taxes to assist governments carry-out their

fiscal expenditures.

In 2020, corporate income tax was the highest contributor to Nigeria’s total tax revenues,

contributing 38 percent of the total tax revenues (OECD Report, 2022). Also, corporate

income tax contributed 25 percent of the total tax revenues in Ghana in the year 2020 (OECD

Report, 2022). Despite the companies’ significant contributions to tax revenues in Sub-

Saharan Africa (SSA), governments in the region have engaged in aggressive tax

mobilization measures in recent years to prop up their fiscal inflows, with most of these tax-

reaping actions targeted at manufacturing companies.

The government of Nigeria increased the existing excise duty rate and expanded the scope to

Single Use Plastics in the 2023 budget (KPMG Nigeria Report, 2023). The government of

Tanzania through the imposition of the finance act 2022 amended the fourth schedule of their

principal act to include some locally produced commodities (examples being foods

containing cocoa, sugar confectionary not containing cocoa, sweet biscuits etc.). On the

Excise Duty Amendment Act, the government of Ghana also expanded the authority to cover

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some processed fruit juices, cigar, mineral water, spirits and wines including sparkling wine

(2023 Budget Highlights). The government of Uganda expanded the scope of excise duty

charges through the redefinition of ‘fruit juice’, ‘un-denatured spirits’ and ‘vegetable juice’

(Deloitte tax and legal alerts, 2022). The government of Malawi introduced a new tax on

roofing tiles coated with acrylic paint which will increase taxes on manufacturing firms

engaged in paint production (Deloitte Malawi tax updates, 2023).

These taxes carving out a whooping amount from corporate profit in addition to the existing

statutory corporate income tax, have led to Effective Tax Rate (ETR) of manufacturing

companies trending upwards. It is obvious therefore, that tax costs and eventual payout

deplete the distributable income of corporate organizations (Chukwudi et. al, 2020). These

taxes in fact, do translate to a substantial cost to organizations and if not properly planned and

managed can have an adverse impact on their bottom line, cash flow and capacity to invest

(Chukwudi et. al, 2020).

This presents an area of concern to the board of directors, whose ultimate objective is

shareholder value maximization, which starts with making significant-sustained profit at the

end of the day. Board members have to resort to tax planning measures, which is the sole

means to licitly reduce, if not avoid, the exacting tax liabilities and hence, enhance the after-

tax profit position of their companies. Tax planning involves taking advantage of the

flexibilities and loopholes existing in the tax laws to reduce tax liability (Chukwudi et. al,

2020; Dyreng et. al, 2008). It is expected that as firms engage in tax planning, they can avoid

paying needless taxes, thereby increasing their after-tax earnings (Tackie et. al, 2022). Tax

planning involves an understanding of relevant tax shelters and incentives for implementing

planned business decisions including, choice of business location, commencing and divesting

from certain types of businesses, leveraging on loans as a source of capital to claim

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exemptions on interest payment and also, claiming reliefs from making losses as well as

planning expenditures to claim capital allowances (Appah, 2022; Fagbemi et. al, 2019).

These decisions to effectively plan and manage tax liabilities, call for the need for the board

of directors to have at least a fair knowledge about the mechanism of corporate taxation.

According to Robinson et. al (2012), companies’ board of directors serve as advisors to

management in addition to their traditional monitoring role. It was found that firms with

board members having specialized knowledge engage in increased levels of activities related

to the board members’ specialized fields (Robinson et. al, 2012; Guner et. al 2008). This

corroborates the assertion that, board members with specialized knowledge in accounting and

finance may tend to engage in increased levels of tax planning and its related tax avoidance

mechanisms for their companies. Robinson et. al (2012), found out in their study on

companies in the United States of America that, companies whose audit committees have

high levels of accounting expertise are associated with higher levels of tax planning.

Furthermore, Robinson et. al (2012) posits that, advice from accounting experts on the board

facilitates effective tax planning.

Tax planning represents cost savings to firms and equally can accumulate both tax and non-

tax costs, especially those associated with agency problems (Maama et. al, 2021).It can be

inferred therefore that, these costs savings and tax costs may impact the financial

performance of companies. In their study conducted in Nigeria, Chukwudi et. al (2020) found

that tax planning, which ETR was used as a proxy, impacted negatively on firm value of

listed manufacturing firms. Also, Tackie et. al (2022) found out there exist a non-linear

relationship between tax planning and the performance of insurance companies in Ghana.

These, hence, shows how tax planning may affect the financial performance of companies.

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This study is therefore motivated by how board financial expertise impact the tax planning-

financial performance nexus of manufacturing companies in the Sub-Saharan African region.

1.2 PROBLEM STATEMENT

Wahab (2010) states that the 2007 report of the National Audit Office of Great Britain shows

that over thirty per cent of the biggest companies in the UK were likely engaged in tax

planning (Usman et. al., 2020). This is because, tax planning provides more benefits for

companies, in addition to increasing firm value, tax planning is also effective in increasing

company liquidity (Bhagiawan and Mukhlasin, 2020; Nwaobia and Jayeoba, 2016). The

board of directors, which is responsible for allocating resources, improving performance, and

increasing shareholder wealth, has a central role in choosing a tax-management strategy

(Khaoula and Moez, 2019). Consequently, for the board to effectively advice management on

tax planning issues requires a good number of the members having specialized knowledge in

accounting and finance.

Quite a number of studies have been conducted to examine the relationship between tax

planning and financial performance of companies (see Maama et al., 2023; Lestari and

Roshinta, 2022; Tackie et al., 2022; Ardhani, 2022; Khaoula and Moez, 2019; Le et al.,

2022), where it was argued that financial performance is significantly influenced by tax

planning. However, whether board financial expertise affects the tax planning and financial

performance relationship has not been considered within the Sub-Saharan context.

For instance, studies have been conducted on the impact of corporate governance on the tax

planning and firm value relationship of listed companies within the East African context

(Maama et. al, 2023). An empirical study has been made to examine the moderating role

audit quality plays on the relationship between tax planning and corporate value of

companies listed on the Indonesian Stock Exchange (Lestari and Roshinta, 2022). Similarly,

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within the Ghanaian context a study has also been undertaken on how corporate governance

impacts the tax planning and financial performance relationship of insurance companies

(Tackie et. al, 2022). An investigation has been made on the moderating role company size

plays on tax planning and company value of companies listed on the Indonesian Stock

Exchange (Wahyuda & Ardhani, 2022). The impact of the board of directors on the

relationship between tax planning and firm value of companies within the European context,

with focus on board independence, board diversity and CEO dual functions has also been

studied (Khaoula & Moez, 2019). An analysis has also been made on the impact of tax

planning on firm value of non-financial companies listed in Vietnam moderating state

ownership (Le et. al, 2022).

To the best of our knowledge, no research has been conducted on moderating the role board

financial expertise plays on the relationship between tax planning and financial performance

of manufacturing companies within the Sub-Saharan Africa context.

This vacuum in existing literature calls for a further study to understand and discover whether

board financial expertise, also significantly impacts the relationship between tax planning and

financial performance of manufacturing companies within the Sub-Saharan Africa context.

Consequently, the purpose of this study is to fill the existing gap on board financial expertise,

tax planning and financial performance. Together with the mixed results from previous

studies on corporate governance impact on the tax planning-financial performance nexus, this

also served as a motivation for this study.

1.3 RESEARCH OBJECTIVES

The main research objective is to examine the moderating role board financial expertise plays

in the tax planning-financial performance relationship of manufacturing companies. The

specific objectives of the study includes;

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 1. To assess the impact of tax planning on the financial performance of manufacturing

companies.

2. To evaluate the relationship between board financial expertise and tax planning of

manufacturing companies.

3. To examine the relationship between board financial expertise and financial

performance of manufacturing companies.

1.4 RESEARCH QUESTIONS

The main research question is “Does board financial expertise moderates the relationship

between tax planning and financial performance of manufacturing companies?” Considering

the specific research objectives, this study aims to provide answers to the following research

questions:

1. What is the relationship between tax planning and the financial performance of

manufacturing companies?

2. Does board financial expertise influence tax planning of manufacturing companies?

3. How does board financial expertise affects the financial performance of

manufacturing companies?

1.5 SIGNIFICANCE OF THE STUDY

This research seeks to expand and enrich the existing literature around tax planning, financial

performance and board financial expertise.

The research will provide knowledge on the relationships between tax planning, financial

performance and board financial expertise which will aid companies in board composition

planning.

1.6 SCOPE OF THE STUDY

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Although many corporate governance factors affect the tax planning-financial performance

relationship, however, this study will focus on how board financial expertise affects the

relationship.

The study is further limited to manufacturing companies listed on the Ghana Stock Exchange

(GSE), Johannesburg Stock Exchange (JSE), Nairobi Securities Exchange (NSE), Nigeria

Stock Exchange (NGX) and Dar es Salaam Stock Exchange (DSE).

1.7 BRIEF METHODOLOGY

This study is based on a quantitative methodology. The population of this study will be based

on the 195 manufacturing companies listed on the 13 stock exchanges in Sub-Saharan Africa.

For the purpose of the study, secondary data, particularly Annual Reports of selected

manufacturing companies listed on the Ghana Stock Exchange (GSE), Johannesburg Stock

Exchange (JSE), Nairobi Securities Exchange (NSE), Nigerian Stock Exchange (NGX) and

Zimbabwe stock Exchange (ZSE) will be used. Our sample size of 35 manufacturing

companies is comprised of 7 manufacturing companies selected from each of the five

sampled stock exchanges.

Data taken will span within 10 years, that is from 2012 - 2021. A timeframe of 10 years was

chosen as Huang and Hillary (2018) and Livnat et. al. (2019), proposes the optimum board

tenure for the maximization of firm value to be within 8 to 11 years.

The main variables for this research are tax planning, financial performance and board

financial expertise. Tax planning would be measured using the Effective Tax Rate (ETR) as a

proxy for tax planning. For financial performance, Return on Asset (ROA) and Return on

Equity (ROE) as was used. Finally, as a measure of board financial expertise, the proportion

of board members with accounting & finance background to the total number of board

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members was used. Regression analytical technique will be used, of which STATA will be

used as the analytical tool for the study.

1.8 LIMITATIONS OF THE STUDY

Due to the small sample size for the study, our findings may not be generalizable as to cover

all manufacturing companies in the Sub-Saharan Africa region.

1.9 ORGANIZATION OF THE STUDY

This study is categorized into five chapters.

Chapter one consists of the introduction of the study where we elaborated on the background

of the study, problem statement, research objectives, research questions, significance of the

study, overview of research methodology, scope of the study, limitations of the study and the

organization of the study.

In chapter two, we will review existing and relevant literatures. This section will be made up

of the conceptual review, theoretical review (Agency theory, etc.) and empirical review.

Then chapter three will shed more light on the methodology of this study, data used, variable

description and measurement, robustness check and summary of chapter.

Chapter four deals with preliminary analysis of data, analysing the research objectives,

diagnostic check and robustness check.

In chapter five, we will present summary of our findings, conclusion and recommendations

from the study.