Adejumo, Babatunde Titus; Sanyaolu, Wasiu Abiodun

Article
Tax planning and profitability of Nigerian deposit
money banks : evidence from dynamic panel model

Accounting and taxation review

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Reference: Adejumo, Babatunde Titus/Sanyaolu, Wasiu Abiodun (2020). Tax planning and
profitability of Nigerian deposit money banks : evidence from dynamic panel model. In: Accounting
and taxation review 4 (2), S. 162 - 169.
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Accounting & Taxation Review, Vol. 4, No. 2, June 2020

ISSN: 2635-2966 (Print), ISSN: 2635-2958 (Online).

©International Accounting and Taxation Research Group, Faculty of Management Sciences,
University of Benin, Benin City, Nigeria.
Available online at http://www.atreview.org

Original Research Article

Tax planning and Profitability of Nigerian Deposit Money Banks:

Evidence from Dynamic Panel Model
1
ADEJUMO, Babatunde Titus &2 SANYAOLU Wasiu Abiodun
1
Director-General, Osun Debt Management Office, Abere, Osogbo, Osun State, Nigeria
2
Department of Accounting, Crescent University, Abeokuta, Ogun State, Nigeria

For Correspondence, Email: [email protected]

Received: 03/06/2020 Accepted: 22/06/2020

Abstract
Corporate tax represents the transfer of wealth from corporate entities to the government. It
is a veritable source of revenue generation to the government while it is a burden on
corporate entities. Therefore corporate entities are always reluctant in its payment while
government forcefully collects it from their profit. Amidst this divergence is the examination
of corporate tax planning and profitability of Nigerian listed deposit money banks. The study
adopted an ex post facto research design by obtaining relevant data of sampled 9 banks from
2012 to 2018 from their annual financial statements. Findings from the study show that tax
planning (effective tax rate) has a significant negative effect on profitability. The study
further found a significant positive effect of capital adequacy ratio as a control variable on
profitability. However, no evidence of the negative effect of bank age and bank size on
profitability is established by the study. The study, therefore, concludes that tax planning has
a significant negative effect on the profitability of Nigerian deposit money banks. Going by
the findings from the study, it is recommended that money deposit banks should engage the
services of a tax consultant and also make use of a reasonable level of debt in their overall
capital structure so as to reduce their tax burden and ultimately improve their profitability.

Keywords: Tax planning, capital adequacy, age, size, profitability and GMM.

JEL Classification Codes: G21, G32

This is an open access article that uses a funding model which does not charge readers or their institutions for access and is
distributed under the terms of the Creative Commons Attribution License. (http://creativecommons.org/licenses/by/4.0) and
the Budapest Open Access Initiative (http://www.budapestopenaccessinitiative.org/read), which permit unrestricted use,
distribution, and reproduction in any medium, provided the original work is properly credited.

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 Adejumo & Sanyaolu.Tax Planning and Profitability of…

© 2020. The authors. This work is licensed under the Creative Commons Attribution 4.0 International
License

Citation: Adejumo, B.T., & Sanyaolu, W.A. (2020). Tax planning and Profitability of
Nigerian Deposit Money Banks: Evidence from Dynamic Panel Model. Accounting
and Taxation Review, 4(2): 162-169.

1. INTRODUCTION profitability and also has implication on

Profitability matters significantly for long shareholders’ wealth maximization as it
term growth and survival of any business reduces distributable earnings to
outfit. Profitable firms can increase their shareholders.
level of operation, meet the needs of
customers, diversify into other areas of According to Nwaobia, Kwarbai and
business, be able to withstand competition Ogundajo (2016), there is often reluctance
from firms in similar industries and enjoy on the part of taxpayers regarding fulfilling
economies of scale with the attendant their civic responsibility of paying tax
reduction in the cost of production. The arising from multiplicity in tax structure,
ability of a business to make profit is which makes effective tax rates far higher
reflected in its income in excess of direct than the statutory rate of company income
and indirect costs of earning such revenue tax. Taxpayers are therefore always looking
basically from operating and investing for strategies to reduce the tax burden. The
activities (Owolabi & Alu, 2011). quest to reduce corporate tax payable has
Profitability is significant to the success of propelled many firms to adopt different
banks and by implication to the successful strategies that are capable of reducing their
functioning of the economy as profitable tax expense. According to Olarewaju and
banks are better positioned to render quality Olayiwola (2019), virtually all companies
financial intermediation of fund effectively are rational to the extent that they want to
and efficiently. Aside the vital financial pay less tax and benefit from tax savings on
intermediation role played by the banking their tax liability. They argued further that
sector, other prominent roles played include this quest is informed by the fact that
payment of tax to the government to finance shareholders’ wealth maximization remains
its expenditure towards achieving the fundamental objective of any profit-
macroeconomic long term developmental oriented business outfit and that this can
objectives and for maintenance of law and only be archived by minimizing cost and tax
orders. The government, therefore, remains burden on their profit. Among important
one of the significant claimants in strategies used by companies in reducing
companies’ profit and such claim manifest their tax burden legally is ‘tax planning’.
in form of corporate tax. Corporate tax is a Tax planning depicts the ability of a
veritable source of revenue to the company to legally reduce its tax
government as all companies, regardless of obligations through the utilization of
their sizes, are statutorily required to pay different loopholes in the tax system.
30% of their net profit to the government. Salawu and Adedeji (2017) argued that
By implication, corporate tax remains one effective tax rate refers to the acceptable
of the significant factors that affect firms’

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Accounting & Taxation Review, Vol. 4, No. 2, June 2020

yardstick for tax planning effectiveness turn, should increase profitability as a

which is based on actual average tax substantial amount of wealth is saved as tax.
payable on a taxpayer’s income before tax, In Accounting and Finance literature, the
as distinct from the statutory tax rate nexus between tax planning and profitability
imposed on taxpayers. Tax planning, have produced conflicting arguments. Some
according to Olarewaju and Olayiwola schools of thought have found that tax
(2019) refers to an arrangement that planning through effective tax rate improves
involves competent financial dealings firms’ financial performance in terms of
within the boundaries of the law to reduce profitability as it is believed that tax savings
tax liability. reduce the amount of tax to be deducted
from net profit. Scholars that have found a
There is no doubt as to the fact that studies significant positive effect of tax planning on
have been conducted on tax planning and profitability include Sathaya and Thatphong
firms’ profitability in Nigeria (See Fagbemi, (2019).Contrarily, other categories of
Olaniyi and Ogundipe, 2019, Nwaobi et al. scholar belonging to the second school of
2016 and Ogundajo&Onakoya, 2016). thought have found a significant negative
Aside from the work of Fagbemi et al. effect of tax planning on profitability (see
(2019) that focused tax planning and Fagbemi et al. .2019, Olarewaju and
financial performance of Nigerian deposit Olayiwola; 2019; Ogundajo & Onakoya,
money banks; however, most of the studies 2016). The rationale for the finding may be
focused on non-financial firms. The central due to the effective tax rate being above the
gap identified in the work of Fagbemi et al. normal tax rate due to firms’ inability to
(2019) is the methodological gap in the area manage their tax liabilities effectively.
of analysis. The referenced study applied Arising from the empirical argument in
static regression analysis which is prone to literature, the study hypothesizes in a null
the problem of homogeneity of variables form that:
and may produce an unreliable result. This H01: Tax planning has no significant effect
study, therefore, examines the effect of tax on the profitability of Nigerian deposit
planning on the profitability of Nigerian money banks.
deposit money banks from a dynamic
perspective using generalized methods of Theoretical Review
the moment from 2012 to 2018. This study is anchored on Hoffman’s Tax
Planning Theory. Hoffman (1961) argued
2. LITERATURE REVIEW AND that corporate entities that are efficient use
HYPOTHESES DEVELOPMENT legal means to divert cash from tax
The effect of tax planning and financial authorities to their corporate purse.
performance has been the outcome of some According to this theory, the firm should
prior empirical literature (Fagbemi et al. only engage in tax planning activities when
2019). Companies that can reduce their there is a tendency to reduce taxable income
effective tax rate are likely to optimize to the barest minimum in such a way that
profitability and by implication, maximize will not negatively affect accounting income
shareholders’ wealth. Tax planning has been as the firm is assessed by appropriate tax
regarded by Sathaya and Thatphong (2019) authority based on taxable income and not
as the transfer of wealth from the accounting income. Therefore, firms should
government to corporate entities, and this, in

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 Adejumo & Sanyaolu.Tax Planning and Profitability of…

deepen their efforts in the tax planning ability of the banks to generate data for the
activities that shrink the income that is sampled periods. The sampled banks are
subject to taxation, rather than on GTBank Plc, UBA Plc, Access Bank Plc,
accounting profit (Fagbemi et al. Zenith Bank Plc, Sterling Bank Plc, Union
.2019).Hoffman (1961) argued for the Bank Plc, Fidelity Bank Plc, Wema Bank
existence of a direct association between tax Plc and Unity Bank Plc. These deposit
planning activities and financial money banks are selected based on size.
performance of an entity to the extent of net
tax planning benefit arising from a direct Data Analysis Instrument
consequence of tax planning being higher The study analyzed the data of the study by
than the cost. using the generalized method of moment,
which is appropriate when the number of
3. METHODOLOGY cross-section exceeds the time series. The
Research Design model is also chosen due to its ability to
The study used an ex post facto research correct the problem of homogeneity, which
because the data are sourced from the characterized the ordinary least square
financial statement, which relates to the method.
event that has happened in the past that the
researcher cannot manipulate. Variable Description and Measurement
Dependent variable: the dependent
Source of Data variable of the study is captured by the
Data for the study were obtained from the return on asset (ROA).
annual financial reports of the sampled 9
banks that produced relevant data from 2011 Independent variables: The only
to 2018. independent variable of the study is tax
planning which is proxied by the effective
Population, Sample and Sampling tax rate.
Technique
The population for the study included 15 Control Variables: In an attempt to obtain
DMBs. The sample size chosen is 9, which a robust result, three other control variables
represents 60% of the entire population of that are likely to influence profitability have
the study. The study adopts a purposive been introduced. The control variables are:
sampling technique based on size and the

Table 1 Measurement of Variables

Variable Acronym Measure Expected effect
Dependent variable
Profitability ROA Profit after tax/ total asset
Independent variables
Tax Planning ETR Profit before tax/Tax payable +
Control Variable:
Capital adequacy CAR Equity capital/total asset +
Age AGE Natural log of listing years +
Size LASSET Natural logarithm of total asset +

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Accounting & Taxation Review, Vol. 4, No. 2, June 2020

Model Specification the study. Profitability shows an average

As a result of the panel nature of data used value of 1.5% with a minimum value of –
in the study, panel data methodology was 10. 5 and a maximum of 12%. ETR shows
adopted. The specific models for the study a mean value of 57% and varies from -3.04
are depicted in equations below: to 38.15. The reason for this is that most of
ROAit= β0+β1ROAit +β2ETRit + β3itCARit + the banks may have profit before tax that is
β4AGEit+ β5SIZEit + eit………………... (1) lower than tax payable. CAR has a mean
value of 13% and ranges from -61% to 80%.
Where, Log inverse of age has a mean of 2.57 and
ROAit = Return on Asset of bank i in period ranges from -2.23 to 3.87. Log inverse of
t; ETR =effective tax rate of bank i in period size has a mean of 20.8 and varies from
t 17.88 to 22.32. As to the normality of the
CARit = Capital Adequacy Ratio of bank i in variables, the Jarque- Bera statistics of all
period t; SIZEit = Size of bank i in period t the variables are significant at 5% implying
eit = Error term that the variables are normally distributed.
The Kurtosis value of all the variables
4. ESTIMATION RESULTS AND shows that they are all leptokurtic given
DISCUSSION OF FINDINGS their values in excess of 3. All the variables
The result of the descriptive statistics below except ETR are negatively skewed.
shows the characteristics of the data used in

Table 2: Descriptive Statistics

ETR CAR AGE SIZE
ROA
Mean 0.015210 0.568391 0.128973 2.568060 20.83668
Median 0.014856 0.118038 0.144139 2.708050 20.89472
Maximum 0.119833 38.15420 0.803866 3.871201 22.32375
Minimum -0.105138 -3.043419 -0.607458 -2.234926 17.87634
Std. Dev. 0.029251 4.525056 0.143941 0.939029 0.888214
Skewness -1.159857 8.116677 -1.170257 -2.182997 -0.701367
Kurtosis 10.04176 67.99315 19.39918 11.52542 3.659425
Jarque-Bera 164.9024 13462.90 823.2330 271.4112 6.907199
Probability 0.000000 0.000000 0.000000 0.000000 0.031632
Sum 1.095130 40.92413 9.286065 182.3323 1437.731
Sum Sq. Dev. 0.060751 1453.806 1.471054 61.72430 53.64681
Observations 72 72 72 72 72
Source:Researchers’ Computation (2020) Using E-views 9

Table 3: Correlation Analysis

ROA ETR CAR LAGE SIZE
ROA 1.000000 -0.128108 0.725833 0.231383 0.335946
ETR -0.128108 1.000000 -0.046204 0.168501 0.039820
CAR 0.725833 -0.046204 1.000000 0.106967 0.089208
LAGE 0.231383 0.168501 0.106967 1.000000 0.178218
SIZE 0.335946 0.039820 0.089208 0.178218 1.000000
Source: Researchers’ Computation (2020) Using E-views 9

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 Adejumo & Sanyaolu.Tax Planning and Profitability of…

The correlation table above shows that none in excess of 80%. This implies that there is
of the variables has a correlation coefficient no problem of multicollinearity in the series.

Table 4: GMM Analysis for Tax Planning and Profitability

Pooled OLS Estimation Fixed Effect Random Effect
Regressors Coeff t-stat p-val Coeff t-stat p-val Coeff t-stat p-val
- - -
C -0.138233 2.512371 0.0152 0.112916 1.090650 0.2815 0.125538 2.431074 0.0186
- -
ROA(-1) 0.095638 1.082323 0.2842 0.050281 0.595143 0.5549 0.059433 0.779413 0.4393
- - - - -
ETR -0.007392 1.408109 0.1652 0.015256 3.260990 0.0022 0.008915 2.007708 0.0500
CAR 0.124437 8.488803 0.0000 0.099467 6.878976 0.0000 0.122180 9.777515 0.0000
- -
AGE 0.003037 1.301982 0.1988 0.000115 0.037488 0.9703 0.002987 1.415294 0.1631
- -
SIZE 0.006292 2.353060 0.0225 0.005083 1.038347 0.3049 0.005726 2.288506 0.0263
R-square 0.705564 0.827392 0.686640
Adj.R-square 0.676697 0.775208 0.655918
J-stat 51.00000 43.0000 51.00000
Prob J-stat 0.0000 0.00000 0.0000
Durbin Watson 2.097912 2.647687 2.159890
Instrument 7 7
rank 15
Hausman Test 15.225620 5 0.0094
Source:Researchers’ Computation (2020) Using E-views 9

The result of the Hauman specification current year profitability. Finding as to the
reveals that the fixed effect is the effect of the effective tax rate (ETR) on
appropriate estimation technique. The result profitability reveals a significant negative
of the fixed effect shows that almost 77.5% effect of ETR on profitability. The
of the variation in profitability is caused by justification for this finding is that some
the independent and control variables of the banks may pay an effective tax rate in
study. The J-statistic value of 43 with a excess of the statutory rate. This is further
corresponding probability value of 0.0000 buttressed by the maximum value of 38. 15,
implies the fitness of the model as a whole. that indicates that the tax paid in the year is
The Durbin Watson statistic of 2.648 means above the profit before tax. This may be due
that there is no problem of autocorrelation to the payment of deferred tax liability in
as it is above the threshold of 2. 000. the current year. The finding of this study is
in line with that of Fagbemi et al.(2019) that
The finding shows that previous year found a significant negative effect of ETR
profitability does not exert a significant on the profitability of Nigerian DBMS. The
negative effect on current year profitability. finding is however in disagreement with that
The negative coefficient may mean that of Sathaya and Thatphong (2019) that found a
previous year profitability may make bank significant positive effect of ETR on
managers feel relaxed in their strategies of firms’profitability
increasing profitability. This shows that last
year profitability is not an essential driver of

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Accounting & Taxation Review, Vol. 4, No. 2, June 2020

Capital adequacy shows a significant level of their use of debt in their capital
positive effect on profitability. This implies structure to benefit from the tax shield on
that highly capitalized banks are associated interest expenses and thus reduces their tax
with higher profit. This finding is in line payable. The study only focused on banking
with that of Sanyaolu, Siyanbola, sub-sector, other studies can improve the
Ogunmefun and Makinde, 2019; Kipruto, scope of this study by including other sub-
Wepukhulu, and Osodo, 2017 and Rahman, sectors like insurance companies, finance
Hamid & Khan, 2015that reported a houses and other non-deposit money banks.
significant positive influence of capital Also, future studies may focus on firms in
adequacy on the profitability of banks. Age the non-financial sector in the country using
has a negative and insignificant effect on the the generalized method of moment.
profitability of Nigerian deposit money
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