Determinants of the effective tax rate: Board composition of South African firms listed on the Johannesburg Stock Exchange

Abstract

Motivation: Numerous international studies have been conducted to determine the effect of board composition on tax aggressiveness, and ultimately the effective tax rate (ETR) of firms, but to the best of the author's knowledge, no similar research from a South African perspective has been conducted.

Purpose: This study explores the association between board composition and the ETR of South African Johannesburg Stock Exchange (JSE)-listed firms for the period 2012 to 2021 to obtain an understanding of how corporate governance attributes affect the ETR of firms.

Design and methodology: A sample of 40 firms is purposively selected from the top 200 JSE-listed firms based on market capitalisation on 31 December 2021. The study employs a quantitative approach by applying the panel data multivariate regression model.

Main findings: The study shows that board size, as a corporate governance attribute, is a determinant of the ETR of South African JSE-listed firms. Additionally, other board composition-related corporate governance attributes such as independence, gender diversity, and director shareholding showed no substantial association with the ETR.

Practical implications: The results of this study indicate that the board of directors – specifically its composition – is successful in its role of ensuring that the firm is, and is seen to be, a responsible corporate citizen by paying its fair share of taxes.

Novelty: This study is the first to offer empirical evidence linking board composition to South African JSE-listed firms’ ETRs. The result of the study therefore fills a research gap and has the potential to guide board governance committees and increase directors’ awareness of their tax-related roles.

Keywords:

• board gender
• board of directors
• board independence
• board size
• effective tax rate
• corporate governance
• director shareholding
• King IV

Disclosure statement

No potential conflict of interest was reported by the author.

Special acknowledgement

The researcher wishes to thank Prof. Martin Kidd from the Centre for Statistical Consultation at Stellenbosch University for his valuable contribution regarding the analysis of the data.

Notes

1 A stock market index that monitors the stock performance of the 500 largest companies traded on stock exchanges within the United States.

2 27% for years of assessments ending on or after 31 March 2023 (which is not part of the scope of this study).