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Financial distress and tax avoidance: the moderating effect of the COVID-19 pandemic

Author

Listed:
  • Akmalia Ariff
  • Wan Adibah Wan Ismail
  • Khairul Anuar Kamarudin
  • Mohd Taufik Mohd Suffian
Abstract
Purpose - This paper examines whether financial distress is associated with tax avoidance and whether the COVID-19 pandemic moderates such association. Design/methodology/approach - The sample covers 38,958 firm-year observations from 32 countries during the period 2015–2020. Financial distress is measured using the ZSCORE by Altman (1968), while tax avoidance is based on the book-tax difference. Findings - Financially distressed firms exhibit low tax avoidance pre- and during the pandemic periods. The authors find higher tax avoidance during the pandemic compared to the pre-pandemic period, but the pandemic enhances the negative relationship between financial distress and tax avoidance. Research limitations/implications - The study offers evidence on how financial distress drives firms to engage in more tax avoidance when firms globally encountered various levels of financial difficulty sparked by the economic challenges of the COVID-19 pandemic. Practical implications - The findings provide insights to policymakers on the need to monitor and incentivise financially distressed firms, especially during economic challenges due to pandemic. Originality/value - This study adds to the limited, albeit important, evidence on the joint effect of the COVID-19 pandemic and financial distress on tax avoidance.

Suggested Citation

  • Akmalia Ariff & Wan Adibah Wan Ismail & Khairul Anuar Kamarudin & Mohd Taufik Mohd Suffian, 2023. "Financial distress and tax avoidance: the moderating effect of the COVID-19 pandemic," Asian Journal of Accounting Research, Emerald Group Publishing Limited, vol. 8(3), pages 279-292, March.
    • Handle: RePEc:eme:ajarpp:ajar-10-2022-0347
    DOI: 10.1108/AJAR-10-2022-0347
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    More about this item

    Keywords

    COVID-19; Financial distress; Corporate tax avoidance; Cross-country; E69; H25; H60; M42; M48;
    All these keywords.

    JEL classification:

    • E69 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Other
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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