The effect of tax planning and corporate governance on tax disclosure in Malaysia

Tax authorities are still facing unresolved issues of a company‘s tax planning activities, whether they involve direct or indirect taxes. In Malaysia direct tax is the fundamental source of the government‘s income. The transformations in the tax systems and accounting standards have given companies opportunities to manage their tax affairs for the benefit of their shareholders. This study reports results of the relationship between tax disclosure and tax planning. At the same time it also considers corporate governance as a moderating influence. This study used a large sample of non-financial listed companies in Bursa Malaysia. To this end, the study used dataset of hand-gathered information from 286 company financial statements for the fiscal years 2010 to 2012. The results indicate that tax planning exhibits a strong positive relationship with tax disclosure, which is unconditional upon corporate governance. This relationship can be further explained as tax disclosure exhibits a significant positive association with the tax losses component of tax saving, but has a significant negative relationship with permanent differences component of tax saving and the temporary differences component of tax saving. This study contributes to the field of taxation in that it uses the ETR reconciliations to measure the level of tax disclosure in financial statements. Moreover, it contributes to the discussion of who verifies and benefits from tax disclosure conducted by companies. The findings of this study also contribute to the body of knowledge since there is a general dearth of published research that investigates these relationships, particularly in Malaysia