Financial derivatives as an instrument in decreasing a firm\u27s effective tax rate: A study on Singaporean publicly listed firms from 2010 to 2014

With the prevalence of current taxation issues across different countries, this study seeks to shed more light on the pressing issue of corporate tax avoidance by exploring the relationship and impact of financial derivatives usage on a firm corporate tax savings in the Singapore setting. It also identifies the possible impact of derivatives in the Philippines by using Singapore as a base case due to its current sophisticated and developed market. This paper explores the relationship of financial derivatives usage and corporate tax avoidance in the Singapore setting. Firstly, the study defined the possible factors that may affect a firm choice to partake in risk management, as well as various indicators that may have an impact on a firm tax avoidance, and utilized these factors as variables to produce a vector of a firm risk management and tax avoidance incentives, respectively. Along with several other control variables, these variables were incorporated in the Heckman Model, which involves a two-step process that analyzes the relationship between a firm derivatives usage and its respective effective tax rate. In exploring this relationship, theoretical explanations and empirical data were used. The annual reports of 185 publicly listed firms in Singapore were used and sorted between firms operating with income and loss to shed light on such relationship and its implications. Using a panel data regression analysis, this research found that there is a statistically significant relationship between a firm financial derivatives usage and their effective tax rate for both firms operating with income and loss. It signifies that both firms with operating loss and income that use financial derivatives have significantly lower effective tax rates compared to firms that do not use such derivatives. These findings may have implications for various stakeholders. Firstly, for the firm management who are typically pressured to do well in managing the business and letting it prosper, with this study, they have presented with an alternative way of improving their financials. With the presentation of this additional knowledge, the shareholders may become more aware of the happenings in the firm, and its respective implications. As such, they can choose to become more active and involved in the operations and the corporate governance of the firm. The minimizing effect of derivatives regarding taxes should also be of concern of the government officials and regulatory bodies. They may derive insights from this study on how to formulate the proper tax laws regarding financial derivatives, so that companies may not abuse such usage of derivatives. Finally, given the limited studies on financial derivatives in the Eastern setting, this study may benefit the academe and the practitioners involved in the field