Empirical Insight into Solvency Constraint and Tax Planning Dynamics in Ghanaian Banking Sector: A Non-Linearity Approach

Abstract

This paper examines the relationship between tax planning activity dynamics and solvency constraints within the Ghanaian banking sector. This is conceived on the premise that banks are likely to change their tax planning dynamics in the midst of solvency challenges to boost their after-tax capital position to minimize the exposure to the going concern problem. The study employs the quantile regression estimation to draw time-varying constraint scenarios to measure solvency constraint proxies: WW index, HP index, and Z-score. Tax planning activity is also measured through cash effective tax rate. Annual data from 2008 to 2022 are used for the investigation with the unit of analysis expanding to cover all licensed banks which have been in operation within the study span. The study employed a quantile estimation approach to conduct the analysis. It is observed that the nature and trend in tax aggressiveness of the banks under a solvency-constraint scenario is dependent on the measurement of the constraints. Nevertheless, the study found non-linearity in the solvency-constraint and tax planning nexus. The banks do not generally alter their tax planning behaviour at the initial stage of the constrained scenario, however, turn to be relatively aggressive when the solvency constraint amplifies. The government is advised to protect the banks not to fall into any solvency constraint situation since that could change their tax planning activities.