IMPACT OF GOVERNANCE MECHANISM ON TAX AGGRESSIVENESS TABLE OF CONTENTS page(s) ABSTRACT CHAPTER ONE: INTRODUCTION 1.1 Background to the study 1.2 Problem Statement 1.3 Research Questions 1.4 Objective of the Study 1.5 Hypotheses of the Study 1.6 Significance of the Study 1.7 Scope of the study 1.8 Definition of Key Terms 1.9 Organization of Study CHAPTER TWO: REVIEW OF RELATED LITERATURE 2.1 Conceptual Review 2.1.1 Concept of Tax aggressiveness 2.1.2 Corporate governance 2.1.3 Determinants of firms\u2019 tax aggressiveness 2.1.4 Corporate governance and tax aggression 2.2 Theoretical Review 2.2.1 Agency theory 2.2.2 Corporate social responsibility theory 2.3 Empirical Review CHAPTER THREE: RESEARCH METHODOLOGY 3.1 Research design 3.2 Population and Sample 3.3 Sampling and sampling technique 3.4 Variables 3.4.1 Dependent Variable 3.4.2 Independent Variables 3.4.3 Control Variables 3.5 Method of Data Analysis CHAPTER FOUR: RESULTS AND DISCUSSION 4.1 Results of Descriptive Statistics 4.2 Results of the Statistical Tests of the Hypotheses 4.3 Results of the Assumptions CHAPTER FIVE: CONCLUSION AND RECOMMENDATION 5.1 Conclusion 5.2 Recommendations 5.3 Suggestion for further study References ABSTRACT This study aims to investigate the relationship between certain mechanisms of corporate governance and tax aggressiveness in companies listed on the Nigeria Stock Exchange during the years 2014-2018. In this regard, the effect of some corporate governance indices (number of board members, non-duty members, managerial ownership and institutional ownership) on tax aggressiveness was investigated. The sample comprises 104 companies listed in the Nigeria Stock Exchange (NSE) out of 169 were examined. E-view software was used for analyzing the data and multiple regressions were used to test the hypotheses. Results indicated that there is no significant relationship between number of board members, proportion of non-duty members, institutional ownership and tax aggressiveness. Furthermore, there is no significant relationship between managerial ownership and tax aggressiveness. CHAPTER ONE INTRODUCTION 1.1 Background to the study Taxes are the major contributor to government\u2019s revenue and become an important issue in every country; therefore taxes are a crucial element in a firm. In maximizing shareholders\u2019 wealth, company tries to minimize its tax burden. Shareholders would like to minimize corporate tax payments net of the private costs to maximize the firm value (Hanlon & Slemrod, 2007). The minimization of the tax payment is called tax aggressiveness or tax planning. Tax aggressiveness is defined by Chen and Shevlin (2008), as a downward management of taxable income through tax planning with respect to reducing tax paid to tax authority. The tax planning activities refers to legal activities which usually provides by the auditor or tax agent, or can be classified as gray area activities, as well as illegal activities (Chen, Chen, Cheng, & Shevlin, 2008). In Nigerian context, example of tax planning activities including excessive claim of tax incentives or claiming incentives which company are not entitled to. Furthermore, company also claiming unallowable expenses which are not allowed by Income Tax Act, 1967. Taxes and corporate governance may intercept in many angle. Corporate governance is the interplay of the governors in managing and controlling a firm; while taxes influence firm financial decision making including in determined the organisational form, restructuring decisions, payout policy, compensation policy and risk management decision (Desai and Dharmapala, 2004). In connection with that, corporate governance is view as a factor influencing tax aggressiveness since minimizing tax payment may increase company\u2019s cash flow and the governors play major role in allocating the fund and also in decision making. Over the years, there are studies that examine the relationship between tax aggressiveness and corporate governance mechanism such as board of director composition (Lanis & Richardson, 2009), form of ownership (Chen & Shevlin, 2010) corporate governance and tax environment changes (Jimenez-Angueira & Eriel, 2007), the influence of ownership structure and the corporate governance mechanisms of Nigerian PLCs on tax aggressiveness (Mahenthrian & Kasipillai, 2011), equity risk incentives and tax planning activities (Rego & Wilson, 2011) and the role of executive in determining the level of tax aggressiveness (Dyreng, Hanlon, & Maydew, 2009). In Nigeria, the emphasis on the need for corporate governance reform sprung up with the incidence of fraudulent financial reporting as in the case of African Petroleum, Cadbury Plc., Oceanic Bank Plc. Afribank Nigeria Plc. among others. This was caused by poor management, high gearing ratios, overtrading creative accounting, and fraud. Presently, there are numerous codes of corporate governance in Nigeria such as Central Bank of Nigeria (CBN) reviewed Code 2014, for Banks established under the provision of the Bank and Other Financial Institution Act (BOFIA), Security and Exchange Commission (SEC) reviewed code 2011, directed at public companies with securities listed on the Stock Exchange; companies seeking to raise funds from the capital market through securities issuance or listing and all other public companies, National Insurance Commission (NAICOM) Code 2009, directed at all insurance, reinsurance, broking and loss adjusting companies in Nigeria, and Pension Commission (PENCOM) Code 2008, for all licensed pension operators. These codes were established with the view to enhancing transparency and accountability in the financial sector, so that the Nigerian economy can forge ahead. Tax aggressive firms were identified by using effective tax rates (ETR) method. Then the relationship of corporate governance mechanism and tax aggressiveness were examined using E-views statistical tools. It is expected that tax aggressiveness has negative relationship with corporate governance mechanism, hence proves that better governance deter the likelihood of tax aggressiveness. Consistent with the prediction, the empirical result appears that board size and institutional investors shows a significant negative relationship with tax aggressiveness. 1.2 Problem Statement Nigeria has beginning the new era of tax assessment by implementing a Self-assessment System (SAS) on companies in 2001. By implementation of self-assessment system, taxpayers is responsible to estimating their own income tax payable for the current year of assessment, informing the tax authorities of the estimate, paying the tax monthly, and submitting a tax return to Inland Revenue Board Nigeria (IRBN). Self-assessment has been defined as the administration of the tax regime where the tax assessment is solely based on voluntary information given by the taxpayer (Marshall, Smith, & Armstrong, 1997). SAS has opened a new agenda to company in planning their tax activities. In Nigeria, government takes 25 percent of company\u2019s profit as corporate tax. According to Chen et al. (2008), the government takes a greater than one-third share of a firm\u2019s pre-tax profits. Thus, tax aggressiveness reduces the tax paid by firm. Therefore, tax aggressiveness may have a significant tax implication because it possibly leads to tax evasion. The consequence of evasion results loss of revenue to the nation and affect public spending. Over the years, very few studies have been conducted pertaining to the topics in the local context. Since this study may provides more information concerning the effect of governance mechanism on tax aggressive corporation in Nigeria, more focus research attempts need to be carried out. In this connection, this study aim to examine the extent of tax aggressiveness in Nigerian manufacturing sector as well as to investigate the relationship between corporate governance mechanism and tax aggressiveness of listed Companies. Therefore, the need for the study becomes vital to ascertain which of the corporate governance mechanisms have the tendency to significantly moderate\/reduce the probability of tax aggressiveness and agency conflicts in the manufacturing sector in Nigeria. 1.3 Research Questions In order to perform this study, the following research questions are necessary to be address: 1.4 Objective of the Study The broad objective of this study is to examine the extent of the effect of corporate governance mechanisms on tax aggressiveness in Nigeria. Specifically, the study will: 1.5 Hypotheses of the Study Based on the theoretical principles and research objectives, the following hypotheses are raised: 1.6 Significance of the Study Taxes are the major contributor to government\u2019s revenue. In 2009, the government has collected a gross amount in direct taxes totaling N88.40 billion. This amount is a decrease of N2.25 billion from the previous year as a result of the global economic crisis beginning from the third quarter of 2008. In year 2008, the collection was N90.651 billion and N74.703 billion was collected in 2007. The collection of direct taxes contributed 54.53% from the total income of the Federal Government of N162.10 billion in year 2009 and 56.11% of N161.558 billion of the Federal Government's overall revenue for 2008 (Lembaga Hasil Dalam Negeri Nigeria, 2010a, 2010b). The study provides useful information to the tax authority in understanding more about tax aggressive corporation. In Nigeria, tax audit are perform by the tax authority to improve tax compliances and on the other hand to detect tax evasion or tax aggressiveness. Various audit programs is implemented to ensure the taxpayers comply with the legal provisions and the current tax regulations within Self-Assessment System. In connection with that, corporate governance are view as an important factor that influencing tax aggressiveness. Thus, this study can provides greater understanding on the role of corporate governance to tax matters. In addition, since the tax department is an important financial statement user, this study can provides them better understandings on information stated in the annual report. Besides that corporate information such as board of directors, shareholders, statement on corporate governance and others can be use as a new channel to run the risk analysis in detecting tax aggressiveness and to perform tax audit. 1.7 Scope of the study This study was carried out on the impact of governance mechanism on tax aggressiveness. All required data was extracted from the real data of companies included in the report of the Nigerian Stock Exchange. The time domain of this study is the years 2014-2018. 1.8 Definition of Key Terms The following section provides explanation on the variables used in the study and how they are used for the purpose of this study. Tax Aggressiveness: Tax aggressiveness refers to the tax planning activities which is legal, illegal or activities that fall into gray area (Chen, et al., 2010), includes tax aggressiveness (Desai & Dharmapala, 2004), tax sheltering (Yeung, 2010) and tax cheating (Hanlon & Slemrod, 2007) . Corporate Governance : Corporate governance is the process and structure used to direct and manage the business and affairs of the company in order to maximize the shareholder value as well as consider the stakeholders\u201f interest (MCCG, 2007). Duality: Duality exist when a single persons hold position as the CEO of the firm and also the chairman of board of directors (Wan Mohamad & Sulong, 2010). Board Independence : Board independent refers to non-executive directors. Independence directors can be describe as independence from management and independence from the significant shareholders (Zulkafli, Samad, & Ismail, 2006). Board Size: Board size represents the number of directors on the board. Institutional Investors : Institutional investors refers to the major investors in Nigerian public listed companies which are Employee Provident Fund (EPF), Permodalan Nasional Berhad (PNB), Lembaga Tabung Angkatan Tentera (LTAT), Lembaga Tabung Haji (LTH) and Social Security Organisation (SOCSO) (E.A. Abdul Wahab, 2010). External Auditor: External auditor used in this study refers to big six firm which are Arthur Andersen, Coopers & Lybrand, Deloitte Touche, Ernst & Young, KPMG Peat Marwick, Price Waterhouse. 1.9 Organization of Study The study is divided into five chapters. Chapter one deals with the study\u2019s introduction and gives a background to the study. Chapter two reviewed related and relevant literature. The chapter three gives the research methodology while the chapter four gives the study\u2019s analysis and interpretation of data. The study concludes with chapter five which deals on the summary, conclusion and recommendation.