The impact of dividend imputation on corporate tax avoidance: The case of shareholder value

Ross McClure, Roman Lanis, Peter Wells and Brett Govendir

Journal of Corporate Finance, 2018, vol. 48, issue C, 492-514

Abstract: The objective of this paper is to evaluate whether dividend imputation, whereby tax credits may be passed on to shareholders for corporate tax paid, impacts corporate tax avoidance. This is undertaken with a pooled cross-sectional research design evaluating differences in tax avoidance across firms where there are significant differences in corporate tax avoidance incentives. Specifically, potential differences arise between firms paying dividends with tax credits, paying dividends without tax credits, and not paying dividends. Results suggest that firms paying dividends with tax credits attached are less likely to engage in tax avoidance with an average cash effective tax rate up to 16.9 percentage points higher than firms that pay dividends without tax credits, and up to 14.7 percentage points higher than firms that do not pay dividends at all. Accordingly, this provides insights into the effectiveness of dividend imputation in mitigating corporate tax avoidance, as well as providing support for the continuance of dividend imputation in Australia. Additionally, a positive association is found to exist between outside directors and corporate tax avoidance, extending to firms paying dividends with tax credits where dividend imputation is expected to mitigate such a relation. In combination, these results suggest heterogeneity of costs and benefits of tax avoidance and this is a challenge in evaluating corporate tax aggressiveness generally, and the impact of corporate governance on corporate tax avoidance in particular.

Keywords: Dividend imputation; Corporate tax avoidance (search for similar items in EconPapers)
JEL-codes: G35 G38 H21 H25 H26 M41 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:48:y:2018:i:c:p:492-514

DOI: 10.1016/j.jcorpfin.2017.10.007

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