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Ijcrb.Webs.Com 523 the Effect of Size, Return on Sales ,Leverage, Fixed Assets, Industry and Ownership on Effective Tax Rate In ijcrb.webs.com MAY 2013 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS VOL 5, NO 1 The Effect of Size, Return on Sales ,Leverage, Fixed Assets, Industry And Ownership on Effective Tax Rate in the Listed Companies of Tehran Stock Exchange Naser Izadinia Assistant Professor Department of Accounting University of Isfahan,Iran Dariush Foroghi Assistant Professor Department of Accounting University of Isfahan,Iran Setare Soltan Gheis MA Accounting Department of Accounting Mobarakeh Branch, Islamic Azad University, Mobarakeh, Iran Abstract The ministry of economy and finance proposed amendment has prepared after years of work and struggle with the idea of using the tax system for establishing reinforce areas and economic expanding. In this amendment companies’ tax that has determined by article 131 exponentially, was changed to 25 percent fixed annual profit. Regarding this change; six variable included size, profitability, financial leverage, fixed asset, industry type and ownership structure have chosen in this study and the purpose is determining whether these six variable have any effect on the tax rate or not? Testing the hypothesis, multiple regression model are used based on a sample including 78 company accepted in stock exchange during 2004 to 2009. Results are shown that four out of six variable (size, financial leverage, ownership structure and industry type) examined in this study, have affected the tax rate. Keywords: Effect of Size, Return on Sales ,Leverage, Fixed Assets, Industry And Ownership , Effective Tax, Rate , Listed Companies , Tehran Stock Exchange 1.Introduction Taxation is one of the most important economic issues in every community. Before the adoption of the amendment, the average tax rate on companies based on Article 131 was about 64%. Calculating method of companies’ income tax was received by virtue of article 131 of the act as follow: in the beginning 10% of company’s taxable income will be received, the rest of it will transfer to the direct tax article 131 table and up to 45% of taxable income will be computed, and also at the time of dividing the profits between shareholders, a double taxation will be deducted. Tax paying in the above mentioned way has led to inefficient economy and shareholders may reduce their liquidity (cash) and investments, so for solving this problem direct tax act has modified and many alternations had occurred on 2002/02/16; including applying a fixed rate equal to 25% and considering the appropriate dispensation but the main issue is monitoring the changes occurred in listed companies in stock exchange in Tehran caused by direct tax act modification in 2002 and the issues that change this flat rate for the companies. 2. Prior Research Now a days, tax as an important payable item by companies, become one of the most important financial issues which its amount is set in the context of tax law. In Iran, in accordance with the article 105 of the direct taxes law, legal entities are obliged to pay 25% of their taxable income to the government. In practice, however, because of some unacceptable costs from the tax viewpoint, effective tax rate is defined as cash ratio of fixed paid tax to the pre-tax income that is higher than the rate that is registered in law, it is clear that with an interval existence between taxable income and companies fixed payable taxes, effective tax rate will be higher. A large volume of literature in accounting and economy is considering real and effective rate of tax. This is the subject of Feldestein and Summers (1979), Fullerton (1984), Stickney and McGee (1982), Gupta and New berry (1997), Lammerson (2002), Plesko (2003), Gordon et al (2002), Lim and Hyun (2006), Dyreng et al (2007) COPY RIGHT © 2013 Institute of Interdisciplinary Business Research 523 ijcrb.webs.com MAY 2013 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS VOL 5, NO 1 researches. These studies generally considered member of Organization for Economic Co-operation (OEC) and developed countries but the developing countries are less noted. In Iran, however, few research is settled on taxable profit, return on sale profit and fixed tax. These researches have taken place by Ghanbari Fard (1995), Ahadiyan (2000), Hasanpour (2001) and Safiri (2008). The mentioned findings shows some factors’ effect on the difference between fixed and return on sale profit, including different tax laws interpretation, differences between rules and regulations of principals adopted and accepted by accounting, payers tax evasion, exemption from taxation in legislation and government targets. This study tries to prepare an answer to this question, whether other external factor such as different interpretation of tax laws, differences between rules and regulations of principals adopted and accepted by accounting, payer’s tax evasion, exemption from taxation in legislation and taxation targets, internal factors like some financial variable such as size, profitability, financial leverage, amount of fixed assets and nonfinancial variables like ownership structure and industry type have any effect on the effective tax rate or not? 3. RESEARCH METHODOLOGY The present study have tested the research hypotheses by use of regression model and synthetic data (Baltaji, 2005). This study is describing variables’ state systematically and its nature is cross-correlation and considers the relation between variables by regression analysis presented by Rodrigrz and Hiemen (2010) in the below equation (1-1), (2-1) and (3-1). TAXi= (1) Where: TAX (Tax effective rate): total payable tax divided by total income before tax which is tax effective rate. SIZE (size): the sum of asset’s logarithm which is the company’s size index. PRO (return on sales): income before deduction of tax divided by total assets which would be profitable. LEV (leverage): total liabilities divided by total assets which is leverage. FIX (Fixed assets): total amount of fixed assets divided by total assets that are fixed assets amount. is i company model error in t year. TAXi= (2) Where: OWNit: I company ownership variable at the end of the year. TAXi= (3) Where: IDUit: I company’s industry variable at the end of t year (in this study the sample companies are classified in 9 industry). 5.Conclusion This research hypothesis results show that the size of a company, fixed assets, ownership type and industry will affect the amount of payable tax and increase or decrease the tax proportionally due to their amount (size). Automotive, pharmaceutical, chemical, machinery, cement, food, metal and tile industries par more tax than others and also companies that have more than 50% ownership of the stock are paying tax more than other companies. These results are achieved in a situation if the tax authorities and auditors acted according to the law and regulations, there will be no factor to affect the payable tax system and show growth or reduction. In this direction psychological factors and the auditors’ different interpretation about taxable income taxes should be taken to consideration. For instance a company that have more fixed assets is an agent which will affect the auditors and causes to receiving more taxes from the company. COPY RIGHT © 2013 Institute of Interdisciplinary Business Research 524 ijcrb.webs.com MAY 2013 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS VOL 5, NO 1 References .Ahadiyan; Fatima (2000), “consideration of the relationship between taxable income and fixed gains realized by tax auditors”, master thesis, Tehran University Aldoun S. Handrikson, Michel F. Vonberda (2006), ” Accounting theories”, Volume 1, Translated by Ali Parsaiyan, Terme Publication Salami, Gholamreza; “ Taxation in Iran”, Accountant, No 10 Safar, Ahmad (2006); “review of differences between authorities profits and detection profit realized by tax authorities”, Azad University Ghanbari fard, Saied (1995); “review of major causes of the differences between income tax and return on sale profit in production companies”, master thesis, Tehran Alame Tabatabaie University Mastband zade, Mahdi (2008),” effect of running article 272 of direct tax law on listed companies in Tehran stock exchange”, Master thesis, Mobarake Azad University Bahl, R.W. and Bird, R.M. (2008), “Tax Policy in Developing Countries: Looking back – and forward”, National Tax Journal, Vol. LXI No. 2,P Feldstein, M. and Summers, L. (1979), “Inflation and the Taxation of Capital Income in the Corporate Sector”, National Tax Journal, Vol. 32 No. 4, pp. 445-71. Lammersen, L. (2002), The Measurement of Effective Tax Rates: Common Themes in Business Management and Economics, Centre for European Economic Research, Mannheim. Lim, B.I. and Hyun, J.K. (2006), “Comparative Analysis of the Effective Income Tax Function : Empirical Evidence Using LIS data”, Applied Economics Letters, Vol. 13, pp. 117-21. Stickney, C.P. and McGee, V.E. (1982), “Effective Corporate Tax Rates the Effect of Size, Capital Intensity, Leverage, and other factors”, Journal of Accounting &Public Policy , Vol. 1, pp. 125-52. Wu, L Wang, Y., Gillis, P. and Wei, L. (2008a), “State ownership, Tax Status, and size effect of effective tax rate in China”, working paper, Peking COPY RIGHT © 2013 Institute of Interdisciplinary Business Research 525 ijcrb.webs.com MAY 2013 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS VOL 5, NO 1 Table (1): Summary of achieved results of regression model 1 TAXi= Variable name Variable coefficient T statistics T probability statistics symbol Basis width
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