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The Effect of Size, Return on Sales ,Leverage, Fixed Assets, Industry And Ownership on Effective Rate in the Listed Companies of Stock Exchange

Naser Izadinia Assistant Professor Department of Accounting University of ,

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 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 ,

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’ was received by virtue of article 131 of the act as follow: in the beginning 10% of company’s will be received, the rest of it will transfer to the 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 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 . In Iran, in accordance with the article 105 of the direct 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 . 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 , 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.

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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 Parsaiyan, Terme Publication Salami, Gholamreza; “ ”, 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), “ 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 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

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Table (1): Summary of achieved results of regression model 1

TAXi= Variable name Variable coefficient T statistics T probability statistics symbol Basis width way -0.0621 -1.053 0.2926 Size SIZE 0.033 3.525 0.0005 Profitability PRO 0.006 0.578 0.5636 Financial leverage LEV 0.009 0.426 0.6703 Fixed assets FIX -0.065 -3.376 0.018 R determination coefficient 0.88 F Statistics 37.47 Glass statistics- Watson 1.87 F probability statistics 0.0000

Table (2): Summary of achieved results of regression model 2

TAXi= Variable name Variable coefficient T statistics T probability statistics symbol Basis width way -0.06 -0.409 0.6821 Size SIZE 0.032 1.179 0.2389 Profitability PRO -0.003 -0.1485 0.882 Financial leverage LEV 0.001 0.05 0.9599 Fixed assets FIX -0.071 -1.762 0.0788 Ownership structure OWN 0.032 3.219 0.0014 R determination coefficient 0.48 F Statistics 4.366 Glass statistics- Watson 1.71 F probability statistics 0.0000

Table (3): Summary of achieved results of regression model 3

TAXi= Variable name Variable coefficient T statistics T probability statistics symbol Basis width way 0.392 12.858 0.0000 Size SIZE -0.025 -6.307 0.0000 Profitability PRO -0.024 -2.104 0.035 Financial leverage LEV 0.007 0.257 0.797 Fixed assets FIX -0.022 -1.408 0.159 Ownership structure OWN -0.006 -1.317 0.188 Automotive industry IDU1 -0.108 -3.144 0.001 Pharmaceutical industry IDU2 -0.076 -2.547 0.0112 Chemical industry IDU3 -0.014 -3.988 0.0000 Machinery industry IDU4 -0.092 -3.313 0.001 Cement industry IDU5 -0.104 -3.288 0.001 Food industry IDU6 -0.075 -2.49 0.013 Metal industry IDU7 -0.09 -3.798 0.0000 Tile industry IDU8 -0.144 -3.345 0.0000 Other industry IDU9 -0.126 -4.325 0.0000 R determination coefficient 0.505 F Statistics 33.076 Glass statistics- Watson 1.64 F probability statistics 0.0000

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Table (4): Test results of research hypothesis

Hypothesis No Description Result 1 Presence of a relation between company size and effective tax rate of the Approved listed companies in Tehran stock exchange 2 Presence of a relation between profitability and effective tax rate of the listed Unapproved companies in Tehran stock exchange 3 Presence of a relation between financial leverage and effective tax rate of the Unapproved listed companies in Tehran stock exchange 4 Presence of a relation between fixed assets and effective tax rate of the listed Approved companies in Tehran stock exchange 5 Presence of a relation between ownership structure and effective tax rate of Approved the listed companies in Tehran stock exchange 6 Presence of a relation between industry and effective tax rate of the listed Approved companies in Tehran stock exchange

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