Impact of Product Market Competition on Corporate Tax Avoidance - Evidence from Pakistan

Abstract

The aim of this study is to investigate the impact of product market competition on corporate tax avoidance. In order to achieve this objective, we collected data from 70 non-financial companies from Pakistan stock markets and used a least square method. It has been shown that greater extents of competition demonstrate a negative correlation with profitability, which leads to a decline in tax rates for corporations, particularly within the context of a progressive corporate income tax framework. Furthermore, it was observed that the companies that experienced intense competition tended to exhibit comparatively lower effective tax rates, as determined in accordance with the Generally Accepted Accounting Principles (GAAP). This work holds significant theoretical and practical consequences for regulators, politicians, and managers. The results highlight the essential requirement for adaptability and consideration of significant variables during the creation of tax laws. It is suggested corporations enhance their internal audit systems and conduct routine examinations of their internal controls and policies in order to ensure the accuracy and integrity of financial reports.

Keywords: Tax Avoidance; Product Market Competition; Effective Tax Rate.