The Effect of Tax Planning Strategies Diversification on Explaining the Relationship between Tax Avoidance and Tax Risk

Prior empirical research, unlike the researchers’ expectation about the relationship between tax avoidance and tax risk, has generally failed to find a relationship between measures of tax risk and measures of tax avoidance and the results have been different and sometimes contradictory. Accordingly, the main purpose of the present study is to investigate the effects of diversification of tax strategies used by a public company on the relationship between measures of tax avoidance and measures of risk. To define the construct of diversification of tax strategies, two diversification measures are based on broad categories of sources of tax benefits. Then, the relationship between the diversification of tax planning strategies and tax risk and the effect of diversification on the relationship between tax avoidance and tax risk is examined by relevant regressions. In empirical tests, the annual data of 160 companies listed on the Tehran Stock Exchange during the period 2008 to 2015 were analyzed. The findings of the study showed using tax risk measures based on the variance of ETRs and tax risk measures based on the spike of a tax rate, more resources of tax avoidance result in less tax risk at a 90% confidence level. Also, using the overall firm risk measure, there is a positive relationship between tax risk and increasing resources of tax avoidance. The results of the study showed that despite the negative effect of diversification of tax planning strategies on tax risk, this variable increases the overall company risk. This might arise from increasing earnings management opportunities and failing financial reporting because of the effect of a multiplicity of tax strategies on the complexity of tax applications and financial reporting and increasing management abuse risk.