Nexus between Tax Avoidance and Corporate Profitability in Bangladesh Banking Sector: Insights from Static and Dynamic Models

Abstract

This paper aims to explore whether company tax avoidance enhances bank profitability in the context of Bangladesh. The study is based on a sample of 34 banks listed on the Dhaka Stock Exchange (DSE), covering the period from 2014 to 2023. The research employs panel data estimators, including Feasible Generalized Least Squares (FGLS), Prais-Winsten Panel Corrected Standard Errors (PCSE), and the Generalized Method of Moments (GMM), to examine the relationship between the variables. Confirming the political power theory, the findings demonstrate a significant positive correlation between tax avoidance and bank profitability, indicating that a higher degree of tax avoidance is associated with increased profitability. Both static and dynamic estimation approaches consistently support these results. These findings are relevant to various stakeholders. First, from a managerial perspective, executives can make more informed decisions regarding their tax strategies. Second, the results may stimulate discussions about the need for more effective tax laws and enforcement to ensure that businesses contribute their fair share of taxes to the government, which can be achieved through improved corporate governance and regulatory oversight. Third, when making investment decisions, investors can utilize this information to assess the ethical considerations and sustainability of banks' earnings streams.