Liquidity Constraint and Tax Planning Activity Nexus in The Ghanaian Banking Sector

Purpose: This paper examines the liquidity constraints and tax planning activity nexus using a simulation approach within the Ghanaian banking sector. Specifically, the study aims to investigate the effect of liquidity constraints on banks' tax planning activities in Ghana. Design/Methodology/Approach: Using a quantitative research design, the study employed purposive sampling. The study employed a sample size of 20 banks from the 23 licensed banks due to data availability. The cash effective tax rate is used to measure tax planning activity. Liquidity constraints are indicated by negative growth in loans and deposits and a negative loan-to-deposit ratio. The study used annualised data from 2008 to 2022 for licensed banks in Ghana. Simultaneous quantile regression (SQR) and generalised robust quantile regression (GQR) were used in the analysis. Research Limitation: The study is limited to the banking sector. However, since taxation is heterogeneous, the estimation strategy and approach could be replicated in other emerging markets facing similar challenges, thereby contributing to a more global understanding of the interplay between liquidity and tax strategies. Findings: The nature and trajectory of banks’ tax aggressiveness under liquidity-constrained scenarios depend on the measurement and severity of the constraints. The study also observed a non-linear relationship between liquidity constraints and tax planning or aggressiveness. Practical Implication: This study would help banks revise their tax planning strategies in the face of liquidity-constrained challenges. Social Implication: Government-imposed restrictions on liquidity in the banking sector would help reduce tax planning among banks in Ghana. This could have far-reaching effects on banks’ ability to expand, thereby reducing unemployment in the country. Originality / Value: These variations could arise from factors such as risk tolerance, the regulatory environment, and market conditions, yielding new insights into how liquidity constraints shape banks’ tax-planning activity or tax aggressiveness. This constitutes a novelty in the investigation of the nonlinear relationship between liquidity constraints and tax planning activity in the Ghanaian context.