Monetary policy, audit quality and tax avoidance: a case of Pakistan

Abstract

Although tax avoidance and evasion concerns have long been recognised, tax compliance in emerging nations has received improved attention with the global and financial crises. This study examines the impacts of monetary policy and audit quality on tax avoidance of 295 public limited firms listed in the Pakistan Stock Exchange (PSX) between 2011 and 2020. Results of panel regression analyses show that the monetary policy interest rates affect the accounting tax avoidance and the Effective Tax Ratios (ETR) differently over time. In contrast, monetary policy is not substantial with the cash ETR, but the external audit fee negatively affects the tax avoidance indicators. These results provide an imperative consideration for practitioners and policymakers better to judge interest rates and their influence on tax behaviour to provide policy incentives for progressive taxation and sustainable development.