The impact of foreign ownership and audit quality on aggressive tax avoidance

Purpose This study aims to examine the influence of foreign ownership and audit quality on aggressive tax avoidance among Malaysian industries with high levels of foreign direct investment (FDI). Design/methodology/approach This study utilised the alignment and entrenchment theory to delineate the impact of foreign shareholdings and audit quality on tax avoidance. The samples encompassed corporations from sectors with significant foreign direct investment. Findings Foreign ownership is associated with greater aggressive tax avoidance among Malaysian firms. However, the effect weakens after controlling for firm characteristics and varies across industries, with the strongest evidence observed in the electronics sector, suggesting that the relationship is conditional on firm fundamentals and sectoral context. Audit report lag is negatively associated with tax avoidance across all three proxies, indicating that extended audit scrutiny constrains opportunistic tax behaviour. Research limitations/implications This study focuses on firms from selected industries that represent major destinations of FDI in Malaysia, which might reduce its generalisability to other sectors or regions. Future researchers are encouraged to replicate this study in other emerging markets for a more holistic understanding. Practical implications This study underscores the requirements for regulators and policymakers to enforce stricter rules and regulations to decrease aggressive tax avoidance, especially among companies with significant foreign ownership. Higher audit quality standards should be implemented for more thorough oversight. Social implications The findings significantly contribute to fairer tax practices and fostered social equity. Stricter regulations could prevent the exploitation of tax loopholes to ensure Malaysian corporations realise their obligations towards national revenue. Originality/value This study provides unique insights into the association between foreign ownership, audit quality and aggressive tax avoidance among Malaysian firms by applying the alignment and entrenchment theory. Valuable implications are also contributed to policymakers, corporate managers, shareholders and academicians.