Assessment of the impact of taxes and subsidies on corporate financial performance: The case of a listed financial holding company in Zimbabwe for the period 2013 – 2018

Abstract

The study assessed the impact of taxes and subsidies on corporate financial performance and the reference case used is a listed financial holding company in Zimbabwe. The study period spans from 2013 to 2018. The objective of the study was to establish the relationship between taxes and subsidies with intend to view the way these variables influence corporate financial performance so that appropriate policies can be recommended to regulate them. Specific objectives were meant to assess impact of each factor and/or the composite impact of the aforementioned factors on the dependent factor. The desk research was conducted to fulfil the requirement of literature review and some of the sources used encompass previous research articles, books and internet. Available literature highlighted that the 2007 to 2008 global financial crises triggered an ongoing debate about taxing the financial sector. This is because other nations are using tax as a recovery measure for costs incurred during the crises whereas other nations are using it as corrective measure for future crises and/or both. However, proposals to build reserve funds for future bailouts captures subsidies variable to this study. A quantitative study was carried out to analyse the trend of taxes and subsidies variables vis-àvis financial performance over the years stretching from 2013 to 2018. Generally, it was established that there is an inverse relationship between taxes and subsidies. However, there are exceptional cases that oppose the aforementioned maxim. The impact of subsidies on tax burden, to a greater extent depends on price elasticity. By and large, taxes increase price consumers have to pay and reduce profit margin that producers receive whereas subsidies reduce price consumers have to pay and increase profit margin that producers receive. In view of the above, it has been concluded that it is prerequisite to align subsidies policies with fiscal policies in order to offset market distortions which emanate from differences in behaviour of beneficiaries and non-beneficiaries of subsidies, such as pricing. The study also supported the use of risk adjusted tax rates to reduce excessive risk taking and over indebtedness. It was recommended to establish subsidies utilisation index for risk profiling and increasing transparency on reporting subsidies in financial statements in order to resolve adverse selection and moral hazard.