characterised by high levels of political involvement in business world and a relationship-
based economy (e.g. Malaysia, Indonesia and Gulf Cooperation Council (GCC) countries)
(Abdul Wahab et al.,2017;Al-Hadi et al.,2017;Adhikari et al., 2006).
Tax avoidance (effective tax rate) is deﬁnedas total income tax expense divided by pre-
tax book income, while politicalconnections is a dummy variable indicating whether a bank
is politically connected. Based on a sample of 18 listed Islamic banks over the 2007-16
period, we ﬁnd that banks with political connectionspay tax at signiﬁcantly lower effective
rates. These results suggest that political connections are an important determinant of tax
avoidance in banking industry. Furthermore, the negative association between political
connections and effective tax rate becomes insigniﬁcant for joint audited banks, while it
remains negative and signiﬁcantfor banks audited by a single auditor.
Our research makes the following contributions. First, very little is currently known
about the association between political connections and tax avoidance in banking sector.
Second, we complement previous literature on joint audit because joint audit provides a
unique setting for analyzing both audit evidence precision and auditor independence
(Deng et al., 2014). Although the existing empirical research focuses on the impact of joint
audit on audit quality and audit fees (Gonthier-Besacier and Schatt, 2007;Ratzinger-Sakel
et al.,2013;Thinggaard and Kiertzner, 2008), our paper provides new empirical evidenceon
the moderating impact of joint audit on the relationship between political connections and
tax avoidance. Finally, this study should be of interest to tax policymakers and regulators.
Our ﬁndings suggest that banks employing politically connected directors exhibit higher
tax avoidance; however, this relationship is weakened with joint audit. Accordingly,
government should strengthenjoint audit, as an external control mechanism, in the banking
sector to reduce the adverse effect of politicalconnections on tax avoidance.
The remainder of the paper is structured as follows. Section II presents a review of the
literature and develops hypotheses. Section III outlines the research design and methods.
Section IV discusses the main results. Section V presents the results of additional analyses
and robustness checks.Finally, Section VI provides the conclusion for this study.
2. Research hypotheses
2.1 Political connections and tax avoidance
Managers may have several incentives to enter into politics to be less burdened with
regulations and less exposed to monitoring and oversight (Habib et al., 2017). This is
particularly true within the banking industry, generally considered as highly regulated
sector. Accordingly, the managers of politically connected banks may beneﬁt from their
connections to reduce their tax payments because they will be protected against detection
and future litigationrisks and will have private access to preferential information.
The ﬁrst beneﬁt of corporate political connections is to be protected by politicians
against detection and future litigation risks. Christensen et al. (2015) focus on the
association between tax avoidance and risk. They indicate that, in the case that
reducing taxes can help a ﬁrm to keep more of its proﬁts, managers would want to
minimize taxes without exposing ﬁrm to any types of risks and uncertainties that tax
avoidance exposes the ﬁrm to. Accordingly, Li et al. (2016) document that once the tax
earnings management is discovered, the ﬁrm faces severe punishment from both the
securities regulatory committee and tax authority, which may dramatically damage the
ﬁrm’s value. Hence, tax avoidance would be optimal only for ﬁrms with the ability to
lower their tax burden and avoid punishment, primarily ﬁrms with politically
connected management (Li et al., 2016). Furthermore, politically connected ﬁrms have
less market pressure to be transparent (Kim and Zhang, 2016). Indeed, tax avoidance