Abstract:
1. Introduction
In recent years, tax planning has gained prominence among financial
institutions in Sri Lanka as a critical tool for minimizing tax liabilities,
improving operational performance, and maintaining compliance with
regulatory frameworks. Since the corporate tax rate in Sri Lanka is
currently high, banks can employ tax planning strategies to reduce their tax
burden and liability, thereby enhancing financial performance. This study
investigates the impact of tax planning strategies on the performance of Sri
Lankan banks.
2. Research Methodology
The researcher adopted a quantitative method to enrich the findings, using
capital intensity and thin capitalization as key metrics for tax planning
strategies, which serve as the independent variable. The dependent
variable is the banks’ performance, which is measured by return on assets
(ROA). The secondary data was collected through annual reports of
sampled banks in Sri Lanka from 2014 to 2023. The sample size is
restricted to 15 banks due to data unavailability. To analyze the data, the
Panel Data Regression method is used as an analytical tool.
3. Findings and Discussion
The findings reveal that these tax planning strategies negatively and
significantly affect banks’ performance. While thin capitalization reduces
taxable income through higher debt and interest expenses, it ultimately
weakens performance. Similarly, increased capital intensity, driven by
higher depreciation, results in lower pre-tax profits and diminished overall
performance.
4. Conclusion and Implications
In conclusion, this study advances knowledge of tax efficiency in a high-tax
context by analyzing capital intensity and thin capitalization, providing
original insights that are important for research and practice. In addition to
adding to the body of knowledge, these findings help legislators improve
tax management strategies that promote long-term expansion in the
banking industry
