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Political Embeddedness, Audit Architecture, and Corporate Tax Avoidance in Financially Regulated Banking Systems: Evidence from Emerging and Islamic-Oriented Markets
Issue Vol. 2 No. 02 (2025): VOLUME 02 ISSUE 02 --- Section Articles
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Abstract
Corporate tax avoidance has long been recognized as a strategically important yet institutionally sensitive phenomenon in modern financial systems. Within banking industries, where firms are simultaneously profit-maximizing corporations and custodians of public trust, the dynamics of tax avoidance become even more complex. These complexities are magnified in emerging and institutionally heterogeneous markets, particularly those characterized by political embeddedness, regulatory fragmentation, and religiously informed governance structures such as Islamic banking. This study develops an integrated theoretical and empirical framework to examine how political connections and audit architecture interact to shape tax avoidance strategies in regulated banking environments, with particular emphasis on Islamic financial institutions.
Building on agency theory, political economy theory, and institutional theory, the article situates tax avoidance not merely as a technical outcome of accounting choices but as a politically mediated organizational behavior shaped by governance arrangements, ownership structures, and audit mechanisms. In doing so, it engages deeply with the growing body of literature that has examined tax avoidance across corporate contexts, including studies of managerial ability, ownership concentration, internal control, and audit committee characteristics (Akbari et al., 2018; Annuar et al., 2014; Bimo et al., 2019; Al Lawati & Hussainey, 2021). Central to the conceptual architecture of the present study is the proposition that political connections fundamentally alter the risk-reward calculus of tax avoidance, particularly when combined with joint audit regimes that may either constrain or facilitate opportunistic behavior.
The empirical and conceptual core of this article is anchored in the seminal work of Ajili and Khlif (2020), who demonstrated that political connections in Islamic banks are systematically associated with higher levels of tax avoidance, and that the presence of joint auditors significantly moderates this relationship. Their findings challenge conventional assumptions that Islamic ethical frameworks or enhanced audit oversight automatically reduce opportunistic tax behavior. Instead, their work reveals a more nuanced reality in which politically embedded banks leverage both regulatory proximity and audit complexity to optimize tax outcomes. By embedding their results within a broader comparative and theoretical framework, this article extends their insights beyond the immediate empirical context and into a generalizable model of politically mediated tax governance.
Methodologically, the article adopts a rigorous qualitative-analytical approach that synthesizes prior econometric findings, institutional indicators, and comparative governance analysis. Rather than presenting new numerical estimates, the study reconstructs causal pathways and behavioral mechanisms through careful interpretation of existing empirical literature, including cross-national studies of tax avoidance, audit effort, ownership separation, and political influence (Badertscher et al., 2013; Bae, 2016; Beer et al., 2019; Bianchi et al., 2018). This interpretive strategy allows for a richly textured understanding of how political, organizational, and audit variables co-evolve in shaping tax outcomes.
The results demonstrate that politically connected banks, particularly in weak institutional environments, are structurally advantaged in pursuing aggressive tax strategies, even when subject to joint audits or formal governance reforms. These outcomes are further conditioned by ownership concentration, managerial incentives, and the symbolic versus substantive nature of audit quality. The discussion elaborates the theoretical implications of these findings for debates on regulatory capture, ethical finance, and the effectiveness of audit-based governance mechanisms. It also highlights the paradox that mechanisms designed to enhance transparency and accountability may, under certain political conditions, instead provide additional layers through which sophisticated avoidance strategies can be legitimized.
By integrating political economy with auditing and taxation scholarship, this article contributes a comprehensive framework for understanding tax avoidance in complex financial systems. It offers implications for regulators, auditors, and policymakers seeking to design governance architectures that are resilient to political capture and capable of genuinely constraining opportunistic fiscal behavior.
Keywords
References
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