Tax Aggressiveness and Financial Distress: A Systematic Literature Review (2015–2023)

Introduction: While the government aims to maximise its tax revenues to properly administer its affairs, companies try to minimise their tax liabilities through acceptable tax management and unacceptable tax evasion. Tax management among companies is a means of temporarily exaggerating earnings to defer financial distress. Consequently, companies’ tax-aggressive activities generate cash and increase liquidity. However, the reputational costs resulting from the companies’ engagement in aggressive tax planning also pose financial constraints for creditors. Research Gap: Researchers have studied the relationship between financial distress and tax aggressiveness, but the results are mixed. Objectives of the Study: This systematic literature review aims to analyse the existing literature on the relationship and suggest further research opportunities. Research Methodology: This article analyses the existing literature using the PRISMA methodology, using 15 peer-reviewed articles from 13 leading journals published between 2015 and 2023. Findings of the Study: The reviewed literature shows mixed results regarding the nexus of tax aggressiveness and financial distress. Some studies show that aggressive taxation practices are higher in firms facing financial distress, while others show a negative or insignificant impact. Studies also depict that firms involved in tax-aggressive activities often face a higher likelihood of bankruptcy. Implication of the Study: Based on the results of this study, the relationship between tax aggressiveness with financial distress can be comprehended under different set-ups. Moreover, the study also identifies further research opportunities on the subject.