The mediating role of financial reporting aggressiveness in corporate tax avoidance strategies
-
Author(s)Andi KusumawatiLink to ORCID Index: https://orcid.org/0009-0004-7270-3714
,
Chamdun MahmudiLink to ORCID Index: https://orcid.org/0000-0002-6747-9373
,
Suhanda SuhandaLink to ORCID Index: https://orcid.org/0000-0002-0248-6943
,
Andi Iqra Pradipta NatsirLink to ORCID Index: https://orcid.org/0009-0008-8539-0795
,
Fakhrul Indra HermansyahLink to ORCID Index: https://orcid.org/0009-0000-6246-2954
,
Muhammad Try DharsanaLink to ORCID Index: https://orcid.org/0009-0003-1947-8274
,
Rianda Ridho Hafizh ThahaLink to ORCID Index: https://orcid.org/0000-0002-7150-2732
-
DOIhttp://dx.doi.org/10.21511/imfi.21(4).2024.18
-
Article InfoVolume 21 2024, Issue #4, pp. 226-238
- 104 Views
-
30 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
Tax avoidance, often driven by managerial discretion, remains a critical issue in corporate governance due to its implications for financial transparency and regulatory compliance. This study investigates how Transfer Pricing, Thin Capitalization, Leverage, and CSR Disclosure – strategies employed by managers – affect Tax Avoidance and examines the mediating role of Financial Reporting Aggressiveness. Grounded in agency theory, the study analyzes data from 20 firms listed on the Indonesian Stock Exchange from 2019 to 2023 using PLS-SEM. The findings reveal that Transfer Pricing (β = 0.062, p = 0.002), Leverage (β = 0.046, p < 0.001), and CSR Disclosure (β = 0.061, p < 0.001) significantly increase Tax Avoidance, with Financial Reporting Aggressiveness acting as a mediator. However, Thin Capitalization does not significantly influence Tax Avoidance (β = 0.028, p = 0.422). These results suggest that managers exploit these mechanisms to minimize tax burdens, often at the cost of long-term shareholder interests. The study calls for stronger corporate governance and stricter oversight of CSR reporting and financial transparency to mitigate such practices.
- Keywords
-
JEL Classification (Paper profile tab)H26, M41, G32, M14, G38
-
References36
-
Tables6
-
Figures1
-
- Figure 1. PLS-SEM analysis
-
- Table 1. Operational definition and measurement of variables
- Table 2. Descriptive statistics
- Table 3. Measurement model results
- Table 4. Model fit indices
- Table 5. Path coefficients and p-values
- Table 6. Mediation effect results
-
- Amidu, M., Coffie, W., & Acquah, P. (2019). Transfer pricing, earnings management and tax avoidance of firms in Ghana. Journal of Financial Crime, 26(1), 235-259.
- Anesa, M., Gillespie, N., Spee, A. P., & Sadiq, K. (2019). The legitimation of corporate tax minimization. Accounting, Organizations and Society, 75, 17-39.
- Asrindah, D., & Atmoko, D. (2024). The Role of Tax Officials in Mitigating Company’s Tax Obstacles. Hasanuddin Economics and Business Review, 8(1).
- Barker, J., & Brickman, S. (2017). Transfer Pricing as a Vehicle in Corporate Tax Avoidance. The Journal of Applied Business Research, 33(1).
- Bradley, M., Jarrell, G. A., & Kim, E. H. (1984). American Finance Association on the Existence of an Optimal Capital Structure: Theory and Evidence. The Journal of Finance, 39(3).
- Davies, R. B., Martin, J., Parenti, M., & Toubal, F. (2018). Knocking on Tax Haven’s Door: Multinational Firms and Transfer Pricing. The Review of Economics and Statistics, 100(1), 120-134.
- Davis, A. K., Guenther, D. A., Krull, L. K., & Williams, B. M. (2016). Do Socially Responsible Firms Pay More Taxes? The Accounting Review, 91(1).
- Desai, M. A., & Dharmapala, D. (2006). Corporate tax avoidance and high-powered incentives. Journal of Financial Economics, 79(1), 145-179.
- Dyreng, S. D., Hanlon, M., & Maydew, E. L. (2008). Long-Run Corporate Tax Avoidance. The Accounting Review, 83(1).
- Freeman, R. McVea, J. (2001). A Stakeholder Approach to Strategic Management. The Accounting Review, 83(1).
- Frank, M. M., Lynch, L. J., & Rego, S. O. (2008). Tax Reporting Aggressiveness and Its Relation to Aggressive Financial Reporting. Accounting Review, 84(2).
- Gulzar, M. A., Cherian, J., Sial, M. S., Badulescu, A., Thu, P. A., Badulescu, D., & Khuong, N. V. (2018). Does corporate social responsibility influence corporate tax avoidance of Chinese listed companies? Sustainability (Switzerland), 10(12).
- Gupta, S., & Newberry, K. (1997). Determinants of the variability in corporate effective tax rates: Evidence from longitudinal data. Journal of Accounting and Public Policy, 16(1), 1-34.
- Hair, J. F., Hult, G. T. M., Ringle, C. M., & Sarstedt, M. (2022). A Primer on Partial Least Square Structural Equation Modeling (PLS-SEM). California: SAGE Publication, Inc.
- Hanlon, M., & Slemrod, J. (2009). What does tax aggressiveness signal? Evidence from stock price reactions to news about tax shelter involvement. Journal of Public Economics, 93(1-2), 126-141.
- Herianti, E., & Chairina, S. W. (2019). Does Transfer Pricing Improve the Tax Avoidance through Financial Reporting Aggressiveness? International Conference on Economics, Management, Accounting.
- Huseynov, F., & Klamm, B. K. (2012). Tax avoidance, tax management and corporate social responsibility. Journal of Corporate Finance, 18(4), 804-827.
- Jensen, M. C., & Meckling, W. H. (1976). Theory of the Firm: Managerial Behavior, Agency Costs And Ownership Structure. Journal of Financial Economics, 3(4), 305-360.
- Lee, Y., Shevlin, T., & Venkat, A. (2020). The Effect of Tax Avoidance On Capital Structure Choices. American Accounting Association.
- López-González, E., Martínez-Ferrero, J., & García-Meca, E. (2019). Does corporate social responsibility affect tax avoidance: Evidence from family firms. Corporate Social Responsibility and Environmental Management, 26(4), 819-831.
- Marchini, P. L., Mazza, T., & Medioli, A. (2018). The impact of related party transactions on earnings management: some insights from the Italian context. Journal of Management and Governance, 22(4), 981-1014.
- Modigliani, F., & Miller, M. H. (1963). Income Taxes and the Cost of Capital. The American Economic Review, 53(3), 433-443.
- Park, S. J. (2016). Is Foreign Direct Investment Effective from the Perspective of Tax Avoidance? An Analysis of Tax Avoidance Through the International Transfer Pricing Behaviors of Korean Corporations. The Journal of Applied Business Research, 32(3).
- Palliam, R., & Shalhoub, Z. (2003). The Phenomenology of Earnings Management within the Confines of Agency Theory. International Journal of Value-Based Management, 16(1), 75-88.
- Rego, S. O. (2003). Tax-Avoidance Activities of U.S. Multinational Corporations. Contemporary Accounting Research, 20(4), 805-833.
- Robin, Toni, N., & Simorangkir, E. N. (2021). The Influence of Transfer Pricing, Corporate Governance, CSR, and Earnings Management on Tax Aggressiveness.
- Ross, S. A. (1973). The Economic Theory of Agency: The Principal’s Problem. The American Economic Review, 63(2).
- Scott, W. R. (2015). Financial Accounting Theory (7th ed.). Canada: Pearson.
- Sholihin, M., & Ratmono, D. (2013). Analisis SEM-PLS dengan Warp PLS 3.0. [SEM-PLS analysis with Warp PLS 3] (1st ed.). Yogyakarta: Andi Offset. (In Indonesian).
- Sikka, P. (2010). Smoke and mirrors: Corporate social responsibility and tax avoidance. Accounting Forum, 34(3-4), 153-168.
- Sikka, P., & Willmott, H. (2010). The dark side of transfer pricing: Its role in tax avoidance and wealth retentiveness. Critical Perspectives on Accounting, 21(4), 342-356.
- Tax Justice Network. (2020). The State of Tax Justice 2020: Tax Justice in The Time of COVID-19. United Kingdom, Stanley.
- Taylor, G., & Richardson, G. (2012). International Corporate Tax Avoidance Practices: Evidence from Australian Firms. International Journal of Accounting, 47(4), 469-496.
- Watts, R. L. & Zimmerman, J. L. (1990). Quality Analysis of Earnings Reported by Banks in Dynamic and Less Dynamic Financial Markets by Applying IAS 39 for Measuring Financial Instruments-Case Study: Mozambique and Portugal. The Accounting Review, 9(3).
- Wier, L. (2020). Tax-motivated transfer mispricing in South Africa: Direct evidence using transaction data. Journal of Public Economics, 184.
- Zeng, J. (2019). Narrating China’s belt and road initiative. Global Policy, 10(2), 207-216.
-
Determinants of financing decision: empirical evidence on manufacturing firms in Indonesia
Sutomo Sutomo , Sugeng Wahyudi ,
Irene Rini Demi Pangestuti ,
Harjum Muharam
doi: http://dx.doi.org/10.21511/imfi.16(2).2019.14
Investment Management and Financial Innovations Volume 16, 2019 Issue #2 pp. 159-170 Views: 2395 Downloads: 333 TO CITE АНОТАЦІЯThis study aims to contribute to the emergence of the literature focusing on exploring the factors influencing the financing decision, as well as examining the relationship between the firm size, profitability and firm growth towards the corporate debt. Questions such as how relevant firm size, profitability and firm growth to debt are, quantitatively, had not been fully answered in the business literature. The purpose of this study is to fill this large gap by examining the role of the firm size, profitability, investment and firm growth for the corporate debt. This study tries to examine the determinants of debt in the financial literature which include size, growth, business risk, and profitability in accordance with the capital structure theory, in manufacturing firms in Indonesia. The sample contained financial data from 150 firms for the period 2012–2017. The results showed that the manufacturing firms in Indonesia had high debt levels, especially the size, profitability, firm growth and profitability had proven to be the debt determinants, which also confirmed the Pecking Order Theory. This study also found that the management preference of manufacturing firms in Indonesia for risk was the risk-seeker or risk-neutral ones. This finding implies that the choice of funding sources originating from debt still provided greater returns compared to the capital cost needed due to business uncertainties.
-
The impact of Working Capital Management on shareholders’ wealth and profitability: evidence from Colombo Stock Exchange
Wasantha Perera ,
Pradeep Priyashantha
doi: http://dx.doi.org/10.21511/imfi.15(2).2018.10
Investment Management and Financial Innovations Volume 15, 2018 Issue #2 pp. 104-115 Views: 2325 Downloads: 481 TO CITE АНОТАЦІЯThe Working Capital Management (WCM) has an important role for the firm’s success or failure, because it directly affects the overall business health of the firm. This study examined the impact of WCM on profitability and shareholders’ wealth using 50 companies listed in different sectors on the Colombo Stock Exchange (CSE) for the period from 2010 to 2015. This sample represents 47% of the selected sectors of CSE. The profitability of the company is measured using gross operating profit (GOP) and shareholders wealth measured by Tobin’s Q (TQ) ratio. The WCM is measured using five independent variables namely stock holding period (SHP), debtors’ collection period (DCP), creditors’ settlement period (CSP), cash conversion circle (CCC) and current assets ratio (CAR). Further, three additional variables such as firm size (SIZE), leverage (LEV) and earning yield (EY) are employed as controlling variables to capture the impact of other performance of the companies.
The data were analyzed using ordinary least square (OLS) and panel data regression models. These regression models reveal that there is a significant negative relationship between CCC and dependent variables (GOP & TQ). Further, this relationship has been confirmed by the major components of CCC such as SHP, DCP. Firm size also positively and significantly effects on the firm GOP while negatively effects on the TQ. Further, they revealed that there is a significant positive relationship between LEV and TQ. The study finds that the shareholders’ wealth and profitability can be increased through the efficiency of WCM. -
Corporate governance quality, firm size and earnings management: empirical study in Indonesia Stock Exchange
Yulia Saftiana , Mukhtaruddin ,
Krisna Winda Putri ,
Ika Sasti Ferina
doi: http://dx.doi.org/10.21511/imfi.14(4).2017.10
Investment Management and Financial Innovations Volume 14, 2017 Issue #4 pp. 105-120 Views: 1983 Downloads: 530 TO CITE АНОТАЦІЯEarnings management (EM) is manipulation done by management in preparing financial statement in order to gain management advantages or to increase the firm value. EM can reduce the quality of financial statements because it does not show the real earning periodical. This research aims to identify the effect of good corporate governance (GCG) (institutional ownership, managerial ownership, frequency of board meetings, frequency of audit committee (AC) meetings), firm size, and leverage on the EM. Population comprises the companies in LQ 45 index of Iindonesia Stock Exchange (IDX) for the period 2010–2014. Samples of the research were taken using purposive sampling method, and the variables are tested using multiple linear regression analysis. The results of the research show that partially, only leverage has significant effect on EM, while institutional ownership, managerial ownership, frequency of board meeting, frequency of AC meetings, and firm size have no significant effect on EM, but all of the variables have simultaneously significant effect on EM. Limitations of the research are the only used 6 independent variables and 21 companies as samples of the research.
