M01961
FINANCIAL AND NON FINANCIAL FACTORS
INFLUENCING INDONESIAN COMPANIES’ TAX
AGRESSIVENESS
Ardy1, Ari Budi Kristanto2
ABSTRACT
Tax aggressiveness conveys benefit in promoting taxpayers’ efficiency, but
also bringing the risk at once. The efficiency can be reached through
minimizing the tax payment. On the other hand, tax payers’ reputation and
firm value may be weakened if the tax aggressiveness is put into
opportunistic objective. This paper aims to investigate whether the financial
and non-financial factors influence the tax aggressiveness. Financial factors
comprise leverage and liquidity. Moreover, the nonfinancial factors cover the
proportion of independent commissioners, audit committee and family
ownership. Furthermore, the tax payers’ aggressiveness is measured by
Effective Tax Rate. The research formulates five hypotheses which are tested
using linear regression methods. Moreover, this research employs 72 firm
years as samples, which cover manufacturing companies listed in the
Indonesian Stock Exchange during 2010 until 2013. Those samples are
sorted out by purposive sampling method. The samples are chosen using the
purposive sampling method based on certain designated criteria. The result
shows that financial factors consist of leverage and liquidity, and nonfinancial
factor of audit committee positively influences the tax aggressiveness. While
the proportion of independent commissioners and family ownership do not
have significant influence toward tax aggressiveness. This finding implies that
Indonesian companies tend to aggressive in avoiding the tax for the financial
motives rather than non financial motives.
Keywords : leverage, liquidity, independent commissioners, audit committee, family
ownership, tax aggressiveness
1
Mr. Ardy, alumnus of Economics and Business Faculty, SatyaWacana Christian University
Mr. Ari Budi Kristanto, faculy member of Economics and Business Faculty, SatyaWacana Christian University.
Email: ari.kristanto@staff.uksw.edu
2
INTRODUCTION
Corporations’ effort to reduce their tax burden may bring them to become
aggressive, using either legally manner (tax avoidance) or illegal (tax evasion)
(Frank et al., 2009). The aggressive behavior may have a higher risk than the others.
The risks canbe taxsanctions or fines, the decline in stock prices (Sari and Martani
2010) and bad reputation if the tax aggressivenessisregarded as illegal manner.The
stakeholders consisting tax authority, investors, auditors and other community
groups require the indicatorsfor recognizing companies that have a higher risk profile
due to tax aggressiveness. The specific criteria in assessing tax payer’s risk will help
the tax authority to focus on high risk taxpayers. The risk profile informations are
important consideration in making investment decisions for the investors. Auditor’s
analysis in assessing the risk is important for an audit judgment.
Previous research by Krisnata (2012), relate the financial condition, corporate
governance and earnings management toward tax aggressiveness. The indicators
used in measuring financial condition are liquidity and leverage. Moreover,the
corporate governance is measured by independent commissionersproportion. The
results of this study indicate that liquidity does not have a significant influence toward
tax aggressiveness, while leverage and earnings management have positive effect
toward tax aggressiveness, and the independent commissioners proportion
negativelyimpact the tax aggressiveness.
Other researches about factors influencing the tax aggressiveness try to
examine the financial condition, corporate governance, and family ownership as the
variables. Prakorsa (2014) conducted research on the effect of profitability to tax
aggressiveness, using leverage as control variables. This study finds significant
negative effect of profitability to tax avoidance, as supported by Kurniasih and Sari
(2013). The result does not in line with Krisnata (2012), which find thatthe leverage
does not significantly influence the tax aggressiveness.
Bradley (1994), Siahaan (2005), Krisnata (2012) and Princess (2014)
conducted a similar study to relate the liquidity and tax aggressiveness. Krisnata’s
(2012) and Princess’ (2014) researches find that the liquidity has no significant
influence toward the aggressiveness of corporate taxes. This results does not agree
to Bradley (1994) and Siahaan (2005).
The relationship between corporate’s taxation and corporate governance has
been studied by several researchers, including Sari and Martani (2010), Krisnata
(2012) and Prakorsa (2014). Sari and Martani’s (2010) findings conveys the fact that
the effects of good corporate governance implementation has not brought real
benefit in Indonesian companies’ taxation. Krisnata (2012) find that independent
commissioners proportion have a negative effect on the tax aggressiveness.
Furthermore Prakorsa (2014) find that the audit committee has no influence toward
tax aggressiveness and independent commissioners have a negative effect on the
tax aggressiveness.
Chen et al.’s (2010) research indicates that the non-family companies tend to
avoid paying higher tax rate than family companies. Hidayanti and Laksito (2013)
conducted a similar study which finds that family ownership does not have a
significant effect to tax aggressiveness tax. A research by Rusyidi and Martani
(2014) find that Indonesian companies with higher family’s ownership are more
aggressive in avoiding the tax, while Chen et al. (2010) finds the opposite result.
This research intends to continue Krisnata (2012), by adding non-financial
indicators in the analysis. It is family ownership which included in the analysis, since
higher agency problem in non family ownership that makes them to become more
aggressive in term of tax avoidance Chen et al. (2010). When the ownership and the
management are separated, there may be imperfection in contracts and supervision.
This will give rise to an opportunity for managers to become opportunist, then lead to
corporate governance problem (Sari and Martani 2010). Hence, this study adds the
analysis to audit committee in corporate governance (as conducted by Prakorsa
(2014)), to enrich the viewpoint from controllng dimension of corporate governance.
In contrast to Krisnata (2012), this study does not include the analysis for earning
management, as its less relevancy. Putri and Kamila (2014) find a strong reciprocal
relationship between earnings management and tax aggressiveness. This research
will only examine variables influencing the tax aggressiveness.
Based on the background, this research are designated to examine the
influence of financial condition (leverage, liquidity) and non-financial (corporate
governance, family ownership) toward tax aggressiveness, on companies listed in
Indonesian Stock Exchange during 2010-2013. Furthermore, the researc result will
conveys some benefits. The result is expected to become input in determining the
criteria for risk-based selection of the taxpayer For the tax authorities in assessing
the taxpayer compliance, to become an indicator in making investment decisions by
the prospective investors and provides references for further research.
LITERATURE REVIEW & HYPOTHESIS DEVELOPMENT
Tax Agressiveness
According to Frank et al. (2009), tax aggressiveness is an behaviour aims to
reduce taxable income through tax planning using both legal (tax avoidance) and
illegal (tax evasion). Tax avoidance is an effort to reduce the tax expense using legal
manner, without conflicting with tax regulations, by exploiting gray areas in tax
regulation. Moreover, the tax evasion is an effort of taxpayers to reduce the tax
expense, using illegal manner by hiding the real situation and breaking the tax rules
(Pohan 2011).
The benefit tax aggressiveness are saving the tax expenditures, that bring
larger return to the owner and to fund the company's investment, so that increase the
the future profit (Krisnata 2012). Particularly for manager (agent), the tax
aggressiveness will increase the compensation paid for them (Hidayanti 2013).
Oppositely, the tax aggressiveness may bring a possibility that the company be fined
by the tax administrator and stock prices decline (Sari and Martani 2010). From the
government point of view, tax aggressiveness can reduce state revenue from tax
sector.
Leverage and Tax Aggressiveness
Leverage refer to funding resource that require fixed cost, which is expected
to provide higher return for shareholder advantage than the fixed costs (Keown
2005). The application of leverage is funding activity through debt source. The debt
interest paid by the company is a fixed cost. Indonesian Law No. 36 of 2008, article 6
states that interest should be classified as deductible expense while calculating the
income taxes.
The companies may fund their operating and investing needs through debt
financing. The higher debt, the lower companies' taxable income. The debt financing
raises interest expense which can be included in deductible expenses, so that the
use of interest expense to minimize the tax payment can be recognized as an
aggressive tax activity. Ozkan (2001) provide evidence that companies with high tax
liability would choose to get into debt financing in order to reduce taxes. The higher
leverage ratio, the higher debt financing from third parties, so that the higher interest
costs. Furthermore, the interest cost can be used to reduce the tax expense.
Krisnata (2012) provide evidence that leverage positively influence the tax
aggressiveness.
H1: leverage is positively influence the tax aggresiveness
Liquidity and Tax Aggressiveness
Liquidity is the ability of the company to meet its short term obligations. Any
failure to meet short-term liabilities will lead to questionably going concern. Liquidity
can be measured by comparing the current assets and current liabilities. Low
liquidity may reflect the company's problem to meet the short-term obligations.
Liquidity problem may lead companies not to comply with the tax rules (Bradley
(1994) and Siahaan (2005)). It may bring the company into aggressive behaviour
against tax. Bradley (1994) and Siahaan (2005) provide evidence that companies
which are experiencing liquidity problems will likely not to comply with the tax laws,
and tend to commit tax evasion. These decisions are taken by the companies to
reduce tax expenditures and to maintain the cash flow. Therefore, companies with
lower liquidity ratios will tend to have higher tax aggressiveness.
H2: Liquidity is negatively influence the tax aggressiveness
Corporate Governance and Tax Aggressiveness
Good corporate governance is defined as a regulating and controlling system
of company to create added value for all stockholders (Desai and Dharmapala
2007). Corporate governance works as an effective mechanisms to minimize the
agency conflicts, emphasising the legal mechanisms preventing the expropriation on
minority shareholders (Kurniasih and Sari, 2013). There are five basic principles of
corporate
governance:
transparency,
accountability
and
responsibility,
independence, and fairness (Warsono, et al (2010) in Hidayanti (2014)).
Indonesian companies use continental system which has two levels in
corporate governance, the board of directors and board of commissioners (FCGI
(2003) in Krisnata (2012)). The board of directors is an authorized party to manage
the company, while commissioners are the ones who oversee the corporate
governance conducted by the management. Members of the commissioners board
consist of independent commissioners who have no financial, management,
ownership, and / or family relationship with the other commissioners, directors and /
or controlling shareholders, or other relationship which could affect its ability to act
independently.
Board of commissioners holds an important role in overseeing the directors’
performance. Independent board members are considered to have better oversight
for free from the company's internal interests. Higher independent board members
may lead to strict supervision over the company. Board of directors shall establish an
audit committee consisting of at least three members, appointed, dismissed, and
responsible to the board of commissioners (Pohan 2008). The audit committee is
designated to assist and strengthen the board of commissioners’ function in
overseeing the financial reporting, risk management, audit and corporate
governance implementation. The audit committee emphasis on providing oversight
on issues related to financial policy, accounting and internal control (Hanum and
Zulaikha 2013). The effective function of audit committee may lead to better control
over the operation and financial statements, also support the good corporate
governance (Andriyani 2008).
In regard to tax aggressiveness, managements are motivated to maximize net
income, as earnings based manager bonus scheme. Reducing tax payment is one of
the way to increase net income, so that the managers are encouraged to become
aggressive in tax. The aggressive behavior using illegal manner (tax evasion) may
bring negative consequences for shareholders such as breaking the corporate’s
credibility if such action is detected by the authorities. Therefore, it is necessary to
supervise the management. Through independent directors’ and audit committees’
supervision role, expectably tax aggressiveness can be anticipated. The higher
independent commissioners ratio, the less manager’s tax aggressiveness (Krisnata
study 2012). The existence of audit committee may minimize the tax avoidance
because it provides insight over accounting system, financial reporting and its notes,
internal control, and independent auditor (Annisa and Kurniasih 2012).
H3: Independent commissioner is negatively influence the tax aggressiveness
H4: Audit committee is negatively influence the tax aggressiveness.
Family Ownership and Tax Aggressiveness
Family firm run by family generations or inherited by the people who had
already run or by a family to the next generation (Morck and Yeung 2004). Anderson
et al. (2003) in Chen et al. (2010), suggests alternative criteria used to categorize
firms with family ownership, among others, as it is controlled by their founders or
their family members, which have a role as key executives, directors, or
blockholders. Arifin (2003) defines family ownership as all individuals and companies
whose ownership is recorded (ownership> 5% have to be recorded) other than public
company, state owned firm, financial institutions, and public (unrecorded individuals).
Family-controlled companies have fewer agency problem, as fewer principal-agent
conflicts. Higher family ownership represents longer investment time span, and
higher awareness for company's reputation. Therefore, the family owners would
protect the long-term company’s interests in regard to the risk of loss arising from
aggressiveness in tax.
Chen et al. (2010) were conducted a research to determine whether the family
owned firms are more tax aggressive than non-family owned firms. This study
provide evidence that the family businesses have lower tax aggressiveness than the
non-family businesses. Family owners are more willing to pay higher taxes, rather
than paying the tax penalty and facing possible decline of their firm value resulting.
H5: family ownership is negatively influence the tax aggressiveness.
RESEARCH METHOD
Population and Sample
The research population are all manufacturing companies listed in Indonesia
Stock Exchange during 2010 until 2013. The samples are selected using purposive
method to get representative samples. The sample selection criteria are: (1) listed on
the Stock Exchange during 2010-2013, (2) the data are available to obtain
information about tax, leverage, liquidity, corporate governance and ownership, (3 )
have positive earnings from the period 2010-2013 consecutively, (4) the ETR is
lower than Indonesian income tax rate. Based on these criteria, there are 72
firmyears used as sample.
Research Data and Variables
The research data are secondary data obtained from annual reports and
financial statements of listed companies during 2010-2013 available in Indonesia
Stock Exchange website.
Table 1
Variables Measurement
Variables
Tax
Aggressiveness
Measurement Indicator
Tax aggressiveness measurement refers Krisnata (2012) is
effective tax rate (ETR). ETR is an outcome of income
statement measurement basis, evaluating the effectiveness of
tax minimization strategies.
Income Tax Expense
ETR =
Earning Before Tax
Leverage
Liquidity
Corporate
Governance
(Krisnata 2012)
Leverage reflects the company's ability to meet its financial
obligations, either short term and long term. Based on Krisnata
(2012), this study measures the leverage based on total
liabilities to total assets.
Debt
Debt to Asset Ratio =
Asset
(Krisnata 2012)
Liquidity is measured using a current ratio.
Current Asset
Current Ratio =
Current Liability
(Krisnata 2012)
This research measures corporate governance using
composition of independent commissioner and audit committee
as proxies. The composition of independent commissioner is
measured using the percentage of the number of independent
commissioner to the total number of commissioners (Andriyani,
2008). Audit committee variables measured by the total number
of committee members in a company (Hanum and Zulaikha,
2013).
1).Independent Commissioners Proportion =
Number of Independent
Commissioners
Total Numbe rs of Commissioners
Board
(Andriyani 2008)
2. Total number of audit committee
(HanumdanZulaikha 2013)
This study refer to family ownership definition by Arifin (2003),
which all individuals and companies whose ownership is
recorded (ownership> 5% must be recorded), other than public
company, state owned company, financial institutions, and
public. Family ownership is a dummy variable, notated by 1 if
the proportion of family ownership> 50%, otherwise notated as
0. This research categorize family ownership as a company
controlled by their founders or their family members, which
have a role as key executives, directors, or blockholders.
(ownership > 5%) (Chen et al. 2010).
Dummy variabel, :
1 = family ownership proportion> 50%
0 = family ownership proportion < 50%
(Arifin 2003)
Family Ownership
ANALYSIS METHOD
The research data is analyzed using multiple regression analysis. Before the
regression analysis is run, the data should pass the classic asumption tests consist
of normality test, auto correlation test, multicolinearity test and heteroscedasticity
test. The normality test is using the Jarque-Bera test. To detect the presence of
autocorrelation, the research uses Breusch-Godfrey test. To test the multicolinearity,
the research refers to correlation matrix of the independent variables. At last, ARCH
test is used to test the heteroscesdaticity.
RESULT AND DISCUSSION
Classic Asumption Tests
Initially, there are 108 samples obtained for the research, but there is
normality problem in the data. Hence, the outlier data were taken out so that the
samples remain at 72 firmyears. The model also free from autocorrelation,
multicollineraity, and heteroscedasticity problem.
ETR
Table 2
Descriptive Statistics Figure
LEV
LIQ
COM
AUD
FAM
Mean
0,2167
0,4121
6,1028
0,3928
3,2083
0,6389
Maximum
0,25
0,81
247,44
0,75
5
1
Minimum
0,16
0,04
0,48
0,25
2
0
Source: Research data (2014)
Table 1 provides descriptive statistics of research data. Tax aggressiveness
(measured by ETR) are averaged at 0.216667. It means that, on average,
companies can reduce their tax burden to 21,66% ( 3.33% lower than corporate
income tax). Leverage ratios are averaged at 0.4121, which indicate that the average
sample finance each dollar owned asset from 41% debt. Liquidity ratios are
averaged at 6.1028. This shows that, on average, the companies were able to settle
each dollar current liabilities by USD 6.1 current assets owned. Independent
commissioner is measured by the number of independent directors to total board of
commissioners. The average value of independent commissioner in the samples is
0.3928. It shows that at average, the proportion of independent board to non
independent member is 39.28%. The audit committee ehich is measured by number
of audit committees, are averaged at 3.2083. This indicates that the companies’
audit committee numbers exceed the government redulation (2 members required).
Family ownership are averaged at 0.6389, which indicates that 63,89% average
companies’ shares are owned by family.
Statistical Result
Table 3
Regression Analysis Result
ETR
Coefficient
Probability
LEV
-0,0478
0,0004
LIQ
-0,00022
0,0073
COM
-0,0311
0,1871
AUD
-0,0088
0,042
FAM
0,002
0,6632
Adjusted R-squared
0,213579
Prob (F-statistic)
0.000765
Source: Research Data (2014)
Leverage and Tax Aggressiveness
Table 3 shows the results of statistical tests. The table shows that leverage
has significant negative effect to ETR, as indicated by LEV’s probability value of
0.0004 and -0.047 regression coefficient. It means that the higher company’s
leverage would result the lower ETR. On other word, more debt financing a company
has, the more tax aggressiveness they would be. This conveys that the H1 stating
leverage is positively influence the tax aggresiveness, is supported by the research
data. The more debt financing from third party used by the company, the smaller
income tax expense. The increase in the leverage ratio causes increasing of tax
aggressiveness, due to interest expense arising from the debt which is included in
deductible expense. This finding agrees with Ozkan (2001) and Krisnata (2012),
which also find that the leverage has significant positive effect on the tax
aggressiveness.
Liquidity and Tax Aggressiveness
Table 3 shows significant negative effect of liquidity toward ETR, indicated by
probability value of 0.0073 (less than 0.05) and negative regression coefficien. It
means that the higher company’s liquidity would make the lower ETR. On the other
words, if a company’s liquidity is higher, the more tax aggressiveness they would be.
The result is not supporting the H2 which states liquidity negatively influence the tax
aggressiveness. High liquidity indicates that the company has a good cash flow to
repay short-term liabilities. This study found that the more liquid a company, it will
tend to have tax aggressiveness. The presumption that the cash availability would
lead to make the company become less aggressive, can not be verified. The
company may also have other priorities requiring cash availability, such as
maintaining the dividend policy. This is supported by the Dewi (2014) which find
posittive influence of liquidity toward dividend policy. The high receivables and
inventory balance may also lead the companies to prioritize cash and cash
equivalents to meet the needs that is more important than taxes. This situation may
occur in PT Kedaung Indah Can Tbk, whith its inventories amounted to 67.84% of
total assets and the cash value of 12% of total current assets, which become
aggressive by successfully lowered the ETR.
Independent Commissioners Proportion and Tax Aggressiveness
The statistical tests show that the proportion of independent commissioners
have no significant effect to the tax aggressiveness. This research can not provide
evidence to support H3. This finding may be resulted by independent directors which
are not well performed in supervisory function, since the background of
commissioners may not from finance area (Hari 2012). This situation can be found,
in PT Tiga Pilar Sejahtera Food Tbk., PT Voxels Electric Tbk. and PT Mayora Indah
Tbk. This finding supports the previous research by Reza (2012) and Zulaikha
(2013), which can not provide evidence of influence between independent
commissioners and tax aggressiveness.
Audit Committee and Tax Aggressiveness
The statistical tests indicates that the audit committee numbers have significant
influence toward ETR, in negative direction (probability value of 0.0298, regression
coefficient of -0.008). The more the number of audit committee, the lesser ETR. In
other words, more audit committee members the more aggressive a company is.
This indicates that the H4 which states that the audit committee would negatively
affect the tax aggressiveness is not supported by the research evidence. Numerous
audit committee members do not necessarily supressed the tax aggressiveness.
Numerous of audit committee may be encouraging the company to operate
efficiencly. This may included the efficiency in tax expenditure. This situation occurs
in PT Charoen Pokphand Indonesia Tbk. which has a number of five audit committee
members, then the company can suppressed the income tax expense by 4% and
book-tax different by 7%.
Family Ownership and Tax Aggressiveness
The statistical tests indicates that family ownership does not significantly
influence the tax aggressiveness of tax. This means H5 which states that family
ownership would negatively affect the tax aggressiveness is not supported by
research finding. This finding supports the previous research by Murniati (2012) and
Hidayanti and Laksito (2013), which found that the family ownership does not
significantly influence the tax aggressiveness. Family ownership in Indonesian firm
has not been able to describe the level of tax aggressiveness. In regard to the firm
value, there may be other factors (other than taxes) which is considered by the
family member (manager). The factors such as profitability, growth opportunity and
capital structure positively affect the firm value (Nilmalasari 2011, Nofrita 2013,
Hermuningsih 2013).
CONCLUSION
Based on the research findings, it can be concluded as follows:
1. Leverage and liquidity are positively influence the tax aggressiveness.
2. The audit committee has a positive influence on the tax aggressiveness.
3. The proportion of independent commissioners and the family ownership do not
significantly affect the tax aggressiveness.
Leverage has a positive effect on the tax aggressiveness. This finding support
previous study by Ozkan (2001) and Krisnata (2012). Liquidity has a positive effect
on the tax aggressiveness, which is not support Bradley (1994) and Siahaan (2005).
The audit committee positively affects the tax aggressiveness, which is support Reza
(2012). The proportion of independent directors and family ownership do not affect
the tax aggressiveness. This evidence about independent directors proportion
support Zulaikha (2013), but do not support Krisnata (2012). The finding on family
ownership supports previous research by Hidayanti and Laksito (2013), but does not
support Chen et al. (2010).
Tax aggressiveness aims to reduce taxable income through tax planning, either
using legal (tax avoidance) or illegal (tax evasion) manners. Companies which is
behave aggressively can be considered by the tax authorities as taxpayers who have
a higher risk. This taxpayer risk is considered in the risk based selection done by the
authorities. For tax authorities (the risk-based selection criteria were primarily for
taxpayer wich report loss and overpaid in their tax returns) may also consider
leverage, liquidity and the audit committee as a additional consideration in
determining the risk. For inverstors, they can consider these three variables in
assessing the tax aggressiveness related risks in their investment decisions.
However, there are manufacturing industry’s sub-sectors which are not
represented in this study (sub sector of ceramic, porcelain and glass, wood and
processing sub-sectors, sub-sectors of the pulp and paper, footwear sub-sector, subsector and sub-sector electronic cigarette). Some data have been eliminated caused
sectoral analysis could not be done. Then, further research may use samples from
different characteristics of the manufacturing sector. So the tax aggressiveness
behavior in Indonesia can be seen wider.
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INFLUENCING INDONESIAN COMPANIES’ TAX
AGRESSIVENESS
Ardy1, Ari Budi Kristanto2
ABSTRACT
Tax aggressiveness conveys benefit in promoting taxpayers’ efficiency, but
also bringing the risk at once. The efficiency can be reached through
minimizing the tax payment. On the other hand, tax payers’ reputation and
firm value may be weakened if the tax aggressiveness is put into
opportunistic objective. This paper aims to investigate whether the financial
and non-financial factors influence the tax aggressiveness. Financial factors
comprise leverage and liquidity. Moreover, the nonfinancial factors cover the
proportion of independent commissioners, audit committee and family
ownership. Furthermore, the tax payers’ aggressiveness is measured by
Effective Tax Rate. The research formulates five hypotheses which are tested
using linear regression methods. Moreover, this research employs 72 firm
years as samples, which cover manufacturing companies listed in the
Indonesian Stock Exchange during 2010 until 2013. Those samples are
sorted out by purposive sampling method. The samples are chosen using the
purposive sampling method based on certain designated criteria. The result
shows that financial factors consist of leverage and liquidity, and nonfinancial
factor of audit committee positively influences the tax aggressiveness. While
the proportion of independent commissioners and family ownership do not
have significant influence toward tax aggressiveness. This finding implies that
Indonesian companies tend to aggressive in avoiding the tax for the financial
motives rather than non financial motives.
Keywords : leverage, liquidity, independent commissioners, audit committee, family
ownership, tax aggressiveness
1
Mr. Ardy, alumnus of Economics and Business Faculty, SatyaWacana Christian University
Mr. Ari Budi Kristanto, faculy member of Economics and Business Faculty, SatyaWacana Christian University.
Email: ari.kristanto@staff.uksw.edu
2
INTRODUCTION
Corporations’ effort to reduce their tax burden may bring them to become
aggressive, using either legally manner (tax avoidance) or illegal (tax evasion)
(Frank et al., 2009). The aggressive behavior may have a higher risk than the others.
The risks canbe taxsanctions or fines, the decline in stock prices (Sari and Martani
2010) and bad reputation if the tax aggressivenessisregarded as illegal manner.The
stakeholders consisting tax authority, investors, auditors and other community
groups require the indicatorsfor recognizing companies that have a higher risk profile
due to tax aggressiveness. The specific criteria in assessing tax payer’s risk will help
the tax authority to focus on high risk taxpayers. The risk profile informations are
important consideration in making investment decisions for the investors. Auditor’s
analysis in assessing the risk is important for an audit judgment.
Previous research by Krisnata (2012), relate the financial condition, corporate
governance and earnings management toward tax aggressiveness. The indicators
used in measuring financial condition are liquidity and leverage. Moreover,the
corporate governance is measured by independent commissionersproportion. The
results of this study indicate that liquidity does not have a significant influence toward
tax aggressiveness, while leverage and earnings management have positive effect
toward tax aggressiveness, and the independent commissioners proportion
negativelyimpact the tax aggressiveness.
Other researches about factors influencing the tax aggressiveness try to
examine the financial condition, corporate governance, and family ownership as the
variables. Prakorsa (2014) conducted research on the effect of profitability to tax
aggressiveness, using leverage as control variables. This study finds significant
negative effect of profitability to tax avoidance, as supported by Kurniasih and Sari
(2013). The result does not in line with Krisnata (2012), which find thatthe leverage
does not significantly influence the tax aggressiveness.
Bradley (1994), Siahaan (2005), Krisnata (2012) and Princess (2014)
conducted a similar study to relate the liquidity and tax aggressiveness. Krisnata’s
(2012) and Princess’ (2014) researches find that the liquidity has no significant
influence toward the aggressiveness of corporate taxes. This results does not agree
to Bradley (1994) and Siahaan (2005).
The relationship between corporate’s taxation and corporate governance has
been studied by several researchers, including Sari and Martani (2010), Krisnata
(2012) and Prakorsa (2014). Sari and Martani’s (2010) findings conveys the fact that
the effects of good corporate governance implementation has not brought real
benefit in Indonesian companies’ taxation. Krisnata (2012) find that independent
commissioners proportion have a negative effect on the tax aggressiveness.
Furthermore Prakorsa (2014) find that the audit committee has no influence toward
tax aggressiveness and independent commissioners have a negative effect on the
tax aggressiveness.
Chen et al.’s (2010) research indicates that the non-family companies tend to
avoid paying higher tax rate than family companies. Hidayanti and Laksito (2013)
conducted a similar study which finds that family ownership does not have a
significant effect to tax aggressiveness tax. A research by Rusyidi and Martani
(2014) find that Indonesian companies with higher family’s ownership are more
aggressive in avoiding the tax, while Chen et al. (2010) finds the opposite result.
This research intends to continue Krisnata (2012), by adding non-financial
indicators in the analysis. It is family ownership which included in the analysis, since
higher agency problem in non family ownership that makes them to become more
aggressive in term of tax avoidance Chen et al. (2010). When the ownership and the
management are separated, there may be imperfection in contracts and supervision.
This will give rise to an opportunity for managers to become opportunist, then lead to
corporate governance problem (Sari and Martani 2010). Hence, this study adds the
analysis to audit committee in corporate governance (as conducted by Prakorsa
(2014)), to enrich the viewpoint from controllng dimension of corporate governance.
In contrast to Krisnata (2012), this study does not include the analysis for earning
management, as its less relevancy. Putri and Kamila (2014) find a strong reciprocal
relationship between earnings management and tax aggressiveness. This research
will only examine variables influencing the tax aggressiveness.
Based on the background, this research are designated to examine the
influence of financial condition (leverage, liquidity) and non-financial (corporate
governance, family ownership) toward tax aggressiveness, on companies listed in
Indonesian Stock Exchange during 2010-2013. Furthermore, the researc result will
conveys some benefits. The result is expected to become input in determining the
criteria for risk-based selection of the taxpayer For the tax authorities in assessing
the taxpayer compliance, to become an indicator in making investment decisions by
the prospective investors and provides references for further research.
LITERATURE REVIEW & HYPOTHESIS DEVELOPMENT
Tax Agressiveness
According to Frank et al. (2009), tax aggressiveness is an behaviour aims to
reduce taxable income through tax planning using both legal (tax avoidance) and
illegal (tax evasion). Tax avoidance is an effort to reduce the tax expense using legal
manner, without conflicting with tax regulations, by exploiting gray areas in tax
regulation. Moreover, the tax evasion is an effort of taxpayers to reduce the tax
expense, using illegal manner by hiding the real situation and breaking the tax rules
(Pohan 2011).
The benefit tax aggressiveness are saving the tax expenditures, that bring
larger return to the owner and to fund the company's investment, so that increase the
the future profit (Krisnata 2012). Particularly for manager (agent), the tax
aggressiveness will increase the compensation paid for them (Hidayanti 2013).
Oppositely, the tax aggressiveness may bring a possibility that the company be fined
by the tax administrator and stock prices decline (Sari and Martani 2010). From the
government point of view, tax aggressiveness can reduce state revenue from tax
sector.
Leverage and Tax Aggressiveness
Leverage refer to funding resource that require fixed cost, which is expected
to provide higher return for shareholder advantage than the fixed costs (Keown
2005). The application of leverage is funding activity through debt source. The debt
interest paid by the company is a fixed cost. Indonesian Law No. 36 of 2008, article 6
states that interest should be classified as deductible expense while calculating the
income taxes.
The companies may fund their operating and investing needs through debt
financing. The higher debt, the lower companies' taxable income. The debt financing
raises interest expense which can be included in deductible expenses, so that the
use of interest expense to minimize the tax payment can be recognized as an
aggressive tax activity. Ozkan (2001) provide evidence that companies with high tax
liability would choose to get into debt financing in order to reduce taxes. The higher
leverage ratio, the higher debt financing from third parties, so that the higher interest
costs. Furthermore, the interest cost can be used to reduce the tax expense.
Krisnata (2012) provide evidence that leverage positively influence the tax
aggressiveness.
H1: leverage is positively influence the tax aggresiveness
Liquidity and Tax Aggressiveness
Liquidity is the ability of the company to meet its short term obligations. Any
failure to meet short-term liabilities will lead to questionably going concern. Liquidity
can be measured by comparing the current assets and current liabilities. Low
liquidity may reflect the company's problem to meet the short-term obligations.
Liquidity problem may lead companies not to comply with the tax rules (Bradley
(1994) and Siahaan (2005)). It may bring the company into aggressive behaviour
against tax. Bradley (1994) and Siahaan (2005) provide evidence that companies
which are experiencing liquidity problems will likely not to comply with the tax laws,
and tend to commit tax evasion. These decisions are taken by the companies to
reduce tax expenditures and to maintain the cash flow. Therefore, companies with
lower liquidity ratios will tend to have higher tax aggressiveness.
H2: Liquidity is negatively influence the tax aggressiveness
Corporate Governance and Tax Aggressiveness
Good corporate governance is defined as a regulating and controlling system
of company to create added value for all stockholders (Desai and Dharmapala
2007). Corporate governance works as an effective mechanisms to minimize the
agency conflicts, emphasising the legal mechanisms preventing the expropriation on
minority shareholders (Kurniasih and Sari, 2013). There are five basic principles of
corporate
governance:
transparency,
accountability
and
responsibility,
independence, and fairness (Warsono, et al (2010) in Hidayanti (2014)).
Indonesian companies use continental system which has two levels in
corporate governance, the board of directors and board of commissioners (FCGI
(2003) in Krisnata (2012)). The board of directors is an authorized party to manage
the company, while commissioners are the ones who oversee the corporate
governance conducted by the management. Members of the commissioners board
consist of independent commissioners who have no financial, management,
ownership, and / or family relationship with the other commissioners, directors and /
or controlling shareholders, or other relationship which could affect its ability to act
independently.
Board of commissioners holds an important role in overseeing the directors’
performance. Independent board members are considered to have better oversight
for free from the company's internal interests. Higher independent board members
may lead to strict supervision over the company. Board of directors shall establish an
audit committee consisting of at least three members, appointed, dismissed, and
responsible to the board of commissioners (Pohan 2008). The audit committee is
designated to assist and strengthen the board of commissioners’ function in
overseeing the financial reporting, risk management, audit and corporate
governance implementation. The audit committee emphasis on providing oversight
on issues related to financial policy, accounting and internal control (Hanum and
Zulaikha 2013). The effective function of audit committee may lead to better control
over the operation and financial statements, also support the good corporate
governance (Andriyani 2008).
In regard to tax aggressiveness, managements are motivated to maximize net
income, as earnings based manager bonus scheme. Reducing tax payment is one of
the way to increase net income, so that the managers are encouraged to become
aggressive in tax. The aggressive behavior using illegal manner (tax evasion) may
bring negative consequences for shareholders such as breaking the corporate’s
credibility if such action is detected by the authorities. Therefore, it is necessary to
supervise the management. Through independent directors’ and audit committees’
supervision role, expectably tax aggressiveness can be anticipated. The higher
independent commissioners ratio, the less manager’s tax aggressiveness (Krisnata
study 2012). The existence of audit committee may minimize the tax avoidance
because it provides insight over accounting system, financial reporting and its notes,
internal control, and independent auditor (Annisa and Kurniasih 2012).
H3: Independent commissioner is negatively influence the tax aggressiveness
H4: Audit committee is negatively influence the tax aggressiveness.
Family Ownership and Tax Aggressiveness
Family firm run by family generations or inherited by the people who had
already run or by a family to the next generation (Morck and Yeung 2004). Anderson
et al. (2003) in Chen et al. (2010), suggests alternative criteria used to categorize
firms with family ownership, among others, as it is controlled by their founders or
their family members, which have a role as key executives, directors, or
blockholders. Arifin (2003) defines family ownership as all individuals and companies
whose ownership is recorded (ownership> 5% have to be recorded) other than public
company, state owned firm, financial institutions, and public (unrecorded individuals).
Family-controlled companies have fewer agency problem, as fewer principal-agent
conflicts. Higher family ownership represents longer investment time span, and
higher awareness for company's reputation. Therefore, the family owners would
protect the long-term company’s interests in regard to the risk of loss arising from
aggressiveness in tax.
Chen et al. (2010) were conducted a research to determine whether the family
owned firms are more tax aggressive than non-family owned firms. This study
provide evidence that the family businesses have lower tax aggressiveness than the
non-family businesses. Family owners are more willing to pay higher taxes, rather
than paying the tax penalty and facing possible decline of their firm value resulting.
H5: family ownership is negatively influence the tax aggressiveness.
RESEARCH METHOD
Population and Sample
The research population are all manufacturing companies listed in Indonesia
Stock Exchange during 2010 until 2013. The samples are selected using purposive
method to get representative samples. The sample selection criteria are: (1) listed on
the Stock Exchange during 2010-2013, (2) the data are available to obtain
information about tax, leverage, liquidity, corporate governance and ownership, (3 )
have positive earnings from the period 2010-2013 consecutively, (4) the ETR is
lower than Indonesian income tax rate. Based on these criteria, there are 72
firmyears used as sample.
Research Data and Variables
The research data are secondary data obtained from annual reports and
financial statements of listed companies during 2010-2013 available in Indonesia
Stock Exchange website.
Table 1
Variables Measurement
Variables
Tax
Aggressiveness
Measurement Indicator
Tax aggressiveness measurement refers Krisnata (2012) is
effective tax rate (ETR). ETR is an outcome of income
statement measurement basis, evaluating the effectiveness of
tax minimization strategies.
Income Tax Expense
ETR =
Earning Before Tax
Leverage
Liquidity
Corporate
Governance
(Krisnata 2012)
Leverage reflects the company's ability to meet its financial
obligations, either short term and long term. Based on Krisnata
(2012), this study measures the leverage based on total
liabilities to total assets.
Debt
Debt to Asset Ratio =
Asset
(Krisnata 2012)
Liquidity is measured using a current ratio.
Current Asset
Current Ratio =
Current Liability
(Krisnata 2012)
This research measures corporate governance using
composition of independent commissioner and audit committee
as proxies. The composition of independent commissioner is
measured using the percentage of the number of independent
commissioner to the total number of commissioners (Andriyani,
2008). Audit committee variables measured by the total number
of committee members in a company (Hanum and Zulaikha,
2013).
1).Independent Commissioners Proportion =
Number of Independent
Commissioners
Total Numbe rs of Commissioners
Board
(Andriyani 2008)
2. Total number of audit committee
(HanumdanZulaikha 2013)
This study refer to family ownership definition by Arifin (2003),
which all individuals and companies whose ownership is
recorded (ownership> 5% must be recorded), other than public
company, state owned company, financial institutions, and
public. Family ownership is a dummy variable, notated by 1 if
the proportion of family ownership> 50%, otherwise notated as
0. This research categorize family ownership as a company
controlled by their founders or their family members, which
have a role as key executives, directors, or blockholders.
(ownership > 5%) (Chen et al. 2010).
Dummy variabel, :
1 = family ownership proportion> 50%
0 = family ownership proportion < 50%
(Arifin 2003)
Family Ownership
ANALYSIS METHOD
The research data is analyzed using multiple regression analysis. Before the
regression analysis is run, the data should pass the classic asumption tests consist
of normality test, auto correlation test, multicolinearity test and heteroscedasticity
test. The normality test is using the Jarque-Bera test. To detect the presence of
autocorrelation, the research uses Breusch-Godfrey test. To test the multicolinearity,
the research refers to correlation matrix of the independent variables. At last, ARCH
test is used to test the heteroscesdaticity.
RESULT AND DISCUSSION
Classic Asumption Tests
Initially, there are 108 samples obtained for the research, but there is
normality problem in the data. Hence, the outlier data were taken out so that the
samples remain at 72 firmyears. The model also free from autocorrelation,
multicollineraity, and heteroscedasticity problem.
ETR
Table 2
Descriptive Statistics Figure
LEV
LIQ
COM
AUD
FAM
Mean
0,2167
0,4121
6,1028
0,3928
3,2083
0,6389
Maximum
0,25
0,81
247,44
0,75
5
1
Minimum
0,16
0,04
0,48
0,25
2
0
Source: Research data (2014)
Table 1 provides descriptive statistics of research data. Tax aggressiveness
(measured by ETR) are averaged at 0.216667. It means that, on average,
companies can reduce their tax burden to 21,66% ( 3.33% lower than corporate
income tax). Leverage ratios are averaged at 0.4121, which indicate that the average
sample finance each dollar owned asset from 41% debt. Liquidity ratios are
averaged at 6.1028. This shows that, on average, the companies were able to settle
each dollar current liabilities by USD 6.1 current assets owned. Independent
commissioner is measured by the number of independent directors to total board of
commissioners. The average value of independent commissioner in the samples is
0.3928. It shows that at average, the proportion of independent board to non
independent member is 39.28%. The audit committee ehich is measured by number
of audit committees, are averaged at 3.2083. This indicates that the companies’
audit committee numbers exceed the government redulation (2 members required).
Family ownership are averaged at 0.6389, which indicates that 63,89% average
companies’ shares are owned by family.
Statistical Result
Table 3
Regression Analysis Result
ETR
Coefficient
Probability
LEV
-0,0478
0,0004
LIQ
-0,00022
0,0073
COM
-0,0311
0,1871
AUD
-0,0088
0,042
FAM
0,002
0,6632
Adjusted R-squared
0,213579
Prob (F-statistic)
0.000765
Source: Research Data (2014)
Leverage and Tax Aggressiveness
Table 3 shows the results of statistical tests. The table shows that leverage
has significant negative effect to ETR, as indicated by LEV’s probability value of
0.0004 and -0.047 regression coefficient. It means that the higher company’s
leverage would result the lower ETR. On other word, more debt financing a company
has, the more tax aggressiveness they would be. This conveys that the H1 stating
leverage is positively influence the tax aggresiveness, is supported by the research
data. The more debt financing from third party used by the company, the smaller
income tax expense. The increase in the leverage ratio causes increasing of tax
aggressiveness, due to interest expense arising from the debt which is included in
deductible expense. This finding agrees with Ozkan (2001) and Krisnata (2012),
which also find that the leverage has significant positive effect on the tax
aggressiveness.
Liquidity and Tax Aggressiveness
Table 3 shows significant negative effect of liquidity toward ETR, indicated by
probability value of 0.0073 (less than 0.05) and negative regression coefficien. It
means that the higher company’s liquidity would make the lower ETR. On the other
words, if a company’s liquidity is higher, the more tax aggressiveness they would be.
The result is not supporting the H2 which states liquidity negatively influence the tax
aggressiveness. High liquidity indicates that the company has a good cash flow to
repay short-term liabilities. This study found that the more liquid a company, it will
tend to have tax aggressiveness. The presumption that the cash availability would
lead to make the company become less aggressive, can not be verified. The
company may also have other priorities requiring cash availability, such as
maintaining the dividend policy. This is supported by the Dewi (2014) which find
posittive influence of liquidity toward dividend policy. The high receivables and
inventory balance may also lead the companies to prioritize cash and cash
equivalents to meet the needs that is more important than taxes. This situation may
occur in PT Kedaung Indah Can Tbk, whith its inventories amounted to 67.84% of
total assets and the cash value of 12% of total current assets, which become
aggressive by successfully lowered the ETR.
Independent Commissioners Proportion and Tax Aggressiveness
The statistical tests show that the proportion of independent commissioners
have no significant effect to the tax aggressiveness. This research can not provide
evidence to support H3. This finding may be resulted by independent directors which
are not well performed in supervisory function, since the background of
commissioners may not from finance area (Hari 2012). This situation can be found,
in PT Tiga Pilar Sejahtera Food Tbk., PT Voxels Electric Tbk. and PT Mayora Indah
Tbk. This finding supports the previous research by Reza (2012) and Zulaikha
(2013), which can not provide evidence of influence between independent
commissioners and tax aggressiveness.
Audit Committee and Tax Aggressiveness
The statistical tests indicates that the audit committee numbers have significant
influence toward ETR, in negative direction (probability value of 0.0298, regression
coefficient of -0.008). The more the number of audit committee, the lesser ETR. In
other words, more audit committee members the more aggressive a company is.
This indicates that the H4 which states that the audit committee would negatively
affect the tax aggressiveness is not supported by the research evidence. Numerous
audit committee members do not necessarily supressed the tax aggressiveness.
Numerous of audit committee may be encouraging the company to operate
efficiencly. This may included the efficiency in tax expenditure. This situation occurs
in PT Charoen Pokphand Indonesia Tbk. which has a number of five audit committee
members, then the company can suppressed the income tax expense by 4% and
book-tax different by 7%.
Family Ownership and Tax Aggressiveness
The statistical tests indicates that family ownership does not significantly
influence the tax aggressiveness of tax. This means H5 which states that family
ownership would negatively affect the tax aggressiveness is not supported by
research finding. This finding supports the previous research by Murniati (2012) and
Hidayanti and Laksito (2013), which found that the family ownership does not
significantly influence the tax aggressiveness. Family ownership in Indonesian firm
has not been able to describe the level of tax aggressiveness. In regard to the firm
value, there may be other factors (other than taxes) which is considered by the
family member (manager). The factors such as profitability, growth opportunity and
capital structure positively affect the firm value (Nilmalasari 2011, Nofrita 2013,
Hermuningsih 2013).
CONCLUSION
Based on the research findings, it can be concluded as follows:
1. Leverage and liquidity are positively influence the tax aggressiveness.
2. The audit committee has a positive influence on the tax aggressiveness.
3. The proportion of independent commissioners and the family ownership do not
significantly affect the tax aggressiveness.
Leverage has a positive effect on the tax aggressiveness. This finding support
previous study by Ozkan (2001) and Krisnata (2012). Liquidity has a positive effect
on the tax aggressiveness, which is not support Bradley (1994) and Siahaan (2005).
The audit committee positively affects the tax aggressiveness, which is support Reza
(2012). The proportion of independent directors and family ownership do not affect
the tax aggressiveness. This evidence about independent directors proportion
support Zulaikha (2013), but do not support Krisnata (2012). The finding on family
ownership supports previous research by Hidayanti and Laksito (2013), but does not
support Chen et al. (2010).
Tax aggressiveness aims to reduce taxable income through tax planning, either
using legal (tax avoidance) or illegal (tax evasion) manners. Companies which is
behave aggressively can be considered by the tax authorities as taxpayers who have
a higher risk. This taxpayer risk is considered in the risk based selection done by the
authorities. For tax authorities (the risk-based selection criteria were primarily for
taxpayer wich report loss and overpaid in their tax returns) may also consider
leverage, liquidity and the audit committee as a additional consideration in
determining the risk. For inverstors, they can consider these three variables in
assessing the tax aggressiveness related risks in their investment decisions.
However, there are manufacturing industry’s sub-sectors which are not
represented in this study (sub sector of ceramic, porcelain and glass, wood and
processing sub-sectors, sub-sectors of the pulp and paper, footwear sub-sector, subsector and sub-sector electronic cigarette). Some data have been eliminated caused
sectoral analysis could not be done. Then, further research may use samples from
different characteristics of the manufacturing sector. So the tax aggressiveness
behavior in Indonesia can be seen wider.
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