Paper English Rina Indah Sari Ginting 27082017
Analysis of Tax Aggressiveness and Financial Reporting Aggressiveness
on Public Companies in Indonesia 2010-2014
Rina Indah Sari Ginting rinaindahsg@gmail.com
and Dwi Martani dwimartani@yahoo.com
Universitas Indonesia, Depok 16424, Indonesia
ABSTRACT
In this paper, we investigate the relationship between tax aggressiveness and financial
reporting aggressiveness in Indonesia-listed companies. The sample used in this study were 157
manufacturing and non manufacturing company during 2010-2014 period. Using discretionary
permanent differences (DTAX) and abnormal book tax differences (ABTD) as proxies, we find
that there is strong positive correlation between tax aggressiveness and financial reporting
aggressiveness. This shows that there is no trade off in decisions related to earnings
management and tax management. The results also show that ABTD able to measure tax
aggressiveness and showed consistent results with DTAX proxy.
Keywords: tax aggressiveness, financial reporting aggressiveness, financial reporting, permanent
differences, abnormal book tax differences.
1.
Introduction
The quality of financial statements is important to stakeholder in making decisions related
to investment, credit and improves market efficiency. It depends on the usefulness of information
presented in the financial statements and how the company's management to prepare financial
statements in accordance with applicable rules and principles. In practice, the intended use of the
financial statements may create incentives for the management company to manipulate financial
statements in order to report the company's best performance and meet the expectations of
stakeholders. Examples of financial manipulation in the company are earnings management and
tax management. Stakeholders are using net profit to evaluate the performance of management
and forecasting the company's profitability in the future. Therefore, to increase the confidence of
stakeholders, companies are trying to manage their net income profit which is often called by
financial reporting aggressiveness. Although it can provide benefits to the company, but financial
reporting aggressiveness actions can have negative impacts for the company through the
payment of taxes. Wherein, the higher the profits of the company, the higher the tax expense of
the company to be paid. Frank et al (2009) states that the tax planning by lowering the value of
the taxable income, either through tax evasion or not, is referred to tax aggressiveness. Tax
aggressiveness can be done in various ways, including finding a gap (loopholes) contained in the
tax laws so often referred to as tax avoidance, tax sheltering and tax management (Hanlon and
Heitzman, 2010).
Frank et al (2009) conducted a research on the relationship of tax and financial reporting
aggressiveness in America using permanent differences as the measurement. Frank et al (2009)
found that there is a strong positive relation between these two constructs. It means that the
company able to increase the level of corporate profits but reported a low tax payment.
Furthermore, Hanlon and Heitzman (2010) states that the tax evasion, in this study referred as
tax aggressiveness, showed a significant result by measuring the content of permanent
differences therein. In addition to discretionary permanent differences (DTAX) which has been
used Frank et al (2009), there is another way to measures tax aggressiveness, the proxy abnormal
book tax differences (ABTD) developed by Tanya and Fifth (2012).
Previous research has been carried out in Indonesia (2014) with the use of permanent
differences (DTAX) as a method of measurement of tax aggressiveness. However, based on a
review of the literature, our study is the first to examine abnormal measurement study book tax
differences as the measurement of tax aggressiveness and examine the relationship with the
aggressive financial reporting. Our results show that tax aggressiveness is significantly related
with financial reporting aggressiveness in Indonesia institution. We also find that both of our
permanent differences measurement, DTAX dan ABTD, show the consistent result to measure
tax aggressiveness as stated by Heitzman and Hanlon (2010). The result of this study provide
important implications for user of financial reporting such as regulators, auditor and investors.
Our findings can help investors to evaluate the quality of financial statement and auditor can
carry out more effective audits by focusing on firms with positive relation between tax
aggressiveness and financial reporting aggressiveness. The analysis of this study also assist
regulators to enhance the credibility of book and tax reporting.
2.
Literature Review
2.1 Quality of Financial Reporting
The financial statements of a company contains a lot of information that can be used by
stakeholders to assist the decision making process. That requires that the financial statements
have a good quality information that can be used to make the right decision. The quality of a
company's financial reporting depends on how much information is presented can be useful and
is based on the conceptual framework, the basic principles and accounting purposes. In practice,
the preparation of the financial statements cannot be separated from the pressure for management
to meet the expectations of users of financial statements. Then the management used to do the
earning management to maximize profits and increase the value of the company's market value.
This earnings management activities will impact the difference in taxable income and hide the
actual condition of the company. At which time the company reported accounting profit is higher
than the burden of the tax to be paid will be higher also. Such conditions indicate a tradeoff
between earnings management activities and management of corporate taxes.
2.2 Financial Reporting Aggressiveness
Frank et al (2009) states that the activities aimed at increasing the company's profit with
earnings management, whether appropriate or not in accordance with generally accepted
accounting principles known as the financial reporting aggressiveness. Therefore, in this study,
financial reporting aggressiveness have the same context with earnings management. Financial
reporting aggressiveness or earnings management in general do some specific techniques. Some
earnings management techniques are taking a bath, income minimization, income maximization
and income smoothing. (Scott, 2009)
Aggressive financial reporting can be measured with various measurement models.
However, the most commonly used proxy is discretionary accruals. Discretionary accruals is the
residual value of the accrual revenue. Revenue accrual is the difference arising from operating
income to operating cash flow in the same period. Selection of operating cash flow as a proxy is
because the opportunity for the company to manipulate earnings from operating currents are
lower than others. Therefore the differences between the two are considered capable of detecting
earnings management action by the company. Several measure that usually used in detected
aggressive financial are Model Jones (1991), Dechow et al (1995), Kasznik (1999) and Kothari
(2005).
2.3 Tax Aggressiveness
Broadly, tax avoidance is define as the reduction of explicit taxes ( Hanlon and Heitzman,
2010 ;Dyreng et al., 2008). But tax avoidance is influenced by the attitudes and opinions of
individuals, therefore the tax aggressiveness represents a continuum of tax planning strategies of
the company. Different people will have different opinions about the degree of aggressiveness of
a transaction. So those tax planning behavior of the company and can be discuss in various terms
such as tax aggressiveness, tax sheltering, tax evasion or non-compliance. However, Hanlon and
Heitzman (2010) emphasizes that the definition of tax aggressiveness are not limited to specific
measurement methods. Commonly tax avoidance measure by several methods such as effective
tax rate, long run effective tax rate, book tax differences, discretionary or abnormal measure of
tax avoidance, unrecognized tax benefits and tax shelter firms.
2.4 Prior Research
Frank et al (2009) is the first literature conducted research about the relationship of tax
and financial reporting aggressiveness. Using their own of proxy of discretionary permanent
differences (DTAX), Frank et al (2009) include that tax and financial reporting aggressiveness
are significantly and positively related. It indicates that there is nonconformity between financial
accounting standards and tax law allows firm to manage book income upward and taxable
income downward. Similar studies have also been carried out in Indonesia by Kamila (2014)
and Ridha (2014). The results show that there is no tradeoff between tax and financial reporting
aggressiveness in Indonesia’s manufacturing company.
By following Frank et al (2009) approach, Tang and Fifth (2012) develop ABTD and
NBTD measures that does not generate temporary differences into account the uniqueness of
Chinese accounting and tax system. Tang and Firth (2012) using estimation models that can
divide the book-tax differences into two sources, normal and abnormal book tax differences.
Normal book-tax differences (NBTD) is estimated by regression of total BTSs on discretionary
items and using the unexplained portion of BTDs as measure of ABTD. NBTDs are book-tax
differences originating from differences in accounting and taxation rules, whereas abnormal
book-tax differences (ABTD) sourced from earnings management and tax evasion. Tang research
results and Firth (2012) showed that NBTD positive effect on earnings of the relevance and
relevance ABTD negatively affects earnings. The research results proved that ABTD negative
effect on earnings because it contains information of relevance earnings management and tax
management.
2.5 Hypothesis Development
Prior results of studies in the United States show that from 1990 to 2000 there was an
increase in book tax difference, and consistently with the increase in book tax gap, there is
evidence that the accounting rules provide an opportunity for management to adjust the gain of
the company without affecting taxable income. This is prove that firm able to manage book
income upward without affecting higher taxable income (Philips et al., 2003; Hanlon, 2005) and
suggest that firm have the opportunity to engage in tax and financial reporting aggressiveness in
the same reporting period (Frank et al, 2009).
H1. Tax aggressiveness measured by discretionary permanent differences (DTAX)
positively related to financial reporting aggressiveness.
H2. Financial reporting aggressiveness positively related with tax aggressiveness measured
by discretionary permanent differences (DTAX).
Hanlon and Heitzman (2010) states that there are various methods that can be used to
measure tax aggressiveness. One of them is to use the content of the company's permanent
differences. In addition to the measurement method DTAX conducted by Frank et al (2009),
Tang and Fifth (2012) develop another measurement using company's permanent differences
called abnormal book tax differences (ABTD). So it can be said that ABTD can be used as
another method to measure tax aggressiveness and find the relationship of tax and financial
reporting aggressiveness as prior research of Frank et al (2009).
H3. Tax aggressiveness measured by abnormal book tax differences (ABTD) positively
related to financial reporting aggressiveness.
H4. Financial reporting aggressiveness positively related with tax aggressiveness
measured by abnormal book tax differences (ABTD).
3.
Research design
This study uses tax aggressiveness measurement adaptation by Frank et al (2009) and
Kamila (2014). However, in this study there is the addition of ABTD develop by Tang and Fifth
(201) as independent variable.
3.1 The effect of tax aggressivenss on financial reporting aggressiveness
The research model to measure the relationship of tax on financial reporting aggressiveness
use two models of discretionary permanent differences (3.1) and abnormal book tax differences
(3.2). The research model used in this study are as follows :
DAC C it =α 0 +α 1 DTA X it +α 2 PTRO Ait + α 3≤V it + α 4 LC F D + α 5 FO R Dit +α 6 SIZ Eit +ε it
it
(3.1)
DAC C it =α 0 +α 1 ABT Dit +α 2 PTRO A it +α 3≤V it +α 4 LC F D +α 5 FO R Dit + α 6 SIZ E it + ε it
it
(3.2)
where :
DACCit
DTAXit
ABTDit
PTROAit
LEVit
LCF_Dit
FOR_Dit
SIZEit
dicretionary accrual
dicretionary permanent differences
abnormal book tax differences
pretax income diveide by total asset at year t-1
sum of long term debt divided by total asset
dummy variable that equals 1 when an entity reported loss carryforwads
dummy variable that equals 1 when the value of foreign income > 0
natural log of total assets
Models 3.1 and 3.2 are used to test hypotheses 1 and 3. Hypothesis 1 and 3 are acceptable
if there is significantly positive correlation between tax and financial reporting aggressiveness.
3.2 The effect of financial reporting aggressiveness on tax aggressiveness
The research model to measure the relationship of financial reporting aggressiveness on tax
aggresivenss use two models of discretionary permanent differences (3.3) and abnormal book tax
differences (3.4). The research model used in this study are as follows :
DTA X it =α 0 +α 1 DAC C it +α 2 PTRO Ait + α 3≤V it + α 4 LC F D + α 5 FO R Dit +α 6 SIZ Eit +ε it
it
(3.3)
ABT Dit =α 0+ α 1 DAC C it +α 2 PTRO A it +α 3≤V it +α 4 LC F D +α 5 FO R Dit + α 6 SIZ E it + ε it
it
(3.4)
Models 3.3 and 3.4 are used to test hypotheses 2 and 4. The hypothesis are acceptable if
there is significantly positive correlation between financial reporting and tax aggressiveness.
3.3 Variable Operationalization
3.3.1 Dependent Variables
The dependent variable in this study is the value of the financial reporting aggressiveness
for models 3.1 and 3.2 and tax aggressiveness for models 3.3 and 3.4 . The research model used
in this study are as follows :
Measuring Financial Reporting Aggressiveness
To measure financial reporting aggressiveness in this study, we use the Modified - Jones
model ( Dechow et al . 1995) as our proxy according to prior research of Frank et al (2009 ). The
research model are as follows :
T AC Cit =α 0+ α 1 ( ∆ ℜV it −∆ A Rit ) + α 2 PP Eit + ε it
(3.5)
where :
TACCit
EBEIit
TTEit
CFOit
ITPit
∆REVit
∆ARit
PPEit
ԑit
total accruals = ((EBEIit +TTEit) – (CFOit+ITPit))
earning before extraorndinary item
total tax expense
cash flow from operating activities
income tax paid
change in sales from year t-1 to year t
change in account receivables from year t-1 to year t
gross property, plant and equipment
discretionary accruals
Measuring Tax Aggressiveness
The proxy used in this study are DTAX adopted by Frank et al (2009) and Kamila (2014)
and ABTD developed by Tang and Fifth (2012). The research model are as follows :
PERMDIFFit = α0 + α1INTANGit + α2UNCONit + α3MIit + α4CSTEit + α5∆NOLit +
α6LAGPERMit + εit
(3.6)
where :
PERMDIFFit permanent differences divided by total aset at t-1
INTANGit goodwill and other intangibles divided by total aset at t-1
UNCONit consolidated net income (loss) divided by total aset at t-1
MIit
Minority net income or loss divided by total aset at t-1
CSTEit
current state tax expense divided by total aset at t-1
∆NOLit
changes in net operating loss carryforward divided by total aset at t-1
LAGPERMit permanent differences in year t-1 divided by total aset at t-1
εit
discretionary permanent differences
PERMDIFF equation is processed by regression of data into two industrial grups,
manufactur and non manufactur company. The discretionary permanent differences is the
residual value of PERMDIFF’s equation regression.
BTD
it
= β0 + β1 ∆INVit + β2 ∆REV
it
+ β3 NOL
it
+ β4 TLU
it
+ β5 BTD
it-1
+ ԑ
it
( 3.7)
BTDit
∆INVit
∆REVitt
TLUit
BTDit-1
ԑit
book tax differences
changes in gross fixed asset from year t-1 to year t
change in sales from year t-1 to year t
the value of tax losses utilized
book tax differences from year t-1
error term
BTD equation is processed by regression of data inti two industrial grups, manufactur and
non manufactur company. The discretionary permanent differences is the residual value of
BTD’s equation regression.
3.3.2 Indipendent variabel.
Independent variables used role in this study consisted of the main independent variables
and control variables. The main independent variables used in the model 3.1 and 3.2 is tax
aggressiveness and the 3.3 and 3.4 models are financial reporting aggressiveness. The main
independent variable measurement method for each model has been described previously .
Controlling independent variable in this study is the pretax return on assets (PTROA) , leverage
(LEV) , dummy loss carry forward (LCF_D) , dummy operational activities abroad (FOR_D)
and firm size (SIZE).
4. Empirical results
4.1 Research samples
The population of this research is companies listed on the Stock Exchange during the
period 2010-2014. Selection of the sample using purposive judgment sampling. The clasification
of the industries are based on JASICA Index in IDX Fact Book Companies in the industrial
sector of agriculture, mining , property , real estate , construction , and finance are excluded from
the study because it is governed by special tax regulations. Data and information obtained from
DataStream , Eikkon and the company's financial statements.
4.2 Econometrics Test
Model Test Panel is used to determine statistical panel models that are considered in
accordance with the characteristics of the research model. The results for Chow Test show that
the four main models have a value of F-stat 0.000 or less than alpha. Therefore, the regression
model that should be used is the model FE (Fixed Effect). Further LM Test showed that the study
results should use the model RE (Random Effect) for F stat has a value below alpha. Hausman
Tests showed that the 1,2 and 4 have the following results alpha or 0,05 and show that the model
should be used in the equation is the FE models. Meanwhile model 3 shows the results of 0.1290
which means a better model used is the model RE. Econometrics test results show that the model
is free from multikolinearitas research, but has a problem of heteroskedasticity and
autocorrelation. Therefore, to solve this problem, it is used commands Generalized Least Square
(GLS) in STATA to be used as a data analysis of the research results.
4.3 Regression Test
4.3.1 The effect of tax aggressiveness on financial reporting aggressiveness
The effect of tax aggressiveness on financial reporting aggressiveness was tested with two
models. Regression results of models 3.1 are shown in Table 4.1. The results showed that the
value of F stat on the measurement model shows the results of 0.0000 or less than α . This shows
that with a 99% confidence level can be said that H0 is rejected . The coefficient of
determination , or r2 worth 0.1435 or 14,35 on DPERM measurements showed that the
discretionary permanent differences can be explained by the major independent variables and
control variables in research methods about 14.35%. Stat p - value indicates the significance of
the relationship between variables included in the research model . With a value of 0.000
indicates that the first hypothesis is accepted or earnings management activities of companies
affected by corporate tax management activities.
Table 4.1
The effect of tax aggressiveness with DTAX proxy on financial reporting
aggressiveness
DACC it =α0 + α1DTAXit + α2PTROAit + α3LEVit + α4LCF_Dit + α5FOR_Dit + α6SIZEit + εit
Hypothesis
Coef
t-stat
p-value
0.000***
DPERM
+
.3002203
6.50
PTROA
.174766
9.36
0.000***
0.296
LEV
+
-.0078229
-1.06
LCF-D
+
-.0130299
-2.62
0.095*
0.380
0.074*
FOR-D
+
.0
33923
0.60
SIZE
-.0040113
-2.90
CONS
.0632194
2.16
0.139
N
785
R-square
0.1435
F-statistics
0.0000
*** significant at alpha 1%
** significant at alpha 5%
* significant at alpha 10%
where :
DACCit
discretionary accrual
DTAXit
discretionary permanent differences
ABTDit
abnormal book tax differences
PTROAit
pretax income divide by total asset at year t-1
LEVit
sum of long term debt divided by total asset
LCF_Dit
dummy variable that equals 1 when an entity reported loss carryforwads
FOR_Dit
dummy variable that equals 1 when the value of foreign income > 0
Regression results of models 3.2 are shown in Table 4.2. The results shows the value of F
stat on showed similar results with model 3.1, that is 0.0000 or smaller than α. This is means that
H0 is rejected. The coefficient of determination, or r2 worth 0.1445 % or 14:45 on ABTD
measurements means that ABTD can be explained by the major independent variables and
control variables in research methods around 14.45%. The p-value stat with a value of 0.000
indicates that the second hypothesis is accepted or tax aggressiveness measured by abnormal
book tax differences (ABTD) positively related to financial reporting aggressiveness.
Table 4.2
The effect of tax aggressiveness with ABTD proxy on financial reporting
aggressiveness
DACCit =α0 + α1ABTDit + α2PTROAit + α3LEVit + α4LCF_Dit + α5FOR_Dit + α6SIZEit + εit
Hypothesis
Coeff
t-stat
ABTD
+
.2521715
6.78
PTROA
.1827347
10.1
LEV
+
-.0063209
-0.86
LCF-D
+
-.0169055
-3.42
FOR-D
+
.0038373
0.70
SIZE
-.0045051
-3.26
CONS
.0835633
2.90
N
785
R-square
0.1445
F-statistics
0.0000
*** significant at alpha 1%
** significant at alpha 5%
* significant at alpha 10%
where :
DACCit
discretionary accrual
DTAXit
discretionary permanent differences
ABTDit
abnormal book tax differences
PTROAit
pretax income divide by total asset at year t-1
p-value
0.000***
0.000***
0.333
0.043**
0.365
0.050**
0.074
LEVit
LCF_Dit
FOR_Dit
sum of long term debt divided by total asset
dummy variable that equals 1 when an entity reported loss carryforwads
dummy variable that equals 1 when the value of foreign income > 0
4.3.2 The effect of financial reporting aggressiveness on tax aggressiveness
Models 3.3 and 3.4 show the results of financial reporting aggressiveness effect’s on tax
aggressiveness. Results of regression presented in Table 4.3 and Table 4.4. Results of regression
model 3.3 and 3.4 4 show that the value of F stat is 0.000 or less than α ( 0.05 ) . This suggests
that the main independent variable and the independent variables significantly influencing the
value DPERM and ABTD. The r2 value in model 3.3 is 0.2150 , or 21.5 % . This value indicates
that the level of discretion permanent differences can be explained by 21.5 % . through the
independent variables of the company. While the value of the coefficient of determination r 2 for
model 3.4 indicate that abnormal levels of book tax differences can be explained by 14,50 %
through independent variables .
Table 4.3
The effect of financial reporting aggressiveness on tax aggressiveness with DTAX proxy
DTAX it =
α0 + α1DACCit + α2PTROAit + α3LEVit + α4LCF_Dit + α5FOR_Dit + α6SIZEit + εit
Hypothesis
Coeff
t-stat
p-value
DACC
+
.0442028
6.50
0.000***
PTROA
.1570568
23.44
0.000***
LEV
+
-.0105168
-3.76
0.030**
LCF-D
+
-.0111278
-5.86
0.001***
FOR-D
+
.0115501
5.44
0.003***
SIZE
-.0025043
-4.72
0.009***
CONS
.0759007
6.84
0.000
N
785
R-square
0.2150
F-statistics
0.0000
*** significant at alpha 1%
** significant at alpha 5%
* significant at alpha 10%
where :
DACCit
discretionary accrual
DTAXit
discretionary permanent differences
ABTDit
abnormal book tax differences
PTROAit
pretax income divide by total asset at year t-1
LEVit
sum of long term debt divided by total asset
LCF_Dit
dummy variable that equals 1 when an entity reported loss carryforwads
FOR_Dit
dummy variable that equals 1 when the value of foreign income > 0
Through this results, we found that there is positive correlation with a 99% confidence
level that the discretionary accruals influence the aggressiveness of tax with DTAX
measurement. Similar results are also shown in Table 4.4 which shows the value of 0.01 which
means there is positive corelation with a 99% confidence level that the discretionary accruals
influence the aggressiveness of tax with DTAX measurement. This results dismissed the
assumption that there is a trade off between tax and financial reporting aggressiveness in the
company. This means that company can increase profits without increasing tax paid or company
using the opportunity to do tax and earning management in the sama reporting period ( Frank et
al, 2009).
Table 4.4
The effect of financial reporting aggressiveness on tax aggressiveness with ABTD
proxy
ABTDit =
α0 + α1DACCit + α2PTROAit + α3LEVit + α4LCF_Dit + α5FOR_Dit +
α6SIZEit + εit
Hypothesis
Coeff
t-stat
p-value
DACC
+
.0572474
6.78
0.000***
PTROA
.1543425
18.56
0.000***
LEV
+
-.0184254
-5.30
0.004***
LCF-D
+
.0021973
0.94
0.320
FOR-D
+
.0119543
4.54
0.011**
SIZE
-.0010009
-1.52
0.224
CONS
.0092842
0.68
0.368
N
785
R-square
0.1450
F-statistik
0.0000
*** significant at alpha 1%
** significant at alpha 5%
* significant at alpha 10%
where :
DACCit
discretionary accrual
DTAXit
discretionary permanent differences
ABTDit
abnormal book tax differences
PTROAit
pretax income divide by total asset at year t-1
LEVit
sum of long term debt divided by total asset
LCF_Dit
dummy variable that equals 1 when an entity reported loss carryforwads
FOR_Dit
dummy variable that equals 1 when the value of foreign income > 0
4.2.3 Consistency of Measuring Tax Aggressiveness
Measurements tax aggressiveness in this study using permanent differences (DPERM) and
abnormal book tax differences (ABTD). Table 4.5 shows the comparative influence of DPERM
and ABTD on financial reporting aggressiveness and comparison of the effect of the financial
reporting aggressiveness on both proxy. Research results shows that both proxies have the same
F stat value for all the equations. The positive coefficient and the same value of significancy
(0,001) showed that consistently DPERM and ABTD show that tax aggressiveness influence the
financial reporting aggressiveness and vice versa. Control variables effect on the research results
also show a similar value between DPERM and ABTD proxy.
Table 4.5
Comparison Measurement of Tax Aggressiveness on Financial Reporting Aggressiveness
Hypot
hesis
DPERM/
ABTD
PTROA
LEV
LCF-D
FOR-D
SIZE
CONS
+
+
+
+
-
N
R-square
F-statistik
DPERM
ABTD
Coeff
.3002203
p-value
0.000***
Coeff
.2521715
p-value
0.000***
.174766
-.0078229
-.0130299
.0033923
-.0040113
.0632194
0.000***
0.333
0.043**
0.365
0.050**
0.074
785
0.1435
0.0000
.1827347
-.0063209
-.0169055
.0038373
-.0045051
.0835633
0.000***
0.030**
0.001***
0.003***
0.009***
0.000
785
0.1445
0.0000
Comparison Measurement of Financial Reporting Aggressiveness on Tax Aggressiveness
Hypot
DPERM
ABTD
hesis
Coeff
p-value
Coeff
p-value
DACC
+
.0442028
0.000***
.0572474
0.000***
PTROA
.1570568
0.000***
.1543425
0.000***
LEV
+
-.0105168
0.030**
-.0184254
0.004***
LCF-D
+
-.0111278
0.001***
.0021973
0.320
FOR-D
+
.0115501
0.003***
.0119543
0.011**
SIZE
-.0025043
0.009***
-.0010009
0.224
CONS
.0759007
0.000
.0092842
0.368
N
785
785
R-square
0.2150
0.1450
F-statistik
0.0000
0.0000
Through research it can be said that ABTD as proxy to measuring tax aggressiveness show
the consistent result with DPERM . The result refers to prior research by Hanlon and Heitzman
(2010 ) which states that the various method of measurement of tax aggressiveness with
permanent differences content show consistent results. But in this study ABTD can not be said
to be better in measuring the tax aggressiveness compared with DPERM proxy because we need
to do further research.
5. Conclusions and recommendation
5.1 Conclusion
The purpose of this study is to investigate the relationship between tax and financial
reporting aggressiveness on public companies in Indonesia. The results show that there is a
positive and significant relation between tax and financial reporting aggressiveness. This
indicates that in accordance with the study of Frank et al (2009), a public company in Indonesia
does not face the problem of trade-offs in decision making related to the value of net income and
tax payment. This may be an indication that the accounting rules and taxation Indonesia has
loopholes that can be exploited by companies to manage their book tax income.
The results also showed that aggressiveness measurement using a permanent tax
differences (DPERM) or abnormal book tax differences (ABTD) showed consistent results. This
proves that the content of permanent differences in both proxies are able to be used as a method
of measuring tax aggressiveness in accordance with the research done by Hanlon and Heitzman
(2010).
5.2 Research implications
The implications of this research for the regulator is that the results show that in
accordance with previous studies that companies in Indonesia does not have a tradoff in doing
the tax and financial reporting aggressiveness. This indicates that the company can reduce
taxable income without reducing net income for accounting purposes. So the regulator needed to
increase awareness in examinations because of of tax and financial reporting aggressiveness
increasingly difficult to detect. Furthermore, for academics , through the study found that ABTD
measurement showed consistent results with DPERM . Thus, ABTD
can be used as an
alternative method of measuring the tax aggressiveness or tax avoidance . This research can also
be used as a reference for future research.
5.3 Limitations and Suggestions
Due to limited time , the study was conducted within only 5 years period. Therefore ,
further research is recommended to add the study period for the activities of tax and financial
reporting aggressiveness can be seen more reliably. The model is limited research on the model
of aggressiveness taxes by Frank et al (2009 ) and Tang and Fifth ( 2012) as well as a model of
financial reporting aggressiness by modified Jones ( Dechow et al, 1995). Further research can
be done using different measuring methods. This study also limited to controlling only five
control variables, which are PTROA , LEV , LCF_D , FOR_D and SIZE. Further research can
add the control variables such as family ownership structure , the effectiveness of corporate
governance and changes in corporate tax rates .
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on Public Companies in Indonesia 2010-2014
Rina Indah Sari Ginting rinaindahsg@gmail.com
and Dwi Martani dwimartani@yahoo.com
Universitas Indonesia, Depok 16424, Indonesia
ABSTRACT
In this paper, we investigate the relationship between tax aggressiveness and financial
reporting aggressiveness in Indonesia-listed companies. The sample used in this study were 157
manufacturing and non manufacturing company during 2010-2014 period. Using discretionary
permanent differences (DTAX) and abnormal book tax differences (ABTD) as proxies, we find
that there is strong positive correlation between tax aggressiveness and financial reporting
aggressiveness. This shows that there is no trade off in decisions related to earnings
management and tax management. The results also show that ABTD able to measure tax
aggressiveness and showed consistent results with DTAX proxy.
Keywords: tax aggressiveness, financial reporting aggressiveness, financial reporting, permanent
differences, abnormal book tax differences.
1.
Introduction
The quality of financial statements is important to stakeholder in making decisions related
to investment, credit and improves market efficiency. It depends on the usefulness of information
presented in the financial statements and how the company's management to prepare financial
statements in accordance with applicable rules and principles. In practice, the intended use of the
financial statements may create incentives for the management company to manipulate financial
statements in order to report the company's best performance and meet the expectations of
stakeholders. Examples of financial manipulation in the company are earnings management and
tax management. Stakeholders are using net profit to evaluate the performance of management
and forecasting the company's profitability in the future. Therefore, to increase the confidence of
stakeholders, companies are trying to manage their net income profit which is often called by
financial reporting aggressiveness. Although it can provide benefits to the company, but financial
reporting aggressiveness actions can have negative impacts for the company through the
payment of taxes. Wherein, the higher the profits of the company, the higher the tax expense of
the company to be paid. Frank et al (2009) states that the tax planning by lowering the value of
the taxable income, either through tax evasion or not, is referred to tax aggressiveness. Tax
aggressiveness can be done in various ways, including finding a gap (loopholes) contained in the
tax laws so often referred to as tax avoidance, tax sheltering and tax management (Hanlon and
Heitzman, 2010).
Frank et al (2009) conducted a research on the relationship of tax and financial reporting
aggressiveness in America using permanent differences as the measurement. Frank et al (2009)
found that there is a strong positive relation between these two constructs. It means that the
company able to increase the level of corporate profits but reported a low tax payment.
Furthermore, Hanlon and Heitzman (2010) states that the tax evasion, in this study referred as
tax aggressiveness, showed a significant result by measuring the content of permanent
differences therein. In addition to discretionary permanent differences (DTAX) which has been
used Frank et al (2009), there is another way to measures tax aggressiveness, the proxy abnormal
book tax differences (ABTD) developed by Tanya and Fifth (2012).
Previous research has been carried out in Indonesia (2014) with the use of permanent
differences (DTAX) as a method of measurement of tax aggressiveness. However, based on a
review of the literature, our study is the first to examine abnormal measurement study book tax
differences as the measurement of tax aggressiveness and examine the relationship with the
aggressive financial reporting. Our results show that tax aggressiveness is significantly related
with financial reporting aggressiveness in Indonesia institution. We also find that both of our
permanent differences measurement, DTAX dan ABTD, show the consistent result to measure
tax aggressiveness as stated by Heitzman and Hanlon (2010). The result of this study provide
important implications for user of financial reporting such as regulators, auditor and investors.
Our findings can help investors to evaluate the quality of financial statement and auditor can
carry out more effective audits by focusing on firms with positive relation between tax
aggressiveness and financial reporting aggressiveness. The analysis of this study also assist
regulators to enhance the credibility of book and tax reporting.
2.
Literature Review
2.1 Quality of Financial Reporting
The financial statements of a company contains a lot of information that can be used by
stakeholders to assist the decision making process. That requires that the financial statements
have a good quality information that can be used to make the right decision. The quality of a
company's financial reporting depends on how much information is presented can be useful and
is based on the conceptual framework, the basic principles and accounting purposes. In practice,
the preparation of the financial statements cannot be separated from the pressure for management
to meet the expectations of users of financial statements. Then the management used to do the
earning management to maximize profits and increase the value of the company's market value.
This earnings management activities will impact the difference in taxable income and hide the
actual condition of the company. At which time the company reported accounting profit is higher
than the burden of the tax to be paid will be higher also. Such conditions indicate a tradeoff
between earnings management activities and management of corporate taxes.
2.2 Financial Reporting Aggressiveness
Frank et al (2009) states that the activities aimed at increasing the company's profit with
earnings management, whether appropriate or not in accordance with generally accepted
accounting principles known as the financial reporting aggressiveness. Therefore, in this study,
financial reporting aggressiveness have the same context with earnings management. Financial
reporting aggressiveness or earnings management in general do some specific techniques. Some
earnings management techniques are taking a bath, income minimization, income maximization
and income smoothing. (Scott, 2009)
Aggressive financial reporting can be measured with various measurement models.
However, the most commonly used proxy is discretionary accruals. Discretionary accruals is the
residual value of the accrual revenue. Revenue accrual is the difference arising from operating
income to operating cash flow in the same period. Selection of operating cash flow as a proxy is
because the opportunity for the company to manipulate earnings from operating currents are
lower than others. Therefore the differences between the two are considered capable of detecting
earnings management action by the company. Several measure that usually used in detected
aggressive financial are Model Jones (1991), Dechow et al (1995), Kasznik (1999) and Kothari
(2005).
2.3 Tax Aggressiveness
Broadly, tax avoidance is define as the reduction of explicit taxes ( Hanlon and Heitzman,
2010 ;Dyreng et al., 2008). But tax avoidance is influenced by the attitudes and opinions of
individuals, therefore the tax aggressiveness represents a continuum of tax planning strategies of
the company. Different people will have different opinions about the degree of aggressiveness of
a transaction. So those tax planning behavior of the company and can be discuss in various terms
such as tax aggressiveness, tax sheltering, tax evasion or non-compliance. However, Hanlon and
Heitzman (2010) emphasizes that the definition of tax aggressiveness are not limited to specific
measurement methods. Commonly tax avoidance measure by several methods such as effective
tax rate, long run effective tax rate, book tax differences, discretionary or abnormal measure of
tax avoidance, unrecognized tax benefits and tax shelter firms.
2.4 Prior Research
Frank et al (2009) is the first literature conducted research about the relationship of tax
and financial reporting aggressiveness. Using their own of proxy of discretionary permanent
differences (DTAX), Frank et al (2009) include that tax and financial reporting aggressiveness
are significantly and positively related. It indicates that there is nonconformity between financial
accounting standards and tax law allows firm to manage book income upward and taxable
income downward. Similar studies have also been carried out in Indonesia by Kamila (2014)
and Ridha (2014). The results show that there is no tradeoff between tax and financial reporting
aggressiveness in Indonesia’s manufacturing company.
By following Frank et al (2009) approach, Tang and Fifth (2012) develop ABTD and
NBTD measures that does not generate temporary differences into account the uniqueness of
Chinese accounting and tax system. Tang and Firth (2012) using estimation models that can
divide the book-tax differences into two sources, normal and abnormal book tax differences.
Normal book-tax differences (NBTD) is estimated by regression of total BTSs on discretionary
items and using the unexplained portion of BTDs as measure of ABTD. NBTDs are book-tax
differences originating from differences in accounting and taxation rules, whereas abnormal
book-tax differences (ABTD) sourced from earnings management and tax evasion. Tang research
results and Firth (2012) showed that NBTD positive effect on earnings of the relevance and
relevance ABTD negatively affects earnings. The research results proved that ABTD negative
effect on earnings because it contains information of relevance earnings management and tax
management.
2.5 Hypothesis Development
Prior results of studies in the United States show that from 1990 to 2000 there was an
increase in book tax difference, and consistently with the increase in book tax gap, there is
evidence that the accounting rules provide an opportunity for management to adjust the gain of
the company without affecting taxable income. This is prove that firm able to manage book
income upward without affecting higher taxable income (Philips et al., 2003; Hanlon, 2005) and
suggest that firm have the opportunity to engage in tax and financial reporting aggressiveness in
the same reporting period (Frank et al, 2009).
H1. Tax aggressiveness measured by discretionary permanent differences (DTAX)
positively related to financial reporting aggressiveness.
H2. Financial reporting aggressiveness positively related with tax aggressiveness measured
by discretionary permanent differences (DTAX).
Hanlon and Heitzman (2010) states that there are various methods that can be used to
measure tax aggressiveness. One of them is to use the content of the company's permanent
differences. In addition to the measurement method DTAX conducted by Frank et al (2009),
Tang and Fifth (2012) develop another measurement using company's permanent differences
called abnormal book tax differences (ABTD). So it can be said that ABTD can be used as
another method to measure tax aggressiveness and find the relationship of tax and financial
reporting aggressiveness as prior research of Frank et al (2009).
H3. Tax aggressiveness measured by abnormal book tax differences (ABTD) positively
related to financial reporting aggressiveness.
H4. Financial reporting aggressiveness positively related with tax aggressiveness
measured by abnormal book tax differences (ABTD).
3.
Research design
This study uses tax aggressiveness measurement adaptation by Frank et al (2009) and
Kamila (2014). However, in this study there is the addition of ABTD develop by Tang and Fifth
(201) as independent variable.
3.1 The effect of tax aggressivenss on financial reporting aggressiveness
The research model to measure the relationship of tax on financial reporting aggressiveness
use two models of discretionary permanent differences (3.1) and abnormal book tax differences
(3.2). The research model used in this study are as follows :
DAC C it =α 0 +α 1 DTA X it +α 2 PTRO Ait + α 3≤V it + α 4 LC F D + α 5 FO R Dit +α 6 SIZ Eit +ε it
it
(3.1)
DAC C it =α 0 +α 1 ABT Dit +α 2 PTRO A it +α 3≤V it +α 4 LC F D +α 5 FO R Dit + α 6 SIZ E it + ε it
it
(3.2)
where :
DACCit
DTAXit
ABTDit
PTROAit
LEVit
LCF_Dit
FOR_Dit
SIZEit
dicretionary accrual
dicretionary permanent differences
abnormal book tax differences
pretax income diveide by total asset at year t-1
sum of long term debt divided by total asset
dummy variable that equals 1 when an entity reported loss carryforwads
dummy variable that equals 1 when the value of foreign income > 0
natural log of total assets
Models 3.1 and 3.2 are used to test hypotheses 1 and 3. Hypothesis 1 and 3 are acceptable
if there is significantly positive correlation between tax and financial reporting aggressiveness.
3.2 The effect of financial reporting aggressiveness on tax aggressiveness
The research model to measure the relationship of financial reporting aggressiveness on tax
aggresivenss use two models of discretionary permanent differences (3.3) and abnormal book tax
differences (3.4). The research model used in this study are as follows :
DTA X it =α 0 +α 1 DAC C it +α 2 PTRO Ait + α 3≤V it + α 4 LC F D + α 5 FO R Dit +α 6 SIZ Eit +ε it
it
(3.3)
ABT Dit =α 0+ α 1 DAC C it +α 2 PTRO A it +α 3≤V it +α 4 LC F D +α 5 FO R Dit + α 6 SIZ E it + ε it
it
(3.4)
Models 3.3 and 3.4 are used to test hypotheses 2 and 4. The hypothesis are acceptable if
there is significantly positive correlation between financial reporting and tax aggressiveness.
3.3 Variable Operationalization
3.3.1 Dependent Variables
The dependent variable in this study is the value of the financial reporting aggressiveness
for models 3.1 and 3.2 and tax aggressiveness for models 3.3 and 3.4 . The research model used
in this study are as follows :
Measuring Financial Reporting Aggressiveness
To measure financial reporting aggressiveness in this study, we use the Modified - Jones
model ( Dechow et al . 1995) as our proxy according to prior research of Frank et al (2009 ). The
research model are as follows :
T AC Cit =α 0+ α 1 ( ∆ ℜV it −∆ A Rit ) + α 2 PP Eit + ε it
(3.5)
where :
TACCit
EBEIit
TTEit
CFOit
ITPit
∆REVit
∆ARit
PPEit
ԑit
total accruals = ((EBEIit +TTEit) – (CFOit+ITPit))
earning before extraorndinary item
total tax expense
cash flow from operating activities
income tax paid
change in sales from year t-1 to year t
change in account receivables from year t-1 to year t
gross property, plant and equipment
discretionary accruals
Measuring Tax Aggressiveness
The proxy used in this study are DTAX adopted by Frank et al (2009) and Kamila (2014)
and ABTD developed by Tang and Fifth (2012). The research model are as follows :
PERMDIFFit = α0 + α1INTANGit + α2UNCONit + α3MIit + α4CSTEit + α5∆NOLit +
α6LAGPERMit + εit
(3.6)
where :
PERMDIFFit permanent differences divided by total aset at t-1
INTANGit goodwill and other intangibles divided by total aset at t-1
UNCONit consolidated net income (loss) divided by total aset at t-1
MIit
Minority net income or loss divided by total aset at t-1
CSTEit
current state tax expense divided by total aset at t-1
∆NOLit
changes in net operating loss carryforward divided by total aset at t-1
LAGPERMit permanent differences in year t-1 divided by total aset at t-1
εit
discretionary permanent differences
PERMDIFF equation is processed by regression of data into two industrial grups,
manufactur and non manufactur company. The discretionary permanent differences is the
residual value of PERMDIFF’s equation regression.
BTD
it
= β0 + β1 ∆INVit + β2 ∆REV
it
+ β3 NOL
it
+ β4 TLU
it
+ β5 BTD
it-1
+ ԑ
it
( 3.7)
BTDit
∆INVit
∆REVitt
TLUit
BTDit-1
ԑit
book tax differences
changes in gross fixed asset from year t-1 to year t
change in sales from year t-1 to year t
the value of tax losses utilized
book tax differences from year t-1
error term
BTD equation is processed by regression of data inti two industrial grups, manufactur and
non manufactur company. The discretionary permanent differences is the residual value of
BTD’s equation regression.
3.3.2 Indipendent variabel.
Independent variables used role in this study consisted of the main independent variables
and control variables. The main independent variables used in the model 3.1 and 3.2 is tax
aggressiveness and the 3.3 and 3.4 models are financial reporting aggressiveness. The main
independent variable measurement method for each model has been described previously .
Controlling independent variable in this study is the pretax return on assets (PTROA) , leverage
(LEV) , dummy loss carry forward (LCF_D) , dummy operational activities abroad (FOR_D)
and firm size (SIZE).
4. Empirical results
4.1 Research samples
The population of this research is companies listed on the Stock Exchange during the
period 2010-2014. Selection of the sample using purposive judgment sampling. The clasification
of the industries are based on JASICA Index in IDX Fact Book Companies in the industrial
sector of agriculture, mining , property , real estate , construction , and finance are excluded from
the study because it is governed by special tax regulations. Data and information obtained from
DataStream , Eikkon and the company's financial statements.
4.2 Econometrics Test
Model Test Panel is used to determine statistical panel models that are considered in
accordance with the characteristics of the research model. The results for Chow Test show that
the four main models have a value of F-stat 0.000 or less than alpha. Therefore, the regression
model that should be used is the model FE (Fixed Effect). Further LM Test showed that the study
results should use the model RE (Random Effect) for F stat has a value below alpha. Hausman
Tests showed that the 1,2 and 4 have the following results alpha or 0,05 and show that the model
should be used in the equation is the FE models. Meanwhile model 3 shows the results of 0.1290
which means a better model used is the model RE. Econometrics test results show that the model
is free from multikolinearitas research, but has a problem of heteroskedasticity and
autocorrelation. Therefore, to solve this problem, it is used commands Generalized Least Square
(GLS) in STATA to be used as a data analysis of the research results.
4.3 Regression Test
4.3.1 The effect of tax aggressiveness on financial reporting aggressiveness
The effect of tax aggressiveness on financial reporting aggressiveness was tested with two
models. Regression results of models 3.1 are shown in Table 4.1. The results showed that the
value of F stat on the measurement model shows the results of 0.0000 or less than α . This shows
that with a 99% confidence level can be said that H0 is rejected . The coefficient of
determination , or r2 worth 0.1435 or 14,35 on DPERM measurements showed that the
discretionary permanent differences can be explained by the major independent variables and
control variables in research methods about 14.35%. Stat p - value indicates the significance of
the relationship between variables included in the research model . With a value of 0.000
indicates that the first hypothesis is accepted or earnings management activities of companies
affected by corporate tax management activities.
Table 4.1
The effect of tax aggressiveness with DTAX proxy on financial reporting
aggressiveness
DACC it =α0 + α1DTAXit + α2PTROAit + α3LEVit + α4LCF_Dit + α5FOR_Dit + α6SIZEit + εit
Hypothesis
Coef
t-stat
p-value
0.000***
DPERM
+
.3002203
6.50
PTROA
.174766
9.36
0.000***
0.296
LEV
+
-.0078229
-1.06
LCF-D
+
-.0130299
-2.62
0.095*
0.380
0.074*
FOR-D
+
.0
33923
0.60
SIZE
-.0040113
-2.90
CONS
.0632194
2.16
0.139
N
785
R-square
0.1435
F-statistics
0.0000
*** significant at alpha 1%
** significant at alpha 5%
* significant at alpha 10%
where :
DACCit
discretionary accrual
DTAXit
discretionary permanent differences
ABTDit
abnormal book tax differences
PTROAit
pretax income divide by total asset at year t-1
LEVit
sum of long term debt divided by total asset
LCF_Dit
dummy variable that equals 1 when an entity reported loss carryforwads
FOR_Dit
dummy variable that equals 1 when the value of foreign income > 0
Regression results of models 3.2 are shown in Table 4.2. The results shows the value of F
stat on showed similar results with model 3.1, that is 0.0000 or smaller than α. This is means that
H0 is rejected. The coefficient of determination, or r2 worth 0.1445 % or 14:45 on ABTD
measurements means that ABTD can be explained by the major independent variables and
control variables in research methods around 14.45%. The p-value stat with a value of 0.000
indicates that the second hypothesis is accepted or tax aggressiveness measured by abnormal
book tax differences (ABTD) positively related to financial reporting aggressiveness.
Table 4.2
The effect of tax aggressiveness with ABTD proxy on financial reporting
aggressiveness
DACCit =α0 + α1ABTDit + α2PTROAit + α3LEVit + α4LCF_Dit + α5FOR_Dit + α6SIZEit + εit
Hypothesis
Coeff
t-stat
ABTD
+
.2521715
6.78
PTROA
.1827347
10.1
LEV
+
-.0063209
-0.86
LCF-D
+
-.0169055
-3.42
FOR-D
+
.0038373
0.70
SIZE
-.0045051
-3.26
CONS
.0835633
2.90
N
785
R-square
0.1445
F-statistics
0.0000
*** significant at alpha 1%
** significant at alpha 5%
* significant at alpha 10%
where :
DACCit
discretionary accrual
DTAXit
discretionary permanent differences
ABTDit
abnormal book tax differences
PTROAit
pretax income divide by total asset at year t-1
p-value
0.000***
0.000***
0.333
0.043**
0.365
0.050**
0.074
LEVit
LCF_Dit
FOR_Dit
sum of long term debt divided by total asset
dummy variable that equals 1 when an entity reported loss carryforwads
dummy variable that equals 1 when the value of foreign income > 0
4.3.2 The effect of financial reporting aggressiveness on tax aggressiveness
Models 3.3 and 3.4 show the results of financial reporting aggressiveness effect’s on tax
aggressiveness. Results of regression presented in Table 4.3 and Table 4.4. Results of regression
model 3.3 and 3.4 4 show that the value of F stat is 0.000 or less than α ( 0.05 ) . This suggests
that the main independent variable and the independent variables significantly influencing the
value DPERM and ABTD. The r2 value in model 3.3 is 0.2150 , or 21.5 % . This value indicates
that the level of discretion permanent differences can be explained by 21.5 % . through the
independent variables of the company. While the value of the coefficient of determination r 2 for
model 3.4 indicate that abnormal levels of book tax differences can be explained by 14,50 %
through independent variables .
Table 4.3
The effect of financial reporting aggressiveness on tax aggressiveness with DTAX proxy
DTAX it =
α0 + α1DACCit + α2PTROAit + α3LEVit + α4LCF_Dit + α5FOR_Dit + α6SIZEit + εit
Hypothesis
Coeff
t-stat
p-value
DACC
+
.0442028
6.50
0.000***
PTROA
.1570568
23.44
0.000***
LEV
+
-.0105168
-3.76
0.030**
LCF-D
+
-.0111278
-5.86
0.001***
FOR-D
+
.0115501
5.44
0.003***
SIZE
-.0025043
-4.72
0.009***
CONS
.0759007
6.84
0.000
N
785
R-square
0.2150
F-statistics
0.0000
*** significant at alpha 1%
** significant at alpha 5%
* significant at alpha 10%
where :
DACCit
discretionary accrual
DTAXit
discretionary permanent differences
ABTDit
abnormal book tax differences
PTROAit
pretax income divide by total asset at year t-1
LEVit
sum of long term debt divided by total asset
LCF_Dit
dummy variable that equals 1 when an entity reported loss carryforwads
FOR_Dit
dummy variable that equals 1 when the value of foreign income > 0
Through this results, we found that there is positive correlation with a 99% confidence
level that the discretionary accruals influence the aggressiveness of tax with DTAX
measurement. Similar results are also shown in Table 4.4 which shows the value of 0.01 which
means there is positive corelation with a 99% confidence level that the discretionary accruals
influence the aggressiveness of tax with DTAX measurement. This results dismissed the
assumption that there is a trade off between tax and financial reporting aggressiveness in the
company. This means that company can increase profits without increasing tax paid or company
using the opportunity to do tax and earning management in the sama reporting period ( Frank et
al, 2009).
Table 4.4
The effect of financial reporting aggressiveness on tax aggressiveness with ABTD
proxy
ABTDit =
α0 + α1DACCit + α2PTROAit + α3LEVit + α4LCF_Dit + α5FOR_Dit +
α6SIZEit + εit
Hypothesis
Coeff
t-stat
p-value
DACC
+
.0572474
6.78
0.000***
PTROA
.1543425
18.56
0.000***
LEV
+
-.0184254
-5.30
0.004***
LCF-D
+
.0021973
0.94
0.320
FOR-D
+
.0119543
4.54
0.011**
SIZE
-.0010009
-1.52
0.224
CONS
.0092842
0.68
0.368
N
785
R-square
0.1450
F-statistik
0.0000
*** significant at alpha 1%
** significant at alpha 5%
* significant at alpha 10%
where :
DACCit
discretionary accrual
DTAXit
discretionary permanent differences
ABTDit
abnormal book tax differences
PTROAit
pretax income divide by total asset at year t-1
LEVit
sum of long term debt divided by total asset
LCF_Dit
dummy variable that equals 1 when an entity reported loss carryforwads
FOR_Dit
dummy variable that equals 1 when the value of foreign income > 0
4.2.3 Consistency of Measuring Tax Aggressiveness
Measurements tax aggressiveness in this study using permanent differences (DPERM) and
abnormal book tax differences (ABTD). Table 4.5 shows the comparative influence of DPERM
and ABTD on financial reporting aggressiveness and comparison of the effect of the financial
reporting aggressiveness on both proxy. Research results shows that both proxies have the same
F stat value for all the equations. The positive coefficient and the same value of significancy
(0,001) showed that consistently DPERM and ABTD show that tax aggressiveness influence the
financial reporting aggressiveness and vice versa. Control variables effect on the research results
also show a similar value between DPERM and ABTD proxy.
Table 4.5
Comparison Measurement of Tax Aggressiveness on Financial Reporting Aggressiveness
Hypot
hesis
DPERM/
ABTD
PTROA
LEV
LCF-D
FOR-D
SIZE
CONS
+
+
+
+
-
N
R-square
F-statistik
DPERM
ABTD
Coeff
.3002203
p-value
0.000***
Coeff
.2521715
p-value
0.000***
.174766
-.0078229
-.0130299
.0033923
-.0040113
.0632194
0.000***
0.333
0.043**
0.365
0.050**
0.074
785
0.1435
0.0000
.1827347
-.0063209
-.0169055
.0038373
-.0045051
.0835633
0.000***
0.030**
0.001***
0.003***
0.009***
0.000
785
0.1445
0.0000
Comparison Measurement of Financial Reporting Aggressiveness on Tax Aggressiveness
Hypot
DPERM
ABTD
hesis
Coeff
p-value
Coeff
p-value
DACC
+
.0442028
0.000***
.0572474
0.000***
PTROA
.1570568
0.000***
.1543425
0.000***
LEV
+
-.0105168
0.030**
-.0184254
0.004***
LCF-D
+
-.0111278
0.001***
.0021973
0.320
FOR-D
+
.0115501
0.003***
.0119543
0.011**
SIZE
-.0025043
0.009***
-.0010009
0.224
CONS
.0759007
0.000
.0092842
0.368
N
785
785
R-square
0.2150
0.1450
F-statistik
0.0000
0.0000
Through research it can be said that ABTD as proxy to measuring tax aggressiveness show
the consistent result with DPERM . The result refers to prior research by Hanlon and Heitzman
(2010 ) which states that the various method of measurement of tax aggressiveness with
permanent differences content show consistent results. But in this study ABTD can not be said
to be better in measuring the tax aggressiveness compared with DPERM proxy because we need
to do further research.
5. Conclusions and recommendation
5.1 Conclusion
The purpose of this study is to investigate the relationship between tax and financial
reporting aggressiveness on public companies in Indonesia. The results show that there is a
positive and significant relation between tax and financial reporting aggressiveness. This
indicates that in accordance with the study of Frank et al (2009), a public company in Indonesia
does not face the problem of trade-offs in decision making related to the value of net income and
tax payment. This may be an indication that the accounting rules and taxation Indonesia has
loopholes that can be exploited by companies to manage their book tax income.
The results also showed that aggressiveness measurement using a permanent tax
differences (DPERM) or abnormal book tax differences (ABTD) showed consistent results. This
proves that the content of permanent differences in both proxies are able to be used as a method
of measuring tax aggressiveness in accordance with the research done by Hanlon and Heitzman
(2010).
5.2 Research implications
The implications of this research for the regulator is that the results show that in
accordance with previous studies that companies in Indonesia does not have a tradoff in doing
the tax and financial reporting aggressiveness. This indicates that the company can reduce
taxable income without reducing net income for accounting purposes. So the regulator needed to
increase awareness in examinations because of of tax and financial reporting aggressiveness
increasingly difficult to detect. Furthermore, for academics , through the study found that ABTD
measurement showed consistent results with DPERM . Thus, ABTD
can be used as an
alternative method of measuring the tax aggressiveness or tax avoidance . This research can also
be used as a reference for future research.
5.3 Limitations and Suggestions
Due to limited time , the study was conducted within only 5 years period. Therefore ,
further research is recommended to add the study period for the activities of tax and financial
reporting aggressiveness can be seen more reliably. The model is limited research on the model
of aggressiveness taxes by Frank et al (2009 ) and Tang and Fifth ( 2012) as well as a model of
financial reporting aggressiness by modified Jones ( Dechow et al, 1995). Further research can
be done using different measuring methods. This study also limited to controlling only five
control variables, which are PTROA , LEV , LCF_D , FOR_D and SIZE. Further research can
add the control variables such as family ownership structure , the effectiveness of corporate
governance and changes in corporate tax rates .
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