Paper Rina Present final
Analysis of Tax Aggressiveness and
Financial Reporting Aggressiveness on
Public Companies in Indonesia
2010-2014
Rina Indah Sari Ginting and Dwi Martani
Agenda
Introduction
Literature Review
Research Method
Empiricial Result
Conclusion
2
Introduction
• The quality of financial statements is important to stakeholder in making
decisions related to investment, credit and improves market efficiency.
• 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.
Companies are trying to manage their net income profit which is often called
by financial reporting aggressiveness.
• Financial reporting aggressiveness actions can have negative impacts for the
company through the payment of taxes.
• 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).
3
Introduction
• Frank et al (2009) conducted a research on the relationship of
tax and financial reporting aggressiveness in America using
residual permanent differences (DTAX) as the measurement. He
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.
• Tanya and Fifth (2012) developed another way to measures tax
aggressiveness, that called abnormal book tax differences
(ABTD).
• The purpose:
– Expand the Frank et al (2009) by using Indonesian capital
market data
– Using the other proxy of tax aggressiveness that developed by
Tanya and Fifth (2012)
4
Literature Review
Quality of Financial Reporting
• Financial statements contains a lot of information that can be used
by stakeholders to assist the decision making process.
• High financial statements quality can be used to make the right
decision.
• To meet stockholder expectation, 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.
5
Literature Review
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.
• In this study, financial reporting aggressiveness have the same context
with earnings management.
• Aggressive financial reporting can be measured by discretionary
accruals.
• Several measure that usually used in detected aggressive financial are
Model Jones (1991), Dechow et al (1995), Kasznik (1999) and Kothari
(2005).
6
Literature Review
Tax Aggressiveness
• Tax avoidance is define as the reduction of explicit taxes ( Hanlon and
Heitzman, 2010 ;Dyreng et al., 2008).
• 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.
• Tax planning behavior of the company and can be discuss in various terms such
as tax aggressiveness, tax sheltering, tax evasion or non-compliance.
• Hanlon and Heitzman (2010) emphasizes that the definition of tax
aggressiveness are not limited to specific measurement methods.
• 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.
7
Literature Review
Tax Aggressiveness Measurement
• 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.
8
Literature Review
Tax Aggressiveness Measurement
• Tang and Fifth (2012) develop ABTD and NBTD measures.
• Tang and Firth (2012) using estimation models that can divide the booktax differences into two sources, normal and abnormal book tax
differences. Normal book-tax differences (NBTD) is estimated by
regression of total BTDs on discretionary items and using the
unexplained portion of BTDs as measure of ABTD.
• Tang and Firth (2012) proved that ABTD negative effect on earnings
because it contains information of relevance earnings management and
tax management.
9
Literature Review
Hyphotesis
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).
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).
10
Research Method
Models
DACCit
DTAXit
ABTDit
PTROAit
LEVit
LCF_Dit
FOR_Dit
SIZEit
:
:
:
:
dicretionary accrual
dicretionary permanent differences
abnormal book tax differences
pretax income divide 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
carry forwards
:
dummy that equals 1 when the value of foreign income > 0
:
natural log of total assets
11
Research Method
Models
DACCit
DTAXit
ABTDit
PTROAit
LEVit
LCF_Dit
FOR_Dit
:
discretionary accrual
:
discretionary permanent differences
:
abnormal book tax differences
:
pretax income divide 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 carryforwards
:
dummy that equals 1 when the value of foreign income
>0
12
Research Method
Financial Reporting Aggressiveness Measurement
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 ).
TACCit
EBEIit
TTEit
CFOit
ITPit
∆REVit
∆ARit
PPEit
:
:
:
:
:
:
:
t
:
total accruals = ((EBEIit +TTEit) – (CFOit+ITPit))
earning before extra ordinary 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
gross property, plant and equipment
13
Research Method
Tax Aggressiveness Measurement
The proxy used in this study are ABTD adopted by ABTD developed by
Tang and Fifth (2012). The abnormal tax differences is the residual value
of BTD’s equation regression.
BTD it = β0 + β1 ∆INVit + β2 ∆REV it + β3 NOL it + β4 TLU it + β5 BTD it-1 + ԑ it
BTDit
:
book tax differences
∆INVit
:
changes in gross fixed asset from year t-1 to
year t
∆REVitt
:
change in sales from year t-1 to year t
TLUit
:
the value of tax losses utilized
NOLit
:
net operating loss
BTDit-1
:
book tax differences from year t-1
Ԑit
:
error term
14
Research Method
Tax Aggressiveness Measurement
The proxy used in this study are DTAX adopted by Frank et al (2009)
and Kamila (2014). The discretionary permanent differences is the
residual value of PERMDIFF’s equation regression.
PERMDIFFit = α0 + α1INTANGit + α2UNCONit + α3MIit + α4CSTEit +
α5∆NOLit + α6LAGPERMit + εit
PERMDIFFit
INTANGit
UNCONit
MIit
CSTEit
∆NOLit
LAGPERMit
εit
:
permanent differences divided by total aset at t-1
:
goodwill and other intangibles divided by total aset at t-1
:
consolidated net income (loss) divided by total aset at t-1
:
Minority net income or loss divided by total aset at t-1
:
current state tax expense divided by total aset at t-1
:
changes in net operating loss carryforward divided by total
aset at t-1
:
permanent differences in year t-1 divided by total aset at t-1
:
discretionary permanent differences
15
Research Method
•
Listed company in IDX on 2010 – 2014
•
Not industry specific that have a special treatment in taxation ie:
construction, oil and gas, shipping.
•
Not financial industry
•
No corporate action
•
Complete financial statement information 2010-2014
•
Using IDR and financial statement date Dec 31
16
Empirical Result
17
Empirical Result
18
Empirical Result
Hypothesis
DPERM
ABTD
DPERM/ABTD
PTROA
LEV
+
+
Coeff
.3002203
.174766
-.0078229
LCF-D
+
-.0130299
0.043**
-.0169055
0.001***
FOR-D
SIZE
+
-
.0033923
-.0040113
0.365
0.050**
.0038373
-.0045051
0.003***
0.009***
CONS
N
R-square
F-statistik
p-value
0.000***
0.000***
0.333
Coeff
.2521715
.1827347
-.0063209
p-value
0.000***
0.000***
0.030**
.0632194 0.074
785
0.1435
0.0000
.0835633 0.000
785
0.1445
0.0000
19
Empirical Result
Hypothesis
DPERM
ABTD
DACC
PTROA
LEV
+
+
Coeff
.0442028
.1570568
-.0105168
LCF-D
+
-.0111278
0.001***
.0021973
FOR-D
SIZE
+
-
.0115501
-.0025043
0.003***
0.009***
.0119543 0.011**
-.0010009 0.224
CONS
N
R-square
F-statistik
p-value
0.000***
0.000***
0.030**
Coeff
Coeff
.0572474 0.000***
.1543425 0.000***
-.0184254 0.004***
.0759007
0.000
785
0.2150
0.0000
.0092842
0.320
0.368
785
0.1450
0.0000
20
Empirical Result
Tax aggressiveness influence the financial reporting
aggressiveness and vice versa.
Both measurement DPERM and ABTD consistently have positive
influence to financial reporting aggressiveness.
ABTD as proxy to measuring tax aggressiveness show the
consistent result with DPERM .
Control variables effect on the research results also show a similar
value between DPERM and ABTD proxy.
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.
21
Conclusion
Conclusion
•
•
•
•
•
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 and
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).
22
Conclusion
Implication
•
•
•
•
The results show that in accordance with previous studies that
companies in Indonesia does not have a trad off 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.
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 .
23
Conclusion
Limitation
Due to limited time , the study was conducted within only 5 years
period. 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 aggressiveness 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 exploit the other variables such as family
ownership structure , the effectiveness of corporate governance and
changes in corporate tax rates.
24
THANK YOU
25
Financial Reporting Aggressiveness on
Public Companies in Indonesia
2010-2014
Rina Indah Sari Ginting and Dwi Martani
Agenda
Introduction
Literature Review
Research Method
Empiricial Result
Conclusion
2
Introduction
• The quality of financial statements is important to stakeholder in making
decisions related to investment, credit and improves market efficiency.
• 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.
Companies are trying to manage their net income profit which is often called
by financial reporting aggressiveness.
• Financial reporting aggressiveness actions can have negative impacts for the
company through the payment of taxes.
• 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).
3
Introduction
• Frank et al (2009) conducted a research on the relationship of
tax and financial reporting aggressiveness in America using
residual permanent differences (DTAX) as the measurement. He
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.
• Tanya and Fifth (2012) developed another way to measures tax
aggressiveness, that called abnormal book tax differences
(ABTD).
• The purpose:
– Expand the Frank et al (2009) by using Indonesian capital
market data
– Using the other proxy of tax aggressiveness that developed by
Tanya and Fifth (2012)
4
Literature Review
Quality of Financial Reporting
• Financial statements contains a lot of information that can be used
by stakeholders to assist the decision making process.
• High financial statements quality can be used to make the right
decision.
• To meet stockholder expectation, 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.
5
Literature Review
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.
• In this study, financial reporting aggressiveness have the same context
with earnings management.
• Aggressive financial reporting can be measured by discretionary
accruals.
• Several measure that usually used in detected aggressive financial are
Model Jones (1991), Dechow et al (1995), Kasznik (1999) and Kothari
(2005).
6
Literature Review
Tax Aggressiveness
• Tax avoidance is define as the reduction of explicit taxes ( Hanlon and
Heitzman, 2010 ;Dyreng et al., 2008).
• 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.
• Tax planning behavior of the company and can be discuss in various terms such
as tax aggressiveness, tax sheltering, tax evasion or non-compliance.
• Hanlon and Heitzman (2010) emphasizes that the definition of tax
aggressiveness are not limited to specific measurement methods.
• 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.
7
Literature Review
Tax Aggressiveness Measurement
• 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.
8
Literature Review
Tax Aggressiveness Measurement
• Tang and Fifth (2012) develop ABTD and NBTD measures.
• Tang and Firth (2012) using estimation models that can divide the booktax differences into two sources, normal and abnormal book tax
differences. Normal book-tax differences (NBTD) is estimated by
regression of total BTDs on discretionary items and using the
unexplained portion of BTDs as measure of ABTD.
• Tang and Firth (2012) proved that ABTD negative effect on earnings
because it contains information of relevance earnings management and
tax management.
9
Literature Review
Hyphotesis
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).
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).
10
Research Method
Models
DACCit
DTAXit
ABTDit
PTROAit
LEVit
LCF_Dit
FOR_Dit
SIZEit
:
:
:
:
dicretionary accrual
dicretionary permanent differences
abnormal book tax differences
pretax income divide 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
carry forwards
:
dummy that equals 1 when the value of foreign income > 0
:
natural log of total assets
11
Research Method
Models
DACCit
DTAXit
ABTDit
PTROAit
LEVit
LCF_Dit
FOR_Dit
:
discretionary accrual
:
discretionary permanent differences
:
abnormal book tax differences
:
pretax income divide 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 carryforwards
:
dummy that equals 1 when the value of foreign income
>0
12
Research Method
Financial Reporting Aggressiveness Measurement
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 ).
TACCit
EBEIit
TTEit
CFOit
ITPit
∆REVit
∆ARit
PPEit
:
:
:
:
:
:
:
t
:
total accruals = ((EBEIit +TTEit) – (CFOit+ITPit))
earning before extra ordinary 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
gross property, plant and equipment
13
Research Method
Tax Aggressiveness Measurement
The proxy used in this study are ABTD adopted by ABTD developed by
Tang and Fifth (2012). The abnormal tax differences is the residual value
of BTD’s equation regression.
BTD it = β0 + β1 ∆INVit + β2 ∆REV it + β3 NOL it + β4 TLU it + β5 BTD it-1 + ԑ it
BTDit
:
book tax differences
∆INVit
:
changes in gross fixed asset from year t-1 to
year t
∆REVitt
:
change in sales from year t-1 to year t
TLUit
:
the value of tax losses utilized
NOLit
:
net operating loss
BTDit-1
:
book tax differences from year t-1
Ԑit
:
error term
14
Research Method
Tax Aggressiveness Measurement
The proxy used in this study are DTAX adopted by Frank et al (2009)
and Kamila (2014). The discretionary permanent differences is the
residual value of PERMDIFF’s equation regression.
PERMDIFFit = α0 + α1INTANGit + α2UNCONit + α3MIit + α4CSTEit +
α5∆NOLit + α6LAGPERMit + εit
PERMDIFFit
INTANGit
UNCONit
MIit
CSTEit
∆NOLit
LAGPERMit
εit
:
permanent differences divided by total aset at t-1
:
goodwill and other intangibles divided by total aset at t-1
:
consolidated net income (loss) divided by total aset at t-1
:
Minority net income or loss divided by total aset at t-1
:
current state tax expense divided by total aset at t-1
:
changes in net operating loss carryforward divided by total
aset at t-1
:
permanent differences in year t-1 divided by total aset at t-1
:
discretionary permanent differences
15
Research Method
•
Listed company in IDX on 2010 – 2014
•
Not industry specific that have a special treatment in taxation ie:
construction, oil and gas, shipping.
•
Not financial industry
•
No corporate action
•
Complete financial statement information 2010-2014
•
Using IDR and financial statement date Dec 31
16
Empirical Result
17
Empirical Result
18
Empirical Result
Hypothesis
DPERM
ABTD
DPERM/ABTD
PTROA
LEV
+
+
Coeff
.3002203
.174766
-.0078229
LCF-D
+
-.0130299
0.043**
-.0169055
0.001***
FOR-D
SIZE
+
-
.0033923
-.0040113
0.365
0.050**
.0038373
-.0045051
0.003***
0.009***
CONS
N
R-square
F-statistik
p-value
0.000***
0.000***
0.333
Coeff
.2521715
.1827347
-.0063209
p-value
0.000***
0.000***
0.030**
.0632194 0.074
785
0.1435
0.0000
.0835633 0.000
785
0.1445
0.0000
19
Empirical Result
Hypothesis
DPERM
ABTD
DACC
PTROA
LEV
+
+
Coeff
.0442028
.1570568
-.0105168
LCF-D
+
-.0111278
0.001***
.0021973
FOR-D
SIZE
+
-
.0115501
-.0025043
0.003***
0.009***
.0119543 0.011**
-.0010009 0.224
CONS
N
R-square
F-statistik
p-value
0.000***
0.000***
0.030**
Coeff
Coeff
.0572474 0.000***
.1543425 0.000***
-.0184254 0.004***
.0759007
0.000
785
0.2150
0.0000
.0092842
0.320
0.368
785
0.1450
0.0000
20
Empirical Result
Tax aggressiveness influence the financial reporting
aggressiveness and vice versa.
Both measurement DPERM and ABTD consistently have positive
influence to financial reporting aggressiveness.
ABTD as proxy to measuring tax aggressiveness show the
consistent result with DPERM .
Control variables effect on the research results also show a similar
value between DPERM and ABTD proxy.
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.
21
Conclusion
Conclusion
•
•
•
•
•
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 and
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).
22
Conclusion
Implication
•
•
•
•
The results show that in accordance with previous studies that
companies in Indonesia does not have a trad off 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.
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 .
23
Conclusion
Limitation
Due to limited time , the study was conducted within only 5 years
period. 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 aggressiveness 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 exploit the other variables such as family
ownership structure , the effectiveness of corporate governance and
changes in corporate tax rates.
24
THANK YOU
25