Examining the Factors Affecting Corporate Tax Avoidance in Indonesia

Abstract

Background: Tax is paramount for a country since it constitutes the state revenue. Societies do not directly benefit from taxes because the taxes are used for public and collective interests rather than individual ones. The government utilises taxes to improve people’s material and spiritual welfare, thus, domestic income must be promoted. Aims: This study aims to examine the effect of company size, audit quality, and political connections on tax avoidance practices in consumer goods manufacturing companies listed on the Indonesia Stock Exchange (IDX) during the period 2018–2022. Methodology: This study uses a quantitative approach using Agency Theory and Stakeholder Theory as theoretical frameworks. This study was conducted using secondary data from consumer goods manufacturing companies listed on the Indonesia Stock Exchange (IDX) covering the years 2018 to 2022. A total of 155 company-year observations were selected through purposive sampling. Multiple linear regression analysis was used to analyse the data. Tax avoidance is measured using the Cash Effective Tax Rate (CETR). Company size is measured using the natural logarithm of total assets, while audit quality and political connections are measured using dummy variables. Results: The results show that company size has a positive and significant effect on tax avoidance, indicating that larger companies are more able to use tax strategies due to greater resources. However, audit quality and political connections do not have a significant effect on tax avoidance. Interestingly, companies with political connections generally pay lower tax rates. Furthermore, companies with the majority of share ownership by the government face lower taxpayer risks as stipulated in the Regulation of the Minister of Finance Number 71/PMK.03/2010 because the government believes that such companies are less likely to engage in tax avoidance. Conclusion: This study concludes that among the variables studied, only company size significantly affects tax avoidance practices. These findings contribute to a broader understanding of how internal and external factors of an organisation affect corporate tax behaviour, especially in the context of an emerging market such as Indonesia.