tax03 ownership characteristics, corporate governance, and tax

The 3rd Accounting & The 2nd Doctoral ColloquiumBridging the Gap between Theory, Research and Practice :IFRS Convergence and ApplicationFaculty of Economics Universitas IndonesiaBali-Indonesia, 27 - 28 Oktober 2010

Organized by :Department of Accounting FEUICenter For Accounting Development FEUIPost Graduate Program in Accounting FEUIMaster in Accounting Program FEUIProfession Education Program in Accounting FEUI

TAX03OWNERSHIP CHARACTERISTICS, CORPORATE

GOVERNANCE, AND TAX AGGRESSIVENESS

Dewi Kartika SariUniversitas Indonesia

Dwi MartaniUniversitas Indonesia

Field of Research : Taxation



ABSTRACT

This study analyzes the links between family ownership, corporate governance, and

tax aggressiveness. It also examines the mediating effect of corporate governance to the

link of family ownership and tax aggressiveness. Examination was conducted for

manufacturing firms which registered in Indonesian Stock Exchange for year 2005-2008.

Although it failed to find significant association between family ownership, corporate

governance and tax aggressiveness, this study has given an early description that family

firm in Indonesia tend to have higher tax aggressiveness than non-family firm. Corporate

governance relative has negative relation with tax aggressiveness. And the link between

family ownership and tax aggressiveness is mediated by corporate governance, which

mediating effect is negative.

Keywords:

Ownership Characteristic, Family Ownership, Corporate Governance, Tax Aggressiveness



1. INTRODUCTION

Income tax that paid by a firm to government is the process of wealth transfer from

company side (especially the owners) to the government, so it could be stated that the

payment of income tax is a cost for the company and owner itself. Hence, the owner of

company is assumed will have a preference for corporate management to be aggressive in

taxation (Chen et al. 2010). Tax aggressive is the action designed to reduce taxable income

with appropriate tax plan, which is classified or unclassified as a tax evasion (Frank et al.

2009). Although not all of the actions committed were against the rules, but the more a firm

utilizes them, then it would be considered as more aggressive.

The existence of an argument which states that tax will constitute a cost for a

company and its owner would not instantly render the company to take tax aggressive

action. This is cause of tax aggressive action can generate other additional cost, which is a

cost as result of agency problem. Agency problem is not always in same level for each

company. Chen et al. (2010) mentioned that level of tax aggressiveness in family firms

compared to non family firms is depend on effect of benefits or the cost arise from those

tax aggressiveness toward founding family of the firm (family owner), or as consequence

to manager persons in non family firm. Chen et al. (2010) showed that apparently tax

aggressiveness level of family firm is less significant than non family firm. This is happen

because family owners is seemed willing to pay higher tax cost, rather than to pay tax

penalties and face possibilities of firm’s reputation damage as consequence from audit by

tax officials.

Study of Chen et al. (2010) which indicated that non family firms had higher tax

aggressiveness level than family firms, showing that this situation probably happen because



of an agency problem occurred more in non family firms. Once the ownership and

management are separated, inefficient process of job contract and control occurs. This

inefficiency will create a chance to manager for performing opportunistic actions, and

bring out corporate governance problems (Desai and Dharmapala 2007).

Connection between tax and corporate governance has frequently been studied by

number of researchers, such as Desai and Dharmapala (2006), Hanlon and Slemrod (2009),

and Sartori (2009). Research conducted by Desai and Dharmapala (2006) uncover that

connection between incentive compensation with tax evasion is negative. This negative

relation mostly occurs in corporations with low governance level, which opportunism is

assumed as dominant factor in managerial. Hanlon and Slemrod (2009) examined how the

market responded to the news of tax evasion actions by corporation, this research showed

that market countered negatively to the news. Nevertheless some variances of reaction will

be more positive to corporation with better governance. Sartori (2009) in his research

revealed that corporate governance has positive influence in level of corporate tax

obedience, thus it will minimize tax aggressiveness.

There are researches examine the influence of family ownership factor and

corporate governance practice in Indonesia (see Siregar 2005, Aditomo 2005, and

Hermawan 2009). However, based on study of literature, there is no research which study

comprehensively of family ownership and corporate governance influenced on tax

aggressiveness.

Therefore this research wants to examine how the influence of family ownership

and corporate governance practice on tax aggressiveness of corporations in Indonesia.



More specified, it will examine the influence of good corporate governance practice to the

relation of corporate ownership characteristic and tax aggressiveness.

This research differs with previous research because of; using sample of public

firms in Indonesia, this research links research of Chen et al. (2010) with some hypothesis

examined by Desai and Dharmapala (2006) and Yin and Cheng (2004). Refers to

comprehensive literatures, then some new things existed in this research are: (1) examining

the tax aggressiveness level of public firms in Indonesia (especially manufactured

industries); (2) examining the interaction between corporate governance and tax; and (3)

using the average tax planning as addition of alternative measuring to tax aggressive

actions.

2. Theoretical Framework and Hypothesis Development

2.1. Agency Problem

Any separation between owners and corporate management can lead to problems,

for example manager possibilities to perform actions which inappropriate with principal

interests or needs. These emerging problems are commonly called as agency problems

(Jensen and Meckling 1976).

Agency problems are not just happened between principal and management, but also

occur between majority shareholders and minority shareholders. Arifin (2003) found that if

there were minority ownership in firm, then it will lead to new agency problems, the

conflict between majority shareholders and minority shareholders.

2.2 Tax Aggressiveness

Definition of tax aggressiveness in this research refers to definition of tax

aggressive used by Frank et al. (2009), which is an action purposed to reduce taxable



income through tax planning as well as using methods that classified or unclassified as tax

evasion. Although, not all of the actions committed were against the rules, more multiple

methods used by company will make a company is being assumed to be more aggressive.

Hite and McGill (1992) and Murphy (2004) also state that an aggressiveness of tax

reporting is a situation when company conduct particular tax policy and one day it might be

a possibility that tax policy will not being audited or disputed by law, however this action

still has risks potential of uncertain final resolution (of law obedience or disobedience).

2.3 Advantages and Disadvantages of Tax Aggressive

When decide to conduct a tax aggressive action, decision maker (manager) will

make calculation of advantages or disadvantages of their decision. At least three

advantages of tax aggressive action that will be elaborated here. (1) Advantage of tax

efficiency that paid by corporate to the authority, thus cash benefit for owners or

shareholders becomes larger. (2) Advantage (direct or indirect) to manager for obtaining

compensations from owners and shareholders for their tax aggressive actions. (3)

Advantage of opportunities for manager to perform rent extraction. (Chen et al. 2010).

In other side, disadvantages of tax aggressive actions are possibilities to get

sanction or penalties from tax officials, and decline of company’s stock price. Probability

of stock price going down, is caused by others shareholder recognize that tax aggressive

actions organized by manager is purposed for rent extraction (Desai and Dharmapala,

2006)



2.4 The Effect of Corporate Ownership Characteristic and Agency Problem to

Tax Aggressive

For determining whether tax aggressive action of family firm is higher or lower

than non family firm, is depend on how high the gain or loss tribute to family member who

involved in firm management (family owners) or managers in non family firm. Compare to

managers in non family firm, family owners have larger shares, longer investment periods,

and have higher concern to corporate goodwill and reputations. Therefore, Chen et al.

(2010) stated that advantage and cost of tax aggressive action will be higher for family

firms.

Research of Chen et al. (2010) which is conducted to detect whether family firm

more aggressive in their tax action rather than non family firms; shows that for the

companies listed in S&P 1500 index (1996-2000 period), family firms have tax

aggressiveness level less than non family firms. This matter is estimated occurs as compare

to non family firms, family owners are willing to pay higher tax cost, rather than to pay tax

penalties and facing possibilities of firm’s reputation damage after audit by tax officials.

Refers to Chen et al. (2010) research, then first hypothesis is formulated in

alternative form as follows:

H1 : family ownership gives negative influence to tax aggressive action.

2.5 Corporate Governance and Taxation

In international level, interaction between corporate governance and tax has starting

to be observed. Acknowledged from Schon (2008), corporate governance regulations have

became tools for authorities to fight tax evasion by corporations.



Friese et al. (2008) stated that tax and corporate governance can relate in some

aspects, and this interaction can be in one or two ways. In Indonesia, example of tax

regulations which is can influence the corporate governance is Ministry of Finance RI

regulation No 43/PMK.03/2008 (DJP-2008). This regulation mentioned that tax payer can

use the book value in business expansion if tax payer or business unit as result of that

expansion will conduct initial public offering. From these regulations is seemed that

government encourage the corporations to be more transparent with becoming public

corporations. While sample of corporate governance principle that can influence corporate

taxation decision making is the principle of openness and transparency. With this

information transparent, then it is expected that corporation will tend to take free risk

taxation actions.

Therefore in this research is being formulated second hypothesis in alternative form

as follows:

H2 : Corporate governance gives negative influence to corporate tax aggressive actions.

2.6 Corporate Governance and Tax Aggressiveness of Family Firm

Research conducted by Desai and Dharmapala (2006) is one model of empirical

research that shows corporate governance influence to tax. Desai and Dharmapala (2006)

was using company data from S&P Compustat Database (period 1993-2001), has examined

the influence of corporate governance practice to the connection between

compensation/incentive of management and tax evasion action.

Answering their research questions, Desai and Dharmapala (2006) divide research

sample into two groups (well governed company and poorly governed) based on level of

corporate governance practice for each companies. From the test, Desai and Dharmapala



(2006) find that the influence of management compensation/incentive to corporate tax

evasion action is differs between company with good corporate governance practice and

bad corporate governance practice. Connection between management

compensation/incentive with tax evasion action gives more negative effect to company

with bad level of corporate governance practice.

Chen et al. (2010) research shows that level of family firm tax aggressiveness is

less than non family firm, and result of the research by Desai and Dharmapala (2006)

which proves that practice of corporate governance good or bad can make difference of

influence of a determinant to tax evasion action. Hence, this research proposes third

hypothesis in alternative form as follows:

H3 : Influence of family ownership to tax aggressive action of well governed company

will be lower than poorly governed company.

3. Research Methodology

3.1. Data Source and Sample Selection

Samples in this research are entire public companies which are classified as

manufacture industries listed in ICMD directory (Indonesian Capital Market Directory) in

period of 2005 – 2008. Index data of Corporate Governance is sourced from Research

Report on Indonesian Corporate Governance Scorecard (IICD), 2007 and 2009), financial

data of companies is obtained from BEI website, www.idx.co.id as 11 May 2010, price of

stock is obtained from OSIRIS data center, and corporate ownership data is gathered from

ICMD.

Available data will be analyzed, if a company is included as below category, then

such company will be excluded from sample. Next is category as discussed: (1) Company



with incomplete data; or company accomplishes no activity in certain year. (2) Company

with negative income, because this will create distortion on score of effective tax rate

(Richardson and Lanis 2007; Zimmerman 1983), (3) Company with score of effective tax

rate more than one, cause this matter will create problem in model estimation (Gupta and

Newberry 1997).

3.2 Data Processing and Hypothesis Testing

To recognize difference of behavior trend of tax aggressive action over group of

company sample, then this research conducts variant test using ANOVA analysis. While

for hypothesis testing, this research will conduct regression test using panel data model.

3.3 Empirical Model and Research Variables

Purpose of empirical model which will be described as follows is meant for testing

some hypothesis of researches as explained in previous section. Follow is the tested

empirical model:

TaxAggit is measured using effective tax rate (ETRit), cash effective tax rate

(CETRit), book-tax difference (BTD_MPit), residual book-tax difference (BTD_DDit), and

average of corporate tax planning level ( ); FAMILYit is dummy variable, has

score 1 if proportion of family ownership > 50% and score 0 if on the contrary; CGit is

dummy variable, whereas it has score 1 if index score CG > 0,6 and score 0 on the

opposite; ROAit is Return on assets for company i, year t, is calculated with divide



operating income to total assets (t-1); LEVit is leverage for company i, year t, is calculated

with divide long term debt to total asset (t-1); NOLit has score 1 if company has loss carry

forward at beginning of year t; NOLit is change of loss carry forward score for company i,

year t, is divided with value of total asset (t-1); PPEit is value of property, plant, and

equipment for company i, year t, is divided to value of total asset (t-1); SIZEit is natural

logarithm score of market value of equity for company i, in beginning of year t, MBit is the

market-to-book ratio for company i, in beginning of year t, is calculated with divide market

value of equity to book value of equity; BTDit is book-tax difference, for company i, year t-

1;

3.4 Measurement of Tax Aggressiveness

To triangulate the result, this research uses five measurements in calculating level

of tax aggressive action. For ease of read, calculation detail of each measurement is

presented in appendix 1.

ETR is used because it can reflect fixed difference between book revenue

calculations with fiscal revenue (Frank et al. 2009). While CETR is used because it is

expected to identify corporate tax planning aggressiveness which is performed using fixed

difference as well as temporary difference (Chen et al. 2010).

To obtain triangulation, this research uses three types book-tax difference, such as

Book-Tax Difference Manzon-Plesko (BTD_MP), Book-Tax Difference Desai-

Dharmapala (BTD_DD), and Tax Planning (TAXPLAN). According to Desai and

Dharmapala (2006), book-tax difference can come out because of existence of tax planning

activity and revenue management, and then residual value from regression value of book-

tax difference and total accrual value are expected to be pure as reflection of tax planning



activity. While value of tax planning (TAXPLAN) is used for explaining level of tax

subsidize prevails. (Yin and Cheng 2004).

If level of family corporate tax aggressive is higher than non family corporate, then

this research expects variable coefficient FAMILY (β1) has negative value if the calculation

of tax aggressive is using effective tax rates (ETRit and CETRit), and has positive value if

using book-tax differences ( , ,and ).

3.5. Independent Variable

This research is using family definition as used by Arifin (2003), that is all

individual and corporate with registered ownership (own > 5% is must registered), not

public company, state, financial institution, and public (individual with no necessity to

register their ownership).

While for measuring Corporate Governance (CG) practice, this research uses CG

index released by IICD (Indonesian Institute for Corporate Directorship). Because the

evaluation of Indonesian Corporate Governance Scorecard for year 2009 reports the

average corporate governance performance for observed company resulting score of

64.96%, then to determine a company includes in well governed category or poorly

governed, researcher use own justification whereas company with index value of CG >

60% will include into well governed category, while company with value of CG < 60%

will be categorized as poorly governed company.

3.6 Control Variable

To control possibility of influence of profitability and company leverage, then this

research will include variable of Return on Assets (ROA), leverage (LEV), fiscal loss

compensation (NOL), and change of sum fiscal loss compensation (NOL) into tested



regression model. Anderson and Reeb (2003) stated that company with better profitability

and company with less fiscal loss compensation value, is seemed to has higher effective tax

rates (ETRs). While for leverage variable, interest cost will reduce tax cost, then higher

value of company long term obligation so value of ETRs of company will be lower.

(Richardson and Lanis 2007). PPE Variable is also controlled because of the difference

between depreciation method for commercial report and fiscal make the value of book-tax

difference for family company with fixed asset investment type (capital-intensity) will

differs from company with inventory-intensity. (Manzon and Plesko 2002).

Richardson and Lanis (2007, Siegfried (1972) stated that larger company will lead

to lower ETRs, this was caused by larger company is better in using its resource to form a

good tax planning (political power theory). However, somewhat company is not always

able to use its power to perform tax planning, because of the barrier of the possibility to

become attention or target of regulator’s policy – Political Cost Theory (Watts and

Zimmerman 1986). Therefore size of the company (SIZE) is controlled.

In other side, level of company’s business growth (Proxy with market-to-book ratio

– MB) is also controlled because Manzon and Plesko (2002) state that growing company

prefers to invest in tax-favored assets. Growing company can freely choose its type of

investment, contrary to company with limited budget. For avoiding the influence of

business condition to behavior tendency of investment which is conducted by company,

this research controls lagged book-tax difference (value of book-tax difference year t-1)



4. Data Analysis

4.1. Sample

In ICMD year of 2005, 2006, 2007, and 2008 is recognized that there were only 135

manufactured companies which are still listed in period of 2005-2008. Observation period

is along four year and based on sample selection, thus total 160 samples of companies are

obtained (40 companies, 4 periods). Detailed sample selection can be seen on Appendix 2

Table 1.

4.2. Descriptive Statistical Analysis

4.2.1. Measurement of Tax Aggressive

Comparison average value (mean) from each measurement of tax aggressive action

(ETR, CETR, BTD_MP, BTD_DD, and TAXPLAN) for each group sample (family firm and

non family firm), and between well governed company and poorly governed can be seen on

Appendix 2 (table 2).

In appendix 2 (Table 2, Panel A) is seemed that mean score of entire measurement

of tax aggressive action (except ETR) between sample group of family firm and non family

firm is differs significantly. For effective tax rates (ETR and CETR), mean score of family

firm is lower than non family firm. While mean score of book-tax difference of family firm

is higher than non family firm. This gives preliminary indication that level of tax

aggressive action of family firm is higher than non family firm.

In appendix 2 (Table 2, Panel B) shows difference of mean score of tax aggressive

action between well governed company and poorly governed company, it indicates that

companies with good CG practice tend to have lower tax aggressive action than companies

with bad CG practice. This matter is figured in score of ETR (CETR) for well governed



companies which are exceed 0,03 (0,07) than poorly governed companies. This prediction

is also supported by score of BTD_MP (BTD_DD ) of well governed companies which are

less 0,051 (0,05) than poorly governed companies. Expect TAXPLAN, average score of tax

aggressive action between both samples is seemed differs significantly.

In sensitivity test also has been accomplished two additional variance test over

average score of tax aggressive action, that is (1) between family firm with good CG

practice (well-governed) and family firm with bad CG practice (poorly-governed), and (2)

between well governed non family firm and poorly governed non family firm. Test result

shows support to the result in Appendix 2 (table 2, Panel B), that is the good corporate

governance practice will weaken company’s tax aggressive action (sensitivity test result

will not be showed in this paper).

Appendix 2 (table 2, Panel C) shows descriptive statistic of measurement of tax

aggressive action for entire company samples. That panel shows in overall that the score of

tax aggressive action of sampling companies are relatively unchanged. This is seemed from

standard deviation score which is relatively small.

Appendix 2 (Table 2, Panel D) shows the correlation among five measurements tax

aggressive action, high level family ownership company and corporate governance

practice. Except CETR, all coefficient correlation show score which minimum significant

at level of 5%, seemed correlation between effective tax rates is positive, and correlation

measurement of effective tax rate and measurement of book-tax difference is negative.

Correlation score between variable BTD_MP and BTD_DD is very high, but this can be

accepted because score of BTD_DD is residual score from regression of BTD_MP with



total accrual score Healy (1985). Use of various measurement of tax aggressive action is

expected to strengthen result of the test.

The connection between family ownership company and variable of tax aggressive

action is almost all show significant score. The correlation with effective tax rates (ETR

and CETR) shows negative trend, while correlation with book-tax difference (BTD_MP,

BTD_DD and TAXPLAN) shows positive trend.

Also in Appendix 2 (Table 2, Panel D), the connection of corporate governance

practice with effective tax rates (ETR and CETR) shows a positive trend with significant

score, and the connection of corporate governance with book-tax difference (BTD_MP and

BTD_DD) has a negative trend with significant score too. From trend of coefficient

correlation, connection between tax aggressive action with variable of family ownership

and corporate governance is inline with preliminary prediction. That is the family

ownership related positively with tax aggressive action, and practice of corporate

governance in contrary related negatively with tax aggressive action.

4.2.2. Characteristic of Company and Control Variable

Comparison of descriptive statistic to company characteristic, and control variable

of family firms and non family firms can be found in Appendix 2 (Table 3, Panel A). On

that panel is seemed that the characteristic, measurement, and level of family firms’s

growth and non family firms are not differ significantly. Significant difference is only

represented in average score of ROA, whereas average score shows that non family firms

have better performance in their operations.

In appendix 2 (Table 3, Panel B) is reported about correlation score among

independent variables. It is consistent with result in Appendix 2 (Table 3, Panel A), the



indicator of family firms show negative relation with variable ROA. From Appendix 2

(Table 3, Panel B), although correlation between variable CG and variable CG*FAM is

quite high, but value of coefficient correlation among other independent variable is

insignificant (<0,4), so it can be concluded that problem of multi co-linier is not seriously

happened.

5. Analysis and Conclusion

5.1. Analysis Relationship between Tax Aggressive Action and Family Ownership

On Appendix 2 (Table 4) is seemed that coefficient value of estimation regression

variable FAMILY which shows negative trend to ETR and CETR, and positive trend to

BTD_MP, BTD_DD and TAXPLAN, indicate the tendency of family firm to conduct

aggressive tax action. This is contrast with proposed Hypothesis 1 (H1), that family

ownership is estimated has negative relation with tax aggressive action. However, output of

this regression is supporting output of descriptive statistical analysis which show level of

tax aggressiveness of family firm is higher than non family firm.

From description above is seemed that result of this research is contrary to research

by Chen et al. (2010). Reason that might explain why this happens is, it might be for

Indonesian companies the revenue as tax saving and rent extraction, higher than loss

probability because decline of company’s stock price, damage of company reputation or

possibility to get sanction/penalties from tax officials. This phenomenon may also occur

because of the effects of cultural externality of business and culture of tax inspection in

Indonesia. As Çule and Fulton (2009), in circumstances where corruption and fraudulent

activity is considered an ordinary thing, then such action would be more acceptable and

cost of such action would be lesser. The survey results PERC (Political & Economic Risk



Consultancy), which was released on March 8, 2010 stated that out of 16 countries as

investment destinations in Asia Pacific, Indonesia is a most corrupt country (edj, 2010). If

associated with the survey results are then Çule and Fulton (2009) statement is probably

running in Indonesia.

5.2. Analysis of Relationship between Tax Aggressive with Corporate Governance

Associated with tax aggressive action and corporate governance, although the

results of regression showed a negative association, but this study found no significant

correlation between them (see Appendix 2, Table 4). Therefore, the statement in the second

hypothesis (H2) that corporate governance is expected to negatively affect the company's

tax aggressive action can not be proven.

Second hypothesis (H2) is similar to results found by Desai and Dharmapala

(2006). In its examination, Desai and Dharmapala (2006) found that the worse the level of

corporate governance in a company, the higher the tax avoidance action by the company,

but the connection was not proven to influence significantly.

5.3. Analysis of Corporate Governance Influence on Tax Aggressive and Family

Ownership Relationship.

Hypothesis 3 (H3), states that the effect of family ownership on the tax aggressive

on well-governed companies will be lower than poorly-governed companies. The results

still show the trend of multiple relations, and overall values are not significant (see

Appendix 2, Table 4). Thus the third hypothesis (H3) is not proven (rejected).

The results of this research are different from the results found by Desai and

Dharmapala (2006). In his research, Desai and Dharmapala (2006) found that the relation

between compensation/incentive management with tax avoidance action is more negative



effect on companies with bad corporate governance practices level. Reasons that might

explain why this happens are because the implementation of corporate governance in

Indonesia is still relatively low. In applying good corporate governance of public

companies tend to only limited to comply with regulations IDX / Bapepam-LK. This is

seemed from the average value of all components of the Indonesian Corporate Governance

Scorecard in 2007 which only amounted to 64.96% (IICD, 2009).

Although different research objects, but the results of this study is similar to

research results by Arsjah (2005) and Rahadian (2007) who found no relation between

corporate governance index with studied object.

5.4 Regression Output of Control Variable Analysis

From Appendix 2 (Table 4), regression output indicates that the relation between

control variables with a proxy variable of tax aggressive showed varied results. Control

variable that have significant value and in accordance with earlier predictions for all proxy

variables of the tax aggressive is, NOL, SIZE, and BTD. This shows that firms with higher

tax loss compensation are more likely to pay less tax. Meanwhile, the larger the company

will make better the company's ability to make a tax plan (political power theory). And the

value of corporate book-tax difference from one year to the next which tend to increase

indicating the business environment in Indonesia is relatively stable, so that firms tend to

continually invest in profitable areas of the tax (tax-Favored Investment). The results of

this research provide support for research by Anderson and Reeb (2003), Manzon and

Plesko (2002), and Chen et al. (2010).

5.5 Analysis of Individual Effect



Advantages of the use of RE models are able to know the approximate average

amount of tax aggressive for each individual if the independent variable changes. From the

value of each individual effect regression output (Appendix 3) shows that company which

has average largest ETR changes are TBLA, while company which has an average of the

lowest ETR changes are RMBA. To CETR, the average value of the biggest changes is

shown by MTDL and the average score of the smallest change indicated by AUTO. While

for BTD_DD BTD_MP and the average value of biggest change is indicated by the RDTX,

and the average value of the smallest change indicated by TOTO. For TAXPLAN average

value of biggest change is indicated by the INTP, and the average value of the smallest

change was also demonstrated by TOTO.

5.6 Summary

This research is aimed to determine the effect of family ownership to the corporate

tax aggressive; analyze the influence of corporate governance practices on the level of

corporate tax aggressiveness, as well as observed differences of the effect of family

ownership on tax aggressive on the company due to different levels of corporate

governance practices. Testing was conducted to all public companies categorized as

manufacturing industry listed in Indonesia Stock Exchange during the period 2005 - 2008

(total sample of 160 firm years).

Differences in this research compare to previous studies because this research used

sample of public companies in Indonesia, examining the interaction between corporate

governance to tax, as well as using additional alternative measurement of tax aggressive

(i.e. average tax planning). As far as the writer, in Indonesia there has been no research

linking the tax to the ownership structure and corporate governance.



The results have not been able to give strong evidence for the hypothesis proposed,

but has given preliminary description of how the influence of ownership characteristic and

corporate governance to corporate tax aggressive. The figure shows the family ownership

tends to be more aggressive in tax than non-family firms, and corporate governance

practices negatively affect to the tax aggressive. Although the regression coefficient is not

significant, but the trend of corporate governance variables provides an illustration of these

variables can weaken the relation of tax aggressive with family ownership.

6. Implication and Limitation

The result of this research empirically shows that the effect of the adoption of good

corporate governance has not been impacted significantly on the Indonesian company.

Family ownership is also likely positively related to aggressive tax planning. The existence

of this phenomenon should be addressed companies (especially family enterprises) with

caution, because in the long term as the current conditions would be bad impact for the

company. Besides the possibility of audit inspection and tax sanction, this action would

also damage the reputation of the company. As for tax officials, the research showed that

companies with high family ownership tends to take tax aggressive as possibility of the risk

/ cost as consequence of those tax aggressive being detected is smaller than the benefits

received, indicating the existence of negative externalities factor of cultural business and

cultural examination of tax in Indonesia. Therefore, tax officers should give more attention

to factors externalities of tax enforcement that is currently implemented, and kept trying to

make improvements. More specifically, in the review process, tax officials should give

more attention on family firms because these firms potentially perform tax aggressive

higher than non-family firms.



There are several limitations encountered in this research. (1) Less precision of

sample selection procedures. In the sample selection, if there is company that has negative

earnings on one year of observation, then the firm is directly removed from the sample.

Although previous research using the same sample selection procedure (see: Chen et al.

2010; Richardson and Lanis 2007; Zimmerman 1983), but the sample selection procedure

like this create a selected number of samples each year will be same number and entirely of

the companies have positive earnings value , so that research results can not be generalized.

Subsequent research could develop this research by conducting sample selection

procedures based on per company per year. (2) The use of multiple tax aggressive

measurement. Too many use of tax aggressive proxies, could be the cause of

inconsistencies in the significance and trend of the coefficient of the independent variables.

Subsequent research could develop this research by conducting factor analysis, and / or

interview process.



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APPENDIX

APPENDIX 1: Variables Measurement

1.1. Measurement of Tax Aggressiveness

1.2. Measurement of Independent Variables and Control Variables

= measured using effective tax rate (ETRit), cash effective tax rate (CETRit),

book-tax difference (BTD_MPit), residual book-tax difference (BTD_DDit),

and average of corporate tax planning level ( ).

FAMILYit = dummy variable, has score 1 if proportion of family ownership > 50% and

score 0 if on the contrary.

CGit = dummy variable, whereas it has score 1 if index score CG > 0,6 and score

0 on the opposite.

ROAit = Return on assets for company i, year t, is calculated by divide operating

income to total assets (t-1).



LEVit = Leverage for company i, year t, is calculated with divide long term debt to

total asset (t-1).

NOLit = has score 1 if company has loss carry forward at beginning of year t.

Appendix 1(Continued)

NOLit = Change of loss carry forward score for company i, year t, is divided with

value of total asset (t-1).

PPEit = Value of property, plant, and equipment for company i, year t, is divided to

value of total asset (t-1).

SIZEit = Natural logarithm score of market value of equity for company i, in

beginning of year t.

MBit = The market-to-book ratio for company i, in beginning of year t, is

calculated with divide market value of equity to book value of equity.

BTDit = Book-tax difference, for company i, year t-1.

it = Error value for individual.

uit = Error value caused of many individual and many periods.



Appendix 2: Table

Table 1

Sample Selection

Primary Sample Firm Year40 manufacturing firms listed in ICMD(2005 – 2008) 640

Deducted by sample criteriaa. Delisting on 2005 – 2008 100b. Close book period other than December 31 4c. Non-rupiah currency 24d. Negative income 220e. ETR > 1 116f. Nilai CETR > 1 16 (480)

Final Sample 160

Source: Data Processed

Appendix 2 (Continued)

Table 2Descriptive Statistics of Tax Aggressiveness Measurement

Panel A: Comparison of descriptive statistics of tax aggressiveness measurement between family firms andnon-family firms.

Firm Groups N MeanETR CETR BTD_MP BTD_DD TAXPLAN

Family 68 0,27 0,31 -0,03 0,02 0,002Non-family 92 0,30 0,39 -0,06 -0,01 -0,0003Hasil Uji BedaF-test (p-values)

160 0,12 0,01** 0,01** 0,01** 0,02**

Panel B: Comparison of descriptive statistics of tax aggressiveness measurement between well-governedfirms and poorly-governed firms.

Firm Groups N MeanETR CETR BTD_MP BTD_DD TAXPLAN

Well-governed 126 0,29 0,37 -0,06 -0,01 0,0006Poorly-governed 34 0,26 0,30 -0,009 0,04 0,003Hasil Uji BedaF-test (p-values)

160 0,03* 0,06* 0,00*** 0,00*** 0,49

Panel C: Statistic desciptive comparison of tax aggressivess measurement all sample (n = 40 firms, 160observation).

Mean Median Min. Maks Std. Dev.ETR 0,287 0,301 -0,280 0,664 0,093CETR 0,359 0,314 0,008 0,987 0,192



BTD_MP -0,046 -0,050 -0,208 0,411 0,075BTD_DD -0,000 -0,003 -0,163 0,457 0,075TAXPLAN 0,001 -0,000 -0,022 0,026 0,007Panel D: Correlatin Matrix of tax aggressiveness measurement with family firm and corporate governance(pearson correlation).

ETR CETR BTD_MP BTD_DD TAXPLANCETR 0,16

(0,05)**BTD_MP -0,48 -0,12

(0,00)*** (0,13)BTD_DD -0,48 -0,12 0,99

(0,00)*** (0,13) (0,00) ***TAXPLAN -0,32 -0,10 0,39 0,39

(0,00) *** (0,20) (0,00) *** (0,00) ***FAM -0,12 -0,20 0,21 0,21 0,18

(0,12) (0,01) *** (0,01) *** (0,01) *** (0,02) ***CG 0,17 0,14 -0,26 -0,23 0,06

(0,02) ***(0,06)*

(0,001)*** (0,003) *** (0,41)

ETR (Effective Tax Rates), CETR (Cash Effective Tax Rates), BTD_MP (Book-tax difference Manzon-Plesko), BTD_DD (Book-tax difference Desai-Dharmapala) dan TAXPLAN (average of three years firm’stax planning). FAMILY = 1 if high family owned firm, and 0 if contrary; CG or Well-governed if firm’s CGindex > 0,6, and poorly-governed if contrary. Subject in paranthesis showing p-values, where: *** significantin 1%; ** significant in 5%; * significant in 10%.

Source: Data Processed

Appendix 2 (continued)

Table 3

Statistic Descriptive of Firm Characteristics and Control Variables

anel A:Statistic descriptive characteristics comparison of tax aggressiveness measurement between family firmsand non-family firms.

Family Firms Non-family Firms Differential test*

N Mean Med. Min. Maks. N Mean Med. Min. Maks. MeanOpportunity to do tax planning and book-tax differences.ROA 68 0,15 0,13 0,04 0,64 92 0,20 0,17 -0,65 0,64 0,03**LEV 68 0,08 0,00 0,00 0,43 92 0,09 0,02 0,00 0,58 0,73NOL 68 0,24 0,00 0,00 1,00 92 0,17 0,00 0,00 1,00 0,34DNOL 68 -0,001 0,00 -0,04 0,06 92 -0,01 0,00 -0,41 0,04 0,20PPE 68 0,36 0,33 0,09 1,29 92 0,35 0,29 0,05 0,97 0,79Size and Firm’s GrowthSIZE 68 11,86 11,66 10,52 13,42 92 12,01 11,90 10,17 14,04 0,25MB 68 1,70 1,41 -25,54 14,18 92 2,61 1,55 -10,67 21,26 0,15BTD PersistencyBTD 68 -0,024 -0,03 -0,13 0,18 92 -0,02 -0,06 -0,20 1,02 0,73



Panel B: Correlation matrix between independent variables (pearson correlation)

FAM CG CG*FAM ROA LEV NOL DNOL PPE SIZE MB

CG -0,23

CG*FAM 0,74 0,33

ROA -0,17 0,07 -0,14

LEV -0,03 0,02 0,002 -0,07

NOL 0,08 -0,20 -0,04 -0,26 0,37

DNOL 0,10 0,16 0,07 -0,000 -0,08 -0,30

PPE 0,02 -0,10 -0,11 0,05 0,38 0,16 0,05

SIZE -0,09 0,24 -0,004 0,23 0,22 -0,05 0,04 0,22

MB -0,11 0,17 -0,02 0,39 -0,142 -0,21 0,14 0,08 0,35

BTD -0,03 -0,10 -0,07 -0,13 0,18 0,31 -0,34 0,09 0,08 -0,03

CG = scored 1 if IICD’s corporate governance index > 0,6; ROA = return on assets; LEV = leverage, total

loan divided by total asset; NOL = indicator variable of any compensation of loss carry forward; DNOL =

changing in compensation of loss carry forward; PPE = fixed asset divide by total asset.; SIZE = Natural

logarithm of market value of equity; MB = market to book ratio; BTD = Book-tax difference (BTD_MP)

periode t-1. *result of differential test, t-test (p-values), ** signifikan dengan α = 5%.

Source: Data Processed.


Table 4Regression Output

Dependent VariablesPredicted Sign

ETR (BTD)ETR CETR BTD_MP BTD_DD TAXPLAN

Intercept 0,71 0,51 -0,12 -0,07 -0,02(0,00) (0,06) (0,01) (0,15) (0,01)

FAMILY + ( - ) -0,004 -0,01 0,02 0,02 0,01(0,91) (0,85) (0,15) (0,14) (0,01)***

CG + ( - ) 0,03 0,09 -0,02 -0,02 0,002(0,35) (0,15) (0,16) (0,16) (0,13)

CG*FAMILY

+ ( - ) -0,01 -0,09 0,004 -0,005 -0,004(0,78) (0,27) (0,77) (0,74) (0,27)

ROA + ( - ) 0,03 -0,34 -0,27 -0,26 -0,003(0,59) (0,01)*** (0,00)*** (0,00)*** (0,27)

LEV - ( + ) 0,06 0,17 0,04 0,04 0,01(0,41) (0,24) (0,12) (0,10)* (0,01)***

NOL - ( + ) -0,06 -0,02 0,02 0,03 0,01(0,004)*** (0,60) (0,00)*** (0,00)*** (0,00)***

NOL + ( - ) -0,01 0,51 -0,88 -0,88 0,06(0,96) (0,23) (0,00)*** (0,00)*** (0,00)***

PPE - ( + ) -0,03 -0,11 0,04 0,04 -0,00



(0,41) (0,23) (0,01)** (0,01)** (0,68)SIZE - ( + ) -0,04 -0,01 0.008 0,01 0,002

(0,003)*** (0,71) (0,05)** (0,07)* (0,03)**MB - ( + ) -0,01 0,004 -0,001 -0,001 0,0002

(0,00)*** (0,34) (0,20) (0,22) (0,02)**BTD - ( + ) -0,06 -0,10 0,04 0,04 0,006

(0,18) (0,31) (0,01)** (0,013)** (0,01)***Adj.R2 0,23 0,07 0,72 0,72 0,35F-statistic 5,23 2,03 38,41 38,32 8,79p value(F-statistic)

0,00*** 0,03** 0,00*** 0,00*** 0,00***

N (perusahaantahun)

160 160 160 160 160

Tax aggressiveness measured by ETR (Effective Tax Rates), CETR (Cash Effective Tax Rates),BTD_MP (Book-tax difference Manzon-Plesko), BTD_DD (Book-tax difference Desai-Dharmapala)dan TAXPLAN (three years firm’s average tax planning). FAMILY = 1 if high family owned firm, and0 if otherwise. CG = scored 1 if IICD’s corporate governance index > 0,6; CG*FAMILY =interaction variable which linking family firm and CG indicator.; ROA = return on assets; LEV =leverage, total loan divided by total asset; NOL = indicator variable of any compensation of losscarry forward; NOL = changing in compensation of loss carry forward; PPE = fixed asset divide bytotal asset; SIZE = Natural logarithm of market value of equity; MB = market to book ratio; BTD =Book-tax difference (BTD_MP) in t-1 period. Nominal in parantheses is p-value of t-statistic where:*** significant in 1%; ** significant in 5%; * significant in 10%.Source: EVIEWS 6 data processed

Appendix 3: Individual Effect Table (Random Effects)

No. ETR CETR BTD_MP BTD_DD TAXPLAN

1 TBLA 0.048 MTDL 0.197 RDTX 0.053 RDTX 0.053 INTP 0.009

2 GGRM 0.047 ASGR 0.142 RMBA 0.034 RMBA 0.035 RDTX 0.007

3 MTDL 0.043 TSPC 0.109 FAST 0.025 FAST 0.025 FAST 0.007

4 KAEF 0.042 BTON 0.091 AUTO 0.023 AUTO 0.024 AUTO 0.006

5 SCCO 0.039 INTP 0.091 ASGR 0.016 ASGR 0.017 KBLI 0.005

6 INTP 0.036 SOBI 0.061 MRAT 0.011 MRAT 0.011 JPRS 0.003

7 MYOR 0.024 KLBF 0.061 HEXA 0.010 HEXA 0.011 TSPC 0.003

8 DVLA 0.022 AQUA 0.047 LTLS 0.010 LTLS 0.010 ASII 0.003

9 UNTR 0.016 SCCO 0.039 DLTA 0.007 DLTA 0.007 SMAR 0.002

10 AQUA 0.015 TOTO 0.025 JPRS 0.007 JPRS 0.007 ASGR 0.002

11 KBLI 0.012 KAEF 0.023 TSPC 0.006 TSPC 0.006 EKAD 0.002

12 SMSM 0.011 MYOR 0.015 ASII 0.003 CLPI 0.002 DLTA 0.002

13 SMGR 0.011 LMSH 0.014 CLPI 0.002 EKAD 0.001 SMSM 0.002

14 KLBF 0.008 UNVR 0.008 EKAD 0.002 ASII 0.001 MRAT 0.002

15 TOTO 0.006 AKRA 0.005 TBLA 0.001 SMAR 0.001 AKRA 0.001

16 TCID 0.004 SMSM 0.000 SMAR 0.001 TBLA 0.001 RMBA 0.001



17 HEXA 0.003 JPRS (0.002) MLBI 0.001 MLBI 0.001 MLBI 0.001

18 SOBI 0.002 DLTA (0.007) MERK (0.001) MERK (0.001) HEXA 0.000

19 MLBI 0.002 MLBI (0.009) UNVR (0.003) UNVR (0.003) MYOR 0.000

20 AKRA 0.002 GGRM (0.010) KBLI (0.004) KAEF (0.003) ARNA (0.001)

21 LMSH (0.001) HEXA (0.016) ARNA (0.004) KBLI (0.004) UNTR (0.001)

22 LION (0.003) UNTR (0.017) KAEF (0.004) ARNA (0.004) SCCO (0.001)

23 EKAD (0.003) MERK (0.019) LION (0.004) LION (0.004) LION (0.001)

24 ASII (0.004) TCID (0.023) SCCO (0.004) GGRM (0.004) UNVR (0.001)

25 ARNA (0.007) RMBA (0.025) GGRM (0.005) SCCO (0.004) MERK (0.001)

26 TSPC (0.009) LTLS (0.030) DVLA (0.006) DVLA (0.006) TCID (0.001)

27 DLTA (0.011) FAST (0.034) TCID (0.006) TCID (0.006) GGRM (0.002)

28 CLPI (0.012) CLPI (0.036) SMSM (0.006) SMSM (0.006) CLPI (0.002)

29 MRAT (0.012) LION (0.036) MTDL (0.007) SOBI (0.006) BTON (0.002)

30 FAST (0.013) SMGR (0.036) SOBI (0.007) MTDL (0.007) KLBF (0.002)

31 ASGR (0.014) EKAD (0.040) INTP (0.007) INTP (0.007) SOBI (0.003)

32 JPRS (0.015) ARNA (0.041) MYOR (0.011) MYOR (0.011) TBLA (0.003)


33 MERK (0.018) DVLA (0.044) LMSH (0.012) LMSH (0.012) MTDL (0.003)

34 RDTX (0.024) RDTX (0.048) BTON (0.012) BTON (0.013) LTLS (0.004)

35 BTON (0.027) TBLA (0.049) UNTR (0.014) SMGR (0.014) KAEF (0.004)

36 AUTO (0.031) SMAR (0.065) SMGR (0.014) UNTR (0.015) DVLA (0.005)

37 LTLS (0.035) MRAT (0.066) AKRA (0.017) AKRA (0.017) LMSH (0.005)

38 UNVR (0.037) KBLI (0.075) AQUA (0.019) AQUA (0.019) AQUA (0.005)

39 SMAR (0.038) ASII (0.095) KLBF (0.023) KLBF (0.022) SMGR (0.005)

40 RMBA (0.077) AUTO (0.108) TOTO (0.024) TOTO (0.025) TOTO (0.006)

Mean (0.000) 0.000 (0.000) (0.000) (0.000)

Source: Data processed

tax03 ownership characteristics, corporate governance, and tax

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