The Trend of Tax Avoidance: Evidence from Manufacturing Companies in Indonesia

Abstract

Unexpected events, such as the COVID-19 pandemic, can occur at any time and have an influence on all countries. The COVID-19 pandemic has infected more than 200 nations, including Indonesia. As a result of this phenomenon, Indonesia's state revenue system will need to be adjusted. Therefore, the goal of this research is to see if there are any differences in taxation in Indonesia as a result of the COVID-19 incident. The data was collected using the base years of 2018, 2019, and 2020. The information came from the financial statements of companies in the industrial sector that are publicly traded on the Indonesian Stock Exchange (IDX). Purposive sampling was used, and there were 54 companies represented in the samples that met the criterion. In this study, the difference test was used as an analytical technique. According to the findings, there was no difference in the pattern of tax avoidance between pre-COVID-19 in 2019 and during the COVID-19 period in terms of leverage and fixed asset intensity. It occurred because the tax avoidance policy was implemented as a short-term fiscal strategy to ensure the company's existence. Finally, because these findings were restricted to the Indonesian environment, their generalizability was limited.

1. Introduction

Unanticipated events that can occur at any time, such as the COVID-19 pandemic, bomb explosions, mass chaos during the presidential succession, and economic embargoes, may have a drastic impact on the life of a country (Machmuddah et al., 2020). The ongoing COVID-19 pandemic is one of the greatest crises of modern times (Irianiet al., 2021; Kristiana et al., 2021; Priambodo et al., 2021; Sunarjo et al., 2021; Zainuri et al., 2021). Unlike the global financial crisis of 2008 that started in New York, the pandemic started near a meat market in Wuhan in central China in December 2019 (Wójcik & Ioannou, 2020). More than 200 countries have been affected by the COVID-19 pandemic, including Indonesia. The state revenue structure must also undergo correction due to this phenomenon. One source of revenue in Indonesia comes from taxes. There would undoubtedly be a decline in tax income during the COVID-19 period in 2020.

Specifically, one of the tax contributors in Indonesia is the corporate taxpayer. This business entity taxpayer is engaged in many sectors. One of the existing sectors is manufacturing. In Indonesia, there are 153 registered manufacturing companies. In fulfilling the company’s tax obligations, of course, it is based on tax planning sourced from tax regulations. However, one of the efforts often done is to use a tax avoidance policy (Frank et al., 2008; Hanlon & Heitzman, 2010; Shen et al., 2021). Tax avoidance is also interesting to study since it also occurs in Indonesia.

Many events affect tax avoidance. These events certainly have different characteristics. In this regard, companies consider taxes an additional cost burden that can reduce company profits. Therefore, companies are predicted to take actions that can reduce the company’s tax burden (Hamermesh, 2021; Handayani & Ibrani, 2019; Helcmanovská & Andrejovská, 2021; Liu et al., 2021). In addition, the tax aspect is a factor the company considers since tax is a significant burden on the company. Hence, domestic and multinational companies seek to minimize the tax burden by utilizing the existing tax provisions to optimize profits. Company owners will encourage management to take aggressive tax actions to reduce the tax burden that arises.

Regarding COVID-19, the state needs to consider tax policies (Abumere, 2021; Branicki et al., 2021). Tax policy is made, of course, with certain assumptions. The tax policies that have been raised take into account the short-term and long-term goals (Abhari et al., 2021). On the other hand, many factors can influence corporate tax avoidance. The absence of these various interests encourages management to be more aggressive in taking actions related to taxation. The level of aggressiveness of taxpayers is also closely related to agency theory (Andayani & Yanti, 2021).

Leverage and fixed asset intensity are the influential independent variables in this study. What is the purpose of leverage? Leverage has a direct impact on tax evasion policies, according to Kong et al. (2021), Uhde (2021), and Yoon et al. (2021). Leverage is thought to lower the level of tax evasion. Fixed asset intensity, in addition to leverage, is a factor that influences tax avoidance. The ability of a corporation to invest its capital in fixed assets is measured by fixed asset intensity. This investment has a direct impact on tax evasion policies (Lee et al., 2020; Rachmat & Al, 2021; Tsai et al., 2021). In Indonesia, Article l 6 of the Tax Law No. 36 of 2008 states that companies may use cost elements that the taxation authority has determined as income deductions. Based on the situation above, the question arises: is there a significant difference between the level of leverage, fixed asset intensity, and tax avoidance before and during the COVID-19 pandemic?

2. Literature Review

2.1. Agency Theory

Agency theory relates to shareholders and company managers. Agency theory is a principle that is used to explain and resolve issues in the relationship between business principals and their agents. Most commonly, that relationship is the one between shareholders, principals, and company executives, as agents (Handayani & Ibrani, 2019). Moreover, this theory relates to tax avoidance by companies. Poor management of tax avoidance policies also impacts the company image (Efendi, 2020). In addition, Chen et al. (2021) mention agency theory as the basis for identifying and measuring the relative severity of the two types of agency conflict. The implication of this theory is that information asymmetry between agent and principal is one of the determining factors for the choice of accounting method. The presence of accounting information asymmetry generally refers to a situation where external users of financial statements cannot obtain complete information about the company because of the gap between the reported information and the actual economic reality of the company.

2.2. Tax Avoidance

Tax avoidance can be used by corporate taxpayers (companies) as an effort to minimize the payment of the tax burden that the company will pay to the state treasury. Oktaviani et al. (2021) and Wicaksono and Oktaviani (2021) stated that tax avoidance is carried out legally and does not violate the statutory provisions set by the government by taking advantage of loopholes in tax regulations. Likewise, if a company wants to practice taxation, the company must be able to understand the current and future tax regulations by taking advantage of loopholes in tax regulations. The company’s actions are likely to be legitimate and will not break tax requirements. Tax evasion is a lawful approach to reduce one’s tax burden without breaking the law (Mindzak & Zeng, 2019). The cash effective rate was used to calculate tax avoidance in this study (CETR). Divide income tax payments by cash, then divide by profit before taxes to get this percentage (Sunarto et al., 2021; Wicaksono & Oktaviani, 2021).

2.3. Leverage

Leverage is a metric that indicates how much of a company’s assets are financed through debt. Companies with a high level of debt will have to pay interest. The cost is deducted from your taxable income. As a result, the bigger the leverage, the higher the likelihood of corporate tax evasion. Leverage is also a ratio that describes the level of risk that a firm face, and it is calculated by dividing total debt by total assets. As a result, the ratio employed in this investigation was DAR. This DAR ratio can be used to determine how much debt is used to finance a company’s assets (liabilities) (Oktaviani et al., 2021). In addition, leverage is an integral part of the tax avoidance policy. Leverage aims to stimulate the company’s strength to stay alive. This policy is a short term policy for the company’s sustainability (Pinheiro & Luís, 2020).

2.4. Fixed Asset Intensity

The ability of a firm to invest its money in fixed assets is referred to as fixed asset intensity (Laschewski & Nasev, 2021;   et al., 2021; Yu et al., 2021). In terms of taxation, the investment option in the form of fixed assets is in terms of depreciation expense. Because the amount of depreciation expense created by fixed assets causes a fall in corporate income, depreciation expense tied to ownership of fixed assets will affect the firm’s tax (Marfiana & Putra, 2021; Oktaviani et al., 2021; Rahman & Hossain, 2020).

Valuation of fixed assets provides advantages and disadvantages for the company. Some of the advantages are as follows: a) Users of financial statements will be able to receive more accurate and exact information by looking at the balance sheet, which will reflect a reasonable position of wealth; b) The excess of revaluation will strengthen the capital structure of the company, which implies the ratio of loans (debt) to own capital (equity) or DER will improve; c) Companies can now withdraw funds through third-party loans or share issuances if DER improves. Revaluation of fixed assets, on the other hand, has the following disadvantages: a.) increased depreciation expense on fixed assets charged to profit or loss or cost of production; and b. in terms of taxation, the excess resulting from the revaluation of fixed assets is a tax object subject to a 10% final tax.

3. Hypotheses Development

Companies use the information they have while preparing their tax returns. The information used is heavily influenced by the environment. Although not directly related to the dynamics of tax planning, the non-economic environment cannot be isolated from this activity (Ahmad et al., 2021; Alsaadi, 2020; Xu & Zeng, 2016). Furthermore, a variety of events have an impact on tax planning policy in the form of tax avoidance. These occasions have distinct characteristics. A COVID-19 pandemic, in this situation, is an unplanned occurrence that does not occur every year. However, a pandemic can strike at any time, causing the company’s worth to plummet (Henderson & Elliot, 2021). Based on the arguments and findings of previous studies, the research hypotheses are as follows:

H1: Is there a significant difference between the company’s tax avoidance ratio before and during the ongoing COVID-19 pandemic?

H2: Is there a significant difference between the leverage ratio before and during the ongoing COVID-19 pandemic?

H3: Is there a significant difference between the fixed asset intensity ratio before and during the ongoing COVID-19 pandemic?

4. Research Methods

The approach used in this study was a quantitative one that included hypothesis testing. Statistical Product and Solution Services were used to process the research data (SPSS). The paired sample t-test was used to evaluate the hypotheses. The purpose of this study was to compare tax avoidance practices before and after COVID-19. The data analysis technique used was a descriptive statistical test to examine the extent to which manufacturing companies listed on the Indonesia Stock Exchange used tax avoidance. Previously, existing data would be evaluated for normality using the Kolmogorov-Smirnov test method to determine data normality. After the normality test was carried out, the data was analyzed employing a paired sample t-test. In addition, the type of data used in this study was secondary data in the form of financial reports, namely annual reports from manufacturing companies listed on the Indonesia Stock Exchange, taken directly from the Indonesian Stock Exchange portal.

Manufacturing companies listed on the Indonesia Stock Exchange (IDX) from 2018 to 2020 were the subject of this research. The purposive sample approach was used in this study, and the following criteria were applied: 1) manufacturing companies that have been listed on the Indonesia Stock Exchange for three years in a row, 2) manufacturing companies with good financial reports for the 2017–2020 period, and 3) manufacturing companies with a CETR score of less than one. 54 companies were chosen as study samples based on the features of the sample selection described above.

5. Results and Discussion

The data processing results related to this research began by looking at each research variable’s mean (or average value). The number of companies employed in the study was 54, according to Table 2. In addition, three years of observation were used in this study, namely 2018, 2019, and 2020. The years 2018 and 2019 are before the occurrence of COVID-19 in Indonesia, while 2020 is the year of the occurrence of COVID-19 in Indonesia.

Table 2: Research Result

In this study, the mean values of the variables of tax avoidance, leverage, and fixed assets intensity were above the standard deviation value. With a mean of 0.2628, the lowest tax avoidance value happened in 2018, while the highest tax avoidance level occurred in 2019. The maximum mean value for the leverage variable was 0.3554 in 2018, with the lowest value of 0.3519 in 2020 when the COVID-19 happened. The fixed asset intensity ratio, which had the highest mean in 2018 with a value of 0.3943 and the lowest in 2020 over the COVID-19 period with a value of 0.3833, demonstrates a similar trend.

The next step was to check that each variable passed the normalcy test. Table 1 shows that the variables of tax avoidance, leverage, and fixed asset intensity were broadly distributed, with an Asymp value of Sig. (2-tailed) greater than 0.05. During the COVID-19 period, the least significant level of each variable was attained in 2020, with a value of 0.0114 for tax evasion, 0.696 for leverage, and 0.905 for fixed asset intensity.

Table 1: Normality Test Result

In addition to looking at the results related to the normality test in Table 1, Table 2 also describes the results of the paired sample t-test. This test aimed to answer the hypotheses developed in the research.

The company’s tax avoidance ratio before and during the ongoing COVID-19 pandemic differed significantly, according to Hypothesis 1. The correlation of pre-COVID-19 measures in the 2019 period and the 2020 period during the COVID-19 period had a positive correlation of 0.292, with a significant level of 0.32, according to the results in Table 2. It denotes the consistency of data from the pre- COVID-19 and current COVID-19 periods. Furthermore, the sig> 0.05 value of 0.300 was found in the independent sample t-test analysis for hypothesis 1. Based on these findings, it can be inferred that the tax avoidance ratio did not differ between the pre-COVID-19 era in 2019 and the current COVID-19 period in 2020. The findings of this study agree with Lind (2020), who claimed that the level of tax avoidance among Chinese, Swedish, and Danish state firms was the same. It happened because the tax avoidance policy is based on short-term observations in a country’s fiscal policy.

Aside from the findings on tax avoidance trends in Indonesian manufacturing enterprises, the findings of this study also provided answers to questions on variable reactions affecting tax avoidance. The leverage ratio before and during the ongoing COVID-19 pandemic differed significantly, according to Hypothesis 2. Table 2 shows that the measurement correlation for the 2019 period as compared to the pre-COVID-19 era was 0.895, with a significance value of 0.000. As a result of this finding, it may be stated that the leverage ratio was aligned before and during the COVID-19 period. Moreover, the independent sample t-test analysis results for hypothesis 2 related to leverage showed the value of sig > 0.05, with a value of 0.761. Based on these results, it can be concluded that there was no difference in the leverage ratio in the pre-COVID-19 period in 2019 and during the COVID-19 period in 2020. The results of this study also corroborate with Dakhli (2021), and Pinheiro and Luís (2020), who affirmed that the leverage policy is short term and is allowed to maintain the company’s sustainability.

The study’s third hypothesis indicated that the fixed asset intensity ratio differed significantly before and during the ongoing COVID-19 pandemic. Table 2 shows that there was a positive correlation of 0.965 between the fixed asset intensity ratio measurement before COVID-19 in 2019 and the COVID-19 period in 2020, with a significant level of 0.000. It denotes a convergence of fixed asset intensity data before COVID-19 in 2019 and the COVID-19 period in 2020. Furthermore, the findings of the independent sample t-test analysis for hypothesis 1 revealed a sig > 0.05 value of 0.477. Based on these findings, it can be inferred that the fixed asset intensity ratio did not differ between the pre- COVID-19 period in 2019 and the COVID-19 period in 2020. The study results are in line with Emmanuel Iatridis and Kilirgiotis (2012), Marfiana and Putra (2021), and Rahman and Hossain (2020), who stated that fixed asset intensity is part of the company’s short-term policy that can be implemented in all situations. Fixed asset intensity in the form of revaluation of fixed assets is permitted since taxes are imposed on the transaction activities.

Figure 1 shows an overview of the tax avoidance trend in Indonesia, in addition to the sources in Tables 1 and 2. Figure 1 shows how the value of the tax avoidance, leverage, and fixed asset intensity ratio has changed over time. The graph above starts with a comparison of pre-COVID-19 values from 2018 and 2019. The tax evasion trend findings revealed an increase of 0.0321; however, this number decreased by 0.274 in the COVID-19 period in 2020. The leverage ratio and fixed asset intensity results, on the other hand, were rather steady. The movement in two years of pre- COVID-19 observations (2018 and 2019) and the COVID-19 period (2020) portrayed a straight line as a kind of ratio stability, as seen in Figure 1. This pattern is almost identical to that seen in Sweden and England. The results of this study are consistent with Azad et al. (2021) and Saka et al. (2019).

Figure 1: Trends Elements of Tax Avoidance

6. Conclusion

The researchers conclude that there was no difference in the trend of tax avoidance between the pre-COVID-19 and COVID-19 periods based on their data. There was also no significant difference in the level of leverage and fixed asset intensity. Furthermore, this research shows that tax avoidance policies are highly dependent on taxpayers, with external influences being small (Frank et al., 2008; Oktaviani et al., 2021; Sunarto et al., 2021). There was also no difference in this study due to tax avoidance policy, which is a short-term fiscal policy adopted by all governments to ensure the company’s long-term viability (Azad et al., 2021; Dzigbede & Pathak, 2020; Estevão, 2020).

However, this study was limited to the Indonesian context, so the generalizability of the findings would be limited. As a result, it is suggested that a more thorough sample be taken by increasing the observation duration or widening the type of sector studied.