📈 economics

Does tax avoidance in Indonesia companies depend on factors such as political connections, fixed asset intensity, independent commissioners, profitability, and leverage?

This quantitative study of Indonesian banking firms from 2020 to 2023 reveals that while political connections, fixed asset intensity, profitability, and leverage significantly influence tax avoidance, the presence of independent commissioners does not have a statistically significant effect.

Original authors: Jenny Morasa, Icuk Rangga Bawono, Rio Dhani Laksana, Ilkay Aydogmus

Published 2026-07-06

📖 5 min read🧠 Deep dive

CC BY 4.0

Original authors: Jenny Morasa, Icuk Rangga Bawono, Rio Dhani Laksana, Ilkay Aydogmus

Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). ✨ This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer

Imagine a group of bank managers trying to figure out how to keep as much of their company's money as possible, rather than handing a large chunk over to the government in taxes. This research paper is like a detective story that investigates five specific clues to see if they help these banks "hide" more of their money from the taxman.

The researchers looked at 172 Indonesian banks over a few years and asked: Do these five things make a bank more likely to pay less tax?

Here is the breakdown of the five clues, explained with simple analogies:

1. The "VIP Pass" (Political Connections)

The Idea: Does having friends in high places (politicians or government officials) help a bank pay less tax?
The Finding: Yes.
The Analogy: Think of political connections like having a "VIP Pass" to a club. If a bank has a board member who is also a politician or close to the government, it's like having a backstage pass. The study found these banks are better at avoiding taxes. They might get special warnings about audits, easier access to loans, or just a general "nod" from the government that lets them be more aggressive in their tax planning. It's like having a friend in the security line who lets you skip the long queue.

2. The "Heavy Backpack" (Fixed Asset Intensity)

The Idea: Does owning a lot of heavy machinery, buildings, or equipment help a bank pay less tax?
The Finding: Yes.
The Analogy: Imagine you buy a giant, heavy backpack. Every year, the backpack gets a little bit more worn out. In accounting, this "wear and tear" is called depreciation, and it counts as an expense. The more heavy backpacks (fixed assets) a bank owns, the more "wear and tear" they can claim as a cost. Since you only pay tax on the money you keep after expenses, a bigger backpack means a bigger expense, which means less taxable profit. It's like saying, "I can't pay you tax on my profit because I spent so much on my heavy backpack!"

3. The "Referees" (Independent Commissioners)

The Idea: Does having "referees" on the board (people who aren't related to the owners or managers) stop the bank from trying to hide money?
The Finding: No.
The Analogy: Independent commissioners are supposed to be the referees in a soccer game, making sure the players (the managers) follow the rules. The researchers hoped that having more referees would stop the team from cheating (tax avoidance). However, the study found that the referees were asleep at the wheel. Even though the banks had the required number of independent commissioners, they didn't actually stop the managers from finding ways to lower their taxes. The referees were there, but they didn't blow the whistle.

4. The "Fat Wallet" (Profitability)

The Idea: If a bank is making a lot of money, does it try harder to avoid taxes?
The Finding: Yes.
The Analogy: Think of a bank with a "fat wallet" (high profits). The more money you have, the more the government wants to take a slice. The study found that when a bank is very profitable, it gets very creative and aggressive in trying to shrink that wallet just enough to pay less tax. It's like a person who, upon winning the lottery, immediately starts looking for every possible tax loophole to keep more of their winnings. The richer the bank, the more motivated it is to play the tax game.

5. The "Loan Ladder" (Leverage)

The Idea: Does borrowing a lot of money (debt) help a bank pay less tax?
The Finding: Yes.
The Analogy: Imagine you are climbing a ladder made of loans. Every rung you climb costs you money in "interest payments." The government actually lets you count these interest payments as a cost before calculating your tax. So, the more loans (debt) a bank takes on, the higher the interest costs, and the lower the "profit" they report to the taxman. It's like using a loan ladder to climb up to a lower tax bracket. The more you borrow, the more you can write off, and the less tax you pay.

The Big Picture

The researchers combined all these clues into one big equation. They found that all five factors together explain about 15% of why banks avoid taxes.

Political connections, heavy assets, high profits, and loans all act like levers that banks pull to lower their tax bills.
Independent commissioners (the referees) were supposed to stop this, but they didn't seem to have any real power to stop the managers in this study.

The Bottom Line: In Indonesia's banking sector, if you want to know if a bank is likely to pay less tax, look at who they know (politics), what they own (assets), how much money they make (profit), and how much they owe (debt). If they have strong connections, lots of assets, high profits, and big loans, they are likely using those tools to keep more money in their own pockets. The "referees" on the board, however, aren't doing much to stop them.

Technical Summary: Determinants of Tax Avoidance in Indonesian Banking Sector

Problem Statement
The research addresses the persistent challenge of low tax compliance in Indonesia, where the tax ratio (11.5% in 2023) lags significantly behind middle-income (14–15%) and developed nations (24–26%). Despite tax reforms shifting the system to self-assessment and efforts to optimize collection, a gap remains between tax revenue targets and realization. The study investigates the specific drivers of tax avoidance within the banking sector listed on the Indonesia Stock Exchange (IDX). It posits that while tax avoidance is a legal practice exploiting gray areas, it significantly reduces state revenue. The core problem is determining whether specific corporate characteristics—political connections, fixed asset intensity, independent commissioners, profitability, and leverage—systematically influence the extent of tax avoidance in these financial institutions.

Methodology
The study employs a quantitative research approach utilizing a positivist framework to test established hypotheses.

Population and Sample: The population consists of all banking sector companies listed on the IDX from 2020 to 2023. Using purposive sampling, the final sample comprised 172 observations derived from 215 initial potential candidates. Exclusion criteria included banks that did not publish financial statements in Rupiah, those reporting negative profits, those with incomplete financial statements, and data outliers.
Variables and Measurement:
- Dependent Variable: Tax Avoidance (TA), measured by the Effective Tax Rate (ETR). The study defines TA as the inverse of ETR ($TA = -ETR$), where a lower ETR indicates higher tax avoidance.
- Independent Variables:
  - Political Connections (DKP): A dummy variable (1 if the bank is a State-Owned Enterprise (SOE) or has directors/commissioners affiliated with political parties or government officials; 0 otherwise).
  - Fixed Asset Intensity (IAT): Calculated as Total Fixed Assets divided by Total Assets.
  - Independent Commissioners (KI): The ratio of independent commissioners to the total number of commissioners.
  - Profitability (PRO): Measured by Return on Assets (ROA).
  - Leverage (LEV): Measured by the Debt to Equity ratio.
Data Analysis: The study utilized multiple linear regression analysis. Prior to hypothesis testing, the data underwent classical assumption tests for normality, multicollinearity, heteroscedasticity, and autocorrelation, all of which were satisfied.

Key Results
The regression analysis yielded the following findings regarding the impact of independent variables on tax avoidance:

Political Connections: Significant negative impact ( $\beta = -2.109, p = 0.023$ ). Banks with political ties exhibit lower Effective Tax Rates, indicating a higher propensity for tax avoidance.
Fixed Asset Intensity: Significant negative impact ( $\beta = -0.517, p = 0.010$ ). Higher fixed asset intensity correlates with lower ETR, suggesting that depreciation expenses are utilized to reduce taxable income.
Independent Commissioners: No significant impact ( $\beta = 1.122, p = 0.754$ ). The presence of independent commissioners did not statistically influence the level of tax avoidance.
Profitability: Significant negative impact ( $\beta = -1.431, p = 0.003$ ). Higher profitability is associated with lower ETR, implying that profitable banks engage in more aggressive tax planning.
Leverage: Significant negative impact ( $\beta = -0.758, p = 0.000$ ). Higher leverage leads to lower ETR, as interest expenses are deducted from taxable income.

Collective Impact:
The F-test confirmed that all independent variables simultaneously influence tax avoidance ( $F_{count} = 6.752, p = 0.000$ ). However, the Adjusted $R^2$ value of 0.151 indicates that these five factors collectively explain only 15.1% of the variation in tax avoidance practices, leaving 84.9% attributable to other factors not examined in this study.

Significance and Claims
The paper claims to provide empirical evidence supporting the Political Cost Hypothesis within the context of Positive Accounting Theory. It asserts that:

Political ties serve as a mechanism for banks to reduce audit risks and access government protections, thereby facilitating aggressive tax strategies.
Fixed assets and leverage are utilized as legitimate accounting tools (depreciation and interest deductions) to legally minimize tax liabilities.
Profitability drives management to utilize tax planning to maximize firm value, consistent with the bonus plan hypothesis.
Independent commissioners, despite being a requirement for Good Corporate Governance (GCG) and intended to oversee management, failed to act as an effective deterrent against tax avoidance in the sampled banking sector. The study suggests that while they meet regulatory quotas (minimum 30%), they lack the actual power to influence board decisions regarding tax strategies.

The authors conclude that while these factors are statistically significant drivers of tax avoidance in Indonesian banks, the low explanatory power ( $R^2$ ) highlights the complexity of the issue and the need for further research involving mixed methodologies and additional variables to fully understand the phenomenon.