Economics and Business
Quarterly Reviews
ISSN 2775-9237 (Online)
Published: 26 September 2018
Role of Audit Committee in Tax Avoidance of Family and Non-Family Firms: Evidence from Indonesia
Elisa Tjondro, Virginia Olivia
Petra Christian University, Indonesia
Download Full-Text Pdf
10.31014/aior.1992.01.03.34
Abstract
Companies often use tax avoidance and cost of debt substitutionally to achieve the desired marginal tax rate, without attracting the attention of the Tax Department of the State. We examine the role of the audit committee in supervising and reducing the trade-off practices of 222 public companies with 1.101 observations in Indonesia from 2011 – 2015 (before the tax amnesty program in 2016). We also examine the structure of company ownership (family and non-family firms) determines the effectiveness of the role of the audit committee in reducing the trade-off between tax avoidance and cost of debt. Data were analyzed using multiple regression data panel with pooled least square. Proxy of tax avoidance in this study uses Lim (2011), while the indicator of the audit committee uses the proportion of the audit committee compared to the number boards of commissioners, in dummy variable. The results suggest that the role of the audit committee is moderated the trade-off between tax avoidance and cost of debt, but in a contrary way. The role of the audit committee is not proved to reduce the trade-off practices, on the contrary increase the cost of debt which can result in reducing tax payments and increasing tax risks. After the advanced analysis, we found evidence that the role of the audit committee is stronger in non-family firms than in family firms. The moderation effect of audit committee found not significant in family companies, though have a significant effect on non-family companies.
References
Anderson, R. C., Mansi, S. A., & Reeb, D. M. (2004). Board Characteristics, Accounting Report Integrity and The Cost of Debt. Journal of Accounting and Economics, 37 (3), 315-342.
Burkart, M. F., Panunzi, A., & Shleifer. (2003). Family Firms. J. Finance, 58, 2167-2202.
Carney, R. W., & Hamilton-hart, N. (2015). Bulletin of Indonesian Economic Studies What Do Changes in Corporate Ownership in Indonesia Tell Us ?, (April), 37–41. https://doi.org/10.1080/00074918.2015.1016570
Caselli, F., & Gennaioli, N. (2003). Dynastic Management, January, NBER Working Paper No. w9442. Available at SSRN: https://ssrn.com/abstract=370426
Casson, M. (1999) The Economics of The Family Firm. Scandinavian Economic History Review, 47 (1), 10-23.
Chami, R. (2001). What is Different about Family Business? International Monetary Fund Working Paper.
Chairman of Capital Market and Financial Institutions Supervisory Republic of Indonesia. (2012). Decision No. 643 of 2012 about Establishment and Guidelines of Work Implementation Audit Committee.
Claessens, S., Djankov, S., & Lang, L.H.P. (2000). The Separation of Ownership and Control in East Asian Corporations. Journal of Financial Economics, 58, 81-112.
Claessens, S., & Fan, J.P.H. (2002). Corporate Governance in Asia: A Survey. International Review of Finance, 3 (2), 71-103.
Davila, T., & Wouters, M. (2005). Managing budget emphasis through the explicit design of conditional budgetary slack. Accounting, Organizations and Society, 30(7/8), 587-608.
DeAngelo, H., & Masulis, R. W. (1980). Optimal Capital Structure under Corporate and Personal Taxation. J Financ Econ 8:3–29.
Dechow, P.M., Sloan, R.G., & Sweeney, A.P. (1995). Detecting Earning Management. The Accounting Review, 70 (2), 193-225.
Deloitte. (2014). Risk, Uncertainty, [G1] and Opportunity in A Changing Tax Landscape: 2014 Asia Pacific Tax Complexity Survey.
Deloitte. (2017). Shifting Sands: Risk and Reform in Uncertainty Times 2017 Asia Pacific Tax Complexity Survey.
Demsetz, H. (1983). The Structure of Ownership and The Theory of The Firm. The Journal of Law Economics, 26 (2), 375-390.
Desai, M. A., & Dharmapala, D. (2009). Corporate tax Avoidance and Firm Value. The Review of Economics and Statistics, 91 (3), 537-546.
Directorate General of Tax Ministry of Finance. (2003). Decision No. 218 of 2003 about Instructions for Implementation of Regulations and Rehabilitation of Good Name of Taxable Taxer Directorate General of Taxes.
Directorate General of Tax Ministry of Finance. (2000). Act No. 19 of 2000 about
Amendment to Act No. 19 of 1997 on Tax Collection by a Forced Letter.
Elgood, T., Paroissien, I., & Quimby, L. (2004). Tax Risk Management. https://www.pwc.co.za/en/assets/pdf/pwc-tax-risk-management-guide.pdf
Erasmus, D. N. (2014). South Africa-Tax Risk Management. Topical Analysis IBFD. http://online.ibfd.org.tjsl.idm.oclc.org/collections/rmtp/printversion/rmtp_za.html
Faccio, M., & Lang, L.H.P. (2002). The Ultimate Ownership of Western European Corporations. Journal of Financial Economics, 65, 365-395.
Ferreira, I. (2008). The Effect of Audit committee composition and structure on the performance of audit committees. Meditari Accountancy Research, 16 (2), 89-106. http://dx.doi.org/10.1108/10222529200800014
Ghosh, D., & Olsen, L. (2008). Environmental Uncertainty and Managers’ Use of Discretionary Accruals. http://ssrn.com/abstract=1323790
Graham, J. R., & Tucker, A. L. (2006). Tax shelters and corporate debt policy $, 81, 563–594. https://doi.org/10.1016/j.jfineco.2005.09.002
Hanlon, M., & Slemrod, J. (2009). What does tax aggressiveness signal ? Evidence from stock price reactions to news about tax shelter involvement. Journal of Public Economics, 93(1–2), 126–141.
Huang, H., Sun, L., & Zhang, J. (2017). Environmental Uncertainty and Tax Avoidance. Advances in Taxation. https://doi.org/10.1108/S1058-749720170000024002
Indrastiti, N. (2016). Tarif PPh Badan Turun, Pamor Emiten Naik. Kontan.(Online), 18 Agustus 2016. (http://investasi.kontan.co.id/news/tarif-pph-badan-turun-pamor-emiten-naik, diakses 20 Agustus 2017).
Indonesia Investments. (2016, February 19). Financial Authorities to Cut Indonesia’s Lending Mortgage Rates. Retrieved from https://www.indonesia-investments.com/news/todays-headlines/financial-authorities-to-cut-indonesia-s-lending-mortgage-rates/item6511?
Izma, N. (2013). Empowering Audit Committee. Accountants Today. March/April 2013.
James, H.Jr. (1999). Owner as Manager, Extended Horizons, and The Family Firm. International Journal of The Economics of Business, 6 (1), 41-55.
KPMG. (2007). Tax Governance Institute – Tax Risk Management E-survey. Internet: https://erm.ncsu.edu/library/article/tax-risk-management.
KPMG's Audit Committee Forum. (2006). Position Paper 1. What makes for an effective audit committee?
http://www.kpmg.co.za/document_store/ACF%20Position%20Paper%201.pdf.
Lim, Y. (2011). Tax avoidance, cost of debt and shareholder activism : Evidence from Korea. Journal of Banking and Finance, 35(2), 456–470.
Lim, Y. (2012). Tax avoidance and underleveraged puzzle : Korean evidence. Review of Quantitative Finance and Accounting, 39 (3), 333–360.
Maury, B. (2006). Corporate Performance, Corporate Governance and Top Executive Turnover in Finland. European Financial Management, 12 (2), 221-248.
Shleifer, A., & Vishny, R. W. (1997). A Survey of Corporate Governance. The Journal of Finance, LII (2), 737-783.
Stein, J. C. (1989). Efficient Capital Markets, Inefficient Firms, A Model of Myopic Corporate Behavior. The Quarterly Journal of Economics, November, 655-669.
Schallheim, J., & Wells, K. (2008). Debt and Taxes: A New Measure for Non-debt Tax Shield. Retrieved fromhttps://www.researchgate.net/profile/Kyle_Wells/publication/228388706_Debt_and_taxes_A_new_measure_for_non-debt_tax_shields/links/577be34508aec3b743366b1a/Debt-and-taxes-A-new-measure-for-non-debt-tax-shields.pdf