THE DETERMINANTS AND CONSEQUENCES OF TAX AVOIDANCE IN INDONESIA:THE EFFECTS OF TOP MANAGEMENT CHARACTERISTICS AND CAPITAL STRUCTURE

Abstract

Tax avoidance is the lawful minimization of income tax by employing legal methods. This study aims to assess the effects of top management characteristics and capital structure on tax avoidance, measured with Effective Tax Rate (ETR). Our longitudinal dataset of publicly listed Indonesian manufacturing corporations over the period of 2010-2015 produces 452 firm-year observations. Based on our statistical analysis using random effects regression model on the EViews software, we find that tax avoidance: (i) is negatively influenced by independent directors (ii) is positively affected by foreign directors; (iii) is influenced by capital structure, measured with firm leverage, and (iv) positively affects current profitability, measured with Return on Equity. Whereas the effects of female directors are found to be nonexistent. We also offer empirical evidence that characteristics of board of directors influence tax avoidance through financing decisions. The findings of this study suggest that firm capital structure determination is motivated by the intention to avoid taxes.