Family ownership and tax avoidance: An analysis of foreign related party transactions and dividend payments

Abstract

This paper aims to investigate the effect of shareholder tax burden on related party transactions (RPTs) and dividend payments in Indonesia. The paper also investigates the moderating effect of family ownership on the relationship between shareholder tax burden, RPTs and dividend payments. The study uses 451 firm-year observations comprising hand-collected data for the period 2010–2015. The results suggest that a high shareholder tax burden has a positive effect on RPTs and a negative effect on dividend payments. This indicates that companies engage in tax avoidance through dividend minimization and RPTs. When faced with a high tax burden, companies tend to reduce dividends and increase their RPTs in a bid to reduce their tax burden. This research also shows that the positive effect of shareholder tax burden on RPTs is weakened with greater family ownership and that the negative effect of shareholder tax burden on dividend payments is strengthened by greater family ownership. This proves that Indonesian family firms tend to engage in tax avoidance through the use of dividend mechanisms as opposed to RPTs.