Analysis of Tax Aggressiveness and
Financial Reporting Aggressiveness on
Public Companies in Indonesia
2010-2014
Agenda
Introduction
Introduction
Literature Review
Literature Review
Research Method
Research Method
Empiricial Result
Empiricial Result
Conclusion
Conclusion
Introduction
• The quality of financial statements is important to stakeholder in making
decisions related to investment, credit and improves market efficiency.
• The intended use of the financial statements may create incentives for the
management company to manipulate financial statements in order to report the company's best performance and meet the expectations of stakeholders. Companies are trying to manage their net income profit which is often called by financial reporting aggressiveness.
• Financial reporting aggressiveness actions can have negative impacts for the
company through the payment of taxes.
• Frank et al (2009) states that the tax planning by lowering the value of the
taxable income, either through tax evasion or not, is referred to tax aggressiveness.
• Tax aggressiveness can be done in various ways, including finding a gap
(loopholes) contained in the tax laws so often referred to as tax avoidance, tax sheltering and tax management (Hanlon and Heitzman, 2010).
Introduction
• Frank et al (2009) conducted a research on the relationship of
tax and financial reporting aggressiveness in America using
residual permanent differences (DTAX) as the measurement. He found that there is a strong positive relation between these two constructs. It means that the company able to increase the level of corporate profits but reported a low tax payment.
• Tanya and Fifth (2012) developed another way to measures tax
aggressiveness, that called abnormal book tax differences (ABTD).
• The purpose:
– Expand the Frank et al (2009) by using Indonesian capital market data
– Using the other proxy of tax aggressiveness that developed by Tanya and Fifth (2012)
Literature Review
Quality of Financial Reporting
• Financial statements contains a lot of information that can be used by stakeholders to assist the decision making process.
• High financial statements quality can be used to make the right decision.
• To meet stockholder expectation, management used to do the
earning management to maximize profits and increase the value of the company's market value.
• This earnings management activities will impact the difference in
taxable income and hide the actual condition of the company.
• At which time the company reported accounting profit is higher than
the burden of the tax to be paid will be higher also.
• Such conditions indicate a tradeoff between earnings management
activities and management of corporate taxes.
Literature Review
Financial Reporting Aggressiveness
• Frank et al (2009) states that the activities aimed at increasing the
company's profit with earnings management, whether appropriate or not in accordance with generally accepted accounting principles known as the financial reporting aggressiveness.
• In this study, financial reporting aggressiveness have the same context with earnings management.
• Aggressive financial reporting can be measured by discretionary accruals.
• Several measure that usually used in detected aggressive financial are Model Jones (1991), Dechow et al (1995), Kasznik (1999) and Kothari (2005).
Literature Review
Tax Aggressiveness
• Tax avoidance is define as the reduction of explicit taxes ( Hanlon and
Heitzman, 2010 ;Dyreng et al., 2008).
• The tax aggressiveness represents a continuum of tax planning strategies of the
company.
• Different people will have different opinions about the degree of aggressiveness
of a transaction.
• Tax planning behavior of the company and can be discuss in various terms such
as tax aggressiveness, tax sheltering, tax evasion or non-compliance.
• Hanlon and Heitzman (2010) emphasizes that the definition of tax
aggressiveness are not limited to specific measurement methods.
• Tax avoidance measure by several methods such as effective tax rate, long run
effective tax rate, book tax differences, discretionary or abnormal measure of tax avoidance, unrecognized tax benefits and tax shelter firms.
Literature Review
Tax Aggressiveness Measurement
• Frank et al (2009) is the first literature conducted research about the relationship of tax and financial reporting aggressiveness.
• Using their own of proxy of discretionary permanent differences (DTAX), Frank et al (2009) include that tax and financial reporting aggressiveness are significantly and positively related.
• It indicates that there is nonconformity between financial
accounting standards and tax law allows firm to manage book income upward and taxable income downward.
• Similar studies have also been carried out in Indonesia by
Kamila (2014) and Ridha (2014). The results show that there is no tradeoff between tax and financial reporting aggressiveness in Indonesia’s manufacturing company.
Literature Review
Tax Aggressiveness Measurement
• Tang and Fifth (2012) develop ABTD and NBTD measures.
• Tang and Firth (2012) using estimation models that can divide the book-tax differences into two sources, normal and abnormal book book-tax
differences. Normal book-tax differences (NBTD) is estimated by regression of total BTDs on discretionary items and using the unexplained portion of BTDs as measure of ABTD.
• Tang and Firth (2012) proved that ABTD negative effect on earnings
because it contains information of relevance earnings management and tax management.
Literature Review
Hyphotesis
10 H1 Tax aggressiveness measured by discretionary permanent
differences (DTAX) positively related to financial reporting aggressiveness.
H2 Financial reporting aggressiveness positively related with tax aggressiveness measured by discretionary permanent
differences (DTAX).
H3. Tax aggressiveness measured by abnormal book tax
differences (ABTD) positively related to financial reporting aggressiveness.
Research Method
Models
11
DACCit : dicretionary accrual
DTAXit : dicretionary permanent differences
ABTDit : abnormal book tax differences
PTROAit : pretax income divide by total asset at year t-1
LEVit : sum of long term debt divided by total asset
LCF_Dit : dummy variable that equals 1 when an entity reported loss
carry forwards
FOR_Dit : dummy that equals 1 when the value of foreign income > 0
Research Method
Models
12 DACCit : discretionary accrual
DTAXit : discretionary permanent differences ABTDit : abnormal book tax differences
PTROAit : pretax income divide by total asset at year t-1 LEVit : sum of long term debt divided by total asset
LCF_Dit : dummy variable that equals 1 when an entity reported loss carryforwards
FOR_Dit : dummy that equals 1 when the value of foreign income > 0
SIZEit : natural log of total assets
Research Method
Financial Reporting Aggressiveness Measurement
13
TACCit : total accruals = ((EBEIit +TTEit) – (CFOit+ITPit)) EBEIit : earning before extra ordinary item
TTEit : total tax expense
CFOit : cash flow from operating activities ITPit : income tax paid
∆REVit : change in sales from year t-1 to year t
∆ARit : change in account receivables from year t-1 to year t
PPEit : gross property, plant and equipment
ԑit discretionary accruals
Research Method
Tax Aggressiveness Measurement
14 BTD it = β0 + β1 ∆INVit + β2 ∆REV it + β3 NOL it + β4 TLU it + β5 BTD it-1 + ԑ it
BTDit : book tax differences
∆INVit : changes in gross fixed asset from year t-1 to
year t
∆REVitt : change in sales from year t-1 to year t
TLUit : the value of tax losses utilized
NOLit : net operating loss
BTDit-1 : book tax differences from year t-1
it
Ԑ : error term
Research Method
Tax Aggressiveness Measurement
15 PERMDIFFit = α0 + α1INTANGit + α2UNCONit + α3MIit + α4CSTEit +
α5∆NOLit + α6LAGPERMit + εit
The proxy used in this study are DTAX adopted by Frank et al (2009) and Kamila (2014). The discretionary permanent differences is the residual value of PERMDIFF’s equation regression.
PERMDIFFit : permanent differences divided by total aset at t-1
INTANGit : goodwill and other intangibles divided by total aset at t-1
UNCONit : consolidated net income (loss) divided by total aset at t-1
MIit : Minority net income or loss divided by total aset at t-1
CSTEit : current state tax expense divided by total aset at t-1
∆NOLit : changes in net operating loss carryforward divided by total
aset at t-1
LAGPERMit : permanent differences in year t-1 divided by total aset at t-1
Research Method
16 • Listed company in IDX on 2010 – 2014
• Not industry specific that have a special treatment in taxation ie: construction, oil and gas, shipping.
• Not financial industry • No corporate action
Empirical Result
Empirical Result
Empirical Result
19
Hypothesis DPERM ABTD
Coeff p-value Coeff p-value
DPERM/ABTD + .3002203 0.000*** .2521715 0.000***
PTROA - .174766 0.000*** .1827347 0.000***
LEV + -.0078229 0.333 -.0063209 0.030**
LCF-D + -.0130299 0.043** -.0169055 0.001***
FOR-D + .0033923 0.365 .0038373 0.003***
SIZE - -.0040113 0.050** -.0045051 0.009***
CONS .0632194 0.074 .0835633 0.000
N 785 785
R-square 0.1435 0.1445
Empirical Result
20 Hypothesis
DPERM ABTD
Coeff p-value Coeff Coeff
DACC + .0442028 0.000*** .0572474 0.000***
PTROA - .1570568 0.000*** .1543425 0.000***
LEV + -.0105168 0.030** -.0184254 0.004***
LCF-D + -.0111278 0.001*** .0021973 0.320
FOR-D + .0115501 0.003*** .0119543 0.011**
SIZE - -.0025043 0.009*** -.0010009 0.224
CONS .0759007 0.000 .0092842 0.368
N 785 785
R-square 0.2150 0.1450
Empirical Result
21
Tax aggressiveness influence the financial reporting
aggressiveness and vice versa.
Both measurement DPERM and ABTD consistently have positive
influence to financial reporting aggressiveness.
ABTD as proxy to measuring tax aggressiveness show the
consistent result with DPERM .
Control variables effect on the research results also show a similar
value between DPERM and ABTD proxy.
The result refers to prior research by Hanlon and Heitzman (2010 )
which states that the various method of measurement of tax aggressiveness with permanent differences content show consistent results.
But in this study, ABTD can not be said to be better in measuring
Conclusion
22
Conclusion
• The results show that there is a positive and significant relation between tax
and financial reporting aggressiveness.
• This indicates that in accordance with the study of Frank et al (2009), a
public company in Indonesia does not face the problem of trade-offs in decision making related to the value of net income and tax payment.
• This may be an indication that the accounting rules and taxation Indonesia
has loopholes that can be exploited by companies to manage their book and tax income.
• The results also showed that aggressiveness measurement using a
permanent tax differences (DPERM) or abnormal book tax differences (ABTD) showed consistent results.
• This proves that the content of permanent differences in both proxies are
Conclusion
23
Implication
• The results show that in accordance with previous studies that
companies in Indonesia does not have a trad off in doing the tax and financial reporting aggressiveness.
• This indicates that the company can reduce taxable income without reducing net income for accounting purposes.
• So the regulator needed to increase awareness in examinations
because of of tax and financial reporting aggressiveness increasingly difficult to detect.
Conclusion
24
Limitation
Due to limited time , the study was conducted within only 5 years
period. Further research is recommended to add the study period for the activities of tax and financial reporting aggressiveness can be seen more reliably.
The model is limited research on the model of aggressiveness taxes
by Frank et al (2009 ) and Tang and Fifth ( 2012) as well as a model of financial reporting aggressiveness by modified Jones (Dechow et al, 1995). Further research can be done using different measuring methods.
This study also limited to controlling only five control variables, which
are PTROA , LEV , LCF_D , FOR_D and SIZE.
Further research can exploit the other variables such as family
