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Financial Derivatives Financial Leverage Intangibl
Financial Derivatives Financial Leverage Intangibl
This study aims to examine the effect of financial derivatives, financial leverage,
Article history: and intangible assets on transfer pricing aggressiveness. The samples are
Received date: 3 January 2020 nonfinancial companies listed on the Indonesia Stock Exchange (IDX) from 2012 to
Received in revised form: 24 February 2020 2016. Using a purposive sampling method, 44 selected company’s data chosen with
Accepted: 3 March 2020 220 total observations. The data is analyzed using multiple regression analysis with
Available online: 03 April 2020 panel data. The results suggest that financial derivatives, financial leverage, and
intangible assets have a positive effect on transfer pricing aggressiveness. This
research shows that financial derivatives in Indonesia, both with the aim of hedging
and with speculative purposes, have the same nature and are closely related to
profit shifting conducted by the company.
Keyword:
Transfer Pricing, Derivative Instrument,
Aggressiveness, Leverage, Intangible Asset Derivatif Keuangan, Leverage Keuangan, Aset Tak Berwujud dan
Agresivitas Harga Transfer: Bukti Empiris dari Perusahaan
Indonesian
Citation:
ABSTRAK
Yunidar, A., & Firmansyah, A. (2020). The
Effect Of Financial Derivatives, Financial Penelitian ini bertujuan untuk menguji pengaruh derivatif keuangan, leverage
Leverage And Intangible Assets On Transfer keuangan, dan aset tidak berwujud pada agresivitas penetapan harga transfer.
Pricing Aggressiveness. Jurnal Dinamika Sampel yang digunakan adalah perusahaan non finansial yang terdaftar di Bursa
Akuntansi dan Bisnis, 7(1), 1-14.
Efek Indonesia (BEI) dari tahun 2012 sampai dengan tahun 2016. Dengan
menggunakan metode purposive sampling, 44 data perusahaan yang dipilih dengan
220 total pengamatan. Data dianalisis dengan menggunakan analisis regresi
Kata Kunci: berganda dengan data panel. Hasil penelitian menunjukkan bahwa derivatif
Harga Transfer, Instrumen Derivatif, keuangan, leverage keuangan, dan aset tidak berwujud berpengaruh positif terhadap
Agresivitas, Leverage, Aset Tak Berwujud agresivitas penetapan harga transfer. Penelitian ini menunjukkan bahwa financial
derivative di Indonesia baik dengan tujuan hedging maupun dengan tujuan
spekulatif memiliki nature yang sama dan erat kaitannya dengan profit shifting
yang dilakukan oleh perusahaan.
of transfer pricing as a significant form of tax funds raises a fixed cost of interest expenses that
avoidance using income taxes from countries must be paid regardless of the level of corporate
with high tax rates to countries with lower tax earnings. Deductible interest expense from taxable
rates. In Indonesia, as one of the developing income can provide an incentive for the company;
countries, Foreign Investment Company (FIC) is hence the company prefers to fund its business
indicated to avoid taxes using transfer pricing from debt. It is reinforced by Badertscher, Katz, &
mechanisms. Rego (2009), stating that the company has the
The mechanism of tax avoidance through potential to obtain tax incentives by choosing to
transfer rates sometimes is influenced by finance its business from debt. Furthermore,
financial derivatives transactions. The experts of interest on debt can be a tax-deductible that
taxation identify the convenience derived from becomes an incentive company in doing tax
the use of derivative transactions that can be planning. Moreover, if debt transactions are
restructured, allowing taxpayers to take conducted with related parties whose expenses or
advantage of regulatory tax loopholes. It is in line loan interest can be deducted from the gross
with the rapidly increasing volume of financial income of the company.
derivatives transactions in the last two decades. In addition to financial derivative and
Oktavia & Martani (2013) showed an increase in financial leverage transactions, one of the
the volume of derivative transactions from transactions that companies also frequently make
Rp17,472.53 billion in 2001 to Rp60,705.55 to avoid taxes through transfer pricing
billion in 2009. aggressiveness is transactions related to
Currently, the provisions for taxation of intangible assets. Indonesia Tax Court
derivative transactions refer to general taxation documented concerning intangible assets disputes
provisions after the revocation of Government of are studied to understand the debate over issues
Indonesia Regulation Number 17/2009 concerning relating to transfer pricing aggressiveness of
Income Tax on Income from Derivative intangible property. In Indonesia, discussions on
Transactions. The taxpayer used Indonesia transfer pricing always use tangible goods as
Financial Accounting Standard Principles /PSAK their starting point.
No. 55 (IAI, 2018) because there are no specific The problem that often arises is how if
tax rules related to derivative transactions. Thus, transfer pricing aggressiveness that involves
there is often a discrepancy with the Indonesia Tax intangible transactions and the absence of data
Authority that corrects the charges arising from comparison. There are a total of 5 cases that have
the derivative transaction loss. The Indonesia Tax been resolved by the Indonesia Tax Court, where
Authority declared that it is defeated in cases of three cases were settled in 2010 to 2011 and two
derivative transactions due to weak regulations on other cases settled in 2002 and 2007 (Navarro et
derivative transactions (Santos, 2016). al., 2012) in (Muhammadi, Ahmad, & Habib.,
Another financial instrument which 2016).
potentially exploited for tax avoidance activities The risk of transfer pricing aggressiveness
through transfer pricing is long term debt. The may increase as the variations in the
financing decision includes an alternative source interpretation of transfer pricing aggressiveness
of funds that the company would use to run its assessments occur when intangible asset transfers
business. Regarding the financing structure, a (Grubert, 2003). According to Richardson,
company is considered to use financial leverage if Taylor, & Lanis (2013), the cost of research and
the company uses a loan or debt as a source of development that does not have a physical form
financing other than its capital. The use of these can allow companies to manipulate the
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tax-aggressive than those with low debt to equity subsidiaries abroad, regardless of whether the
ratio (Bernard et al., 2006). company has other related parties abroad or not.
In the practice of transfer pricing, a robust This study employs different proxies
alleged debt transaction between the company following Taylor, Richardson, & Lanis (2015),
and its affiliates are used to generate interest i.e., total assets intangible divided by total assets.
charges or loan charges that would be deducted Therefore, the last hypothesis in this research is:
from the company's gross income to reduce the H4: Intangible assets have a positive effect on
company's profit. Therefore, the hypothesis of transfer pricing aggressiveness.
this research is:
H3: Financial leverage has a positive effect on 3. Research Method
transfer pricing aggressiveness This study employs a quantitative method.
The sample is taken from the Indonesia Stock
Intangible Assets and Transfer Pricing Exchange (IDX) from 2012 to 2016. Sampling is
Aggressiveness conducted by purposive sampling based on
Positive accounting theory explains why several criteria, the selection of samples that are
accounting policy becomes a problem for conducted not randomly based on specific
companies and parties concerned with financial criteria. First, the company is engaged in the non-
statements, and for predicting accounting policies financial sector (excluding companies engaged in
to be chosen by the company under certain the financial and insurance sector). Companies
conditions. One of the evidence of the importance engaged in the financial sector are excluded
of intangible assets in transfer pricing because of differences in capital structure
aggressiveness is by considering the intangible characteristics. It is related to the use of leverage
assets in various stages of examination of transfer as one of the independent variables in this study.
pricing by Indonesia Tax Authority, both in the Second, the company is listed on IDX before
planning stage (risk analysis) and in the January 1, 2012.
implementation stage (function, asset, and risk This study uses 2012 as the first year
analysis). The risk of transfer pricing because, in that year, the financial statements of
aggressiveness would increase as the variations in public companies in Indonesia had used IFRS-
the interpretation of transfer pricing based financial accounting standards. The
aggressiveness assessments occur when standard also stipulates that the disclosure of
intangible asset transfers (Grubert, 2003). derivative instruments uses the fair value. Third,
It is similar to that of T Taylor, Richardson, the company has complete data related to the
& Lanis (2015) stated that intangible assets have variables studied, from 2012 to 2016. Fourth, the
a positive effect on transfer pricing company did not suffer losses during the study
aggressiveness. Although the research in period. After all, it could affect the measurement
Indonesia conducted by Waworuntu & of one of the author's research variables where
Hadisaputra (2016) resulted in the finding that the use of derivatives seem lower because it is
intangible assets variable negatively affect the going to happen financial loss company.
transfer pricing aggressiveness hence that there Accurately, for the sample of derivative
are differences in the effect, it may be due to the transactions, it would first distinguish between
full replication of (Richardson, Taylor, & Lanis, derivative transactions for common hedging
2013), including within the scope of research that purposes (economic goals) and hedging for
eliminates companies that do not have accounting purposes. Derivatives to be used are
derivative value transactions for accounting
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purposes (assets and liabilities) measured using The sum-score approach for calculating
the fair value of derivatives, by the provisions of transfer pricing aggressiveness is conducting
the disclosure of PSAK 60 (IAI, 2018). according to how to add the following indicators;
Furthermore, the derivative value would be then, the results are divided into seven criteria
differentiated into hedging or non-hedging namely (1) the existence of debt/interest-bearing
purposes (speculative purposes) by looking at the receivables to related parties, (2) exemption of
company's financial statements. debt / receivable from/to related parties, (3) any
The dependent variable in this study is the impairment of debts/receivables or uncollectible
Transfer Pricing Aggressiveness (TP). It is receivables from/to related parties, (4) the
measured using an index as has been conducted by existence of non-monetary liabilities
Richardson, Taylor, & Lanis (2013) and Taylor, (service/utilization of non-current assets/leases)
Richardson, & Lanis (2015). The index uses a among related parties, (5) the absence of a formal
sum-score approach that sums up to eight items document that can support the use of transfer
taken from the company's financial statements and pricing method used in transactions between
annual reports. related parties, (6) the existence of long-term
The index is an IRS's audit transfer audit check disposal of assets to/from related parties without
consisting of eight parts determining whether a commercial justification, and (7) the absence of
related party's transactions are commercially any justification may indicate that transactions
reasonable on a commercial basis, which provides between related parties have been reasonably
score one if appropriate and 0 otherwise. exercised.
However, there is one criterion of transfer pricing The independent variables in this study consist
aggressiveness, which is not taken in this research of financial derivatives, financial leverage, and
because it can be applied in Indonesia, which is intangible assets. Financial derivatives are divided
the 8th index criterion regarding the existence of into non-hedging and hedging purposes. Financial
loss transfer between related parties without derivatives variables are measured following Lee
commercial justification. The elimination of this (2016) as the fair value of non-hedging and
criterion must be conducted because there is no hedging derivative assets (liabilities) for
regulation regarding Group Taxation in Indonesia. accounting purposes is described as follows:
Where:
FVHDit = Fair Value of Hedging Derivatives Assets (Liabilities),
the fair value of derivative assets (liability) designated
for hedging purposes for the accounting purposes of the
company i year t
FVNHDit = Fair Value of Non-Hedging Derivatives Assets
(Liabilities), the fair value of a derivative (liability)
asset not designated as a hedge for the accounting
purposes of the company i year t
The fair value of the = The fair value of absolute assets (liabilities) derivatives
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The intangible assets utilization variable (Richardson, Taylor, & Lanis, 2013). It is
describes how firms utilize transactions related to measured by the number of intangible assets
intangible assets, both intellectual property and divided by total assets following Taylor,
research and development expenditures Richardson, & Lanis (2015) as follows:
This study employs three control variables, management to do earnings management by using
namely Return on Assets (ROA), Company Size the transfer pricing mechanism. The
(SIZE), and Cash Flow from Operating Activities measurement of this variable uses the proxy in
(CFOA). Profitability is a measure to assess the the form of the natural logarithm of total assets.
efficiency of capital use in a company by Furthermore, Cash Flow from Operating
comparing the capital used with the operating Activities (CFOA) variable follows Hanlon &
profit achieved. This study uses the measurement Heitzman (2010), who stated that some of the tax
of firm characteristics, according to Richardson, rules favored by corporations, such as tax
Taylor, & Lanis (2013), using ROA, calculated shelters, often provide information about a
from profit before tax divided by total assets. consistent cashflow flow by multinational
While based on research Nurjanah, Isnawati, & corporations. Therefore, the CFOA variable is
Sondakh (2016), firm size affects the transfer measured based on the cash flow value of the
pricing decision. The larger the size of a operating activity compared to the total assets.
company, the higher the incentive for
TPit =β0it+ β1 FVHDit + β2 FVNHDit + β3 LEVit + β4 INTANGit + β5 ROAit + β6 SIZEit + β7 CFOAit + εit.
Where:
The panel data study has three regression Model (REM). To strengthen the result of model
models, namely Ordinary Least Square (OLS), selection, the selection of a panel data regression
Fixed Effect Model (FEM), and Random Effect method consists of three data test, Chow test,
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Hausman test, and Lagrange Multiplier Test. Fixed Effect Model (FEM). The hypothesis test
Based on the test result, the most suitable panel results can be seen in Table 3.
data regression model for this research is the
Prob(F-stat.) 0.000
The effect of financial derivatives for hedging aspects by delaying the realization of derivative
purposes on transfer pricing aggressiveness profit. Regarding taxes, the company does not
The result of this study suggests that the pay taxes until derivatives earnings are realized.
transaction of the company's derivative In contrast, regarding accounting, the company
instruments for hedging purposes has a positive gains profit in the form of an increase in assets
effect on transfer pricing aggressiveness. and income in the financial statements. The
Research conducted by Santos (2016) and Lee company is indicated to utilize tax regulation
(2016) showed similar results, which proved that with the principle of realization in the derivative
derivative instruments for hedging purposes profit tax. About hedging transactions, unrealized
positively affect transfer pricing aggressiveness. derivative profits directly affect the company's
Transfer pricing aggressiveness used in this study net income so that the company benefits from an
is closely related to the tax aggressiveness of the increase in net income in the financial statements.
company. This result could also be interpreted as In contrast to non-hedging transactions, hedging
an increase in the condition of the transaction accounting requires the deletion of gain/loss on
derivative instruments of the company may cause hedging instruments on a hedged item's
aggressive transfer pricing increases. profit/loss. Also, the recognition of gain and loss
According to Lee (2016), related to hedging on changes in the fair value of hedging
activities, it is found that companies tend to opt instruments and hedged items in the same period
to delay the realization of derivative profit so that accounting for these changes directly
compared to realizing a loss in the current year to affect the company's income before tax.
reduce taxes. Regarding transfer pricing, The high derivative assets can increase the
derivative transactions for hedging purposes are company's tax expense. Derivative assets
performed with financial institutions and represent accumulated gain on changes in fair
counterparts with related parties. The company value of derivatives. However, the company
gains benefits from both the accounting and tax tends to postpone the realization of the derivative
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profit of the hedge until the settlement date, as it purposes are indicated to be more aggressive in
may be profitable regarding both accounting and tax avoidance through transfer pricing than firms
taxes. Differences in accounting standards and that have no or fewer derivative transactions for
tax laws result in the emergence of deferred tax hedging or non-hedging purposes for accounting
liabilities on the recognition of fair value changes purposes. However, transfer pricing activities are
based on accounting, while earnings change in closely related to the disclosure of transactions
fair value is not recognized under the tax rules as with related parties by PSAK No.7 (IAI, 2018).
it is based on the principle of realization. The For financial derivatives for speculative
temporary difference in the gain on the change in purposes, it is assumed that the company tends to
fair value of the derivative results in a high tax delay the realization of profit while accelerating
burden on the financial statements. Still, the the realization of derivative losses in the current
company does not pay tax on the profit increase year. It indicates companies are aggressively
in the year due to unrealized profit. Related to the reducing tax payments through derivative
aggressiveness of transfer pricing, the use of the transactions that are not designated for hedging,
principle of realization more reflects a more through a transfer of price transactions with their
aggressive behavior in tax avoidance because the respective parties. Financial derivatives for
company can delay or accelerate the realization speculative purposes can cause relatively
of derivative profits or losses by transferring significant losses due to the absence of offsetting
derivative profits or losses to related parties in with hedged items. Based on Article 6 paragraph
the country of destination. 1 of the Indonesia Income Tax Act, to become a
deduction of income, a loss must be a loss caused
The Effect of Financial Derivatives for by the activities of obtaining, collecting, and
Speculative Purposes on Transfer Pricing maintaining an income. In this regard, derivative
Aggressiveness transactions should not be designated for hedging
The result of this study indicates that the purposes in accounting are transactions not
transaction of financial derivatives for related to those activities or the main activities of
speculative purposes has a positive effect on the company. However, the absence of special tax
transfer pricing aggressiveness. Research rules on derivative transactions makes hedging
conducted by Santos (2016) and Lee (2016) constraints unclear, which can be used by
suggested similar results. Transfer pricing companies to reduce tax payments through the
aggressiveness used in this study is closely realization of loss on derivative transactions
related to the tax aggressiveness of the company. rather than hedging objectives. It also indicates
This result is in line with the initial hypothesis so that the company engages in complex derivative
that the results shown have a coefficient marked transactions with its affiliates so that it can
positive this can also be interpreted as an increase impose non-hedging derivative losses to reduce
in the condition of the transaction derivative tax payments.
instruments of the company that may cause
aggressive transfer pricing increases. The Effect of Financial Leverage on Transfer
This study is in line with Lee (2016), which Pricing Aggressiveness
divided the use of derivatives by separating The result of this study suggests that
derivatives into derivative assets and derivative financial leverage has a positive effect on transfer
liabilities and value-added designs. The research pricing aggressiveness. Research conducted by
led to the conclusion that firms that have non- Richardson, Taylor, & Lanis (2013) suggested
hedging derivative transactions for accounting the same result, which proves that financial
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leverage has a positive effect on transfer pricing tax expense through financial leverage is
aggressiveness. This result is in line with the possible. Moreover, by engaging in debt-and-
initial hypothesis so that the results shown have a loan-related transactions, as well as charging the
coefficient marked positive this can also be debt and interest on the loan to a qualifying party,
interpreted as an increase in corporate debt it can be used by the company to reduce the tax
transactions that may cause transfer pricing amount through the deductible interest expense.
aggressiveness increases.
This result is relevant to previous studies The Effect of Intangible Assets on Transfer
such as research Harrington & Smith (2012), Pricing Aggressiveness
which explained that financial leverage affects The result of this study suggests that the
the level of tax aggressiveness made by the intangible transaction assets have a positive effect
company. Proven companies indicated willing to on transfer pricing aggressiveness. Research
bear the risk of solvency to increase the book-tax conducted by Taylor et al. (2015) suggested the
difference. same result that proves that intangible assets have
Regarding financial leverage, one of the a positive effect on transfer pricing
issues of taxation of multinational corporations aggressiveness. This result could be interpreted
considered through the strategy of transfer as an increase in the intangible transaction assets
pricing. This issue is triggered by transactions of of the company that may cause transfer pricing
multinational companies in Indonesia to affiliates aggressiveness increases. The measurement of
abroad because the taxpayer from multinational these intangible assets is by comparing total
companies recorded themselves always suffered intangible assets with total assets owned by the
losses in recent years. By using an unreasonable company.
transaction, the taxpayer is required to "buy" It is different from Waworuntu &
goods or services from the Low Tax Rate Hadisaputra (2016), who stated that intangible
Country company at a price above the fair, thus assets do not affect transfer pricing
continuing to lose money. aggressiveness. The unfavorable transfer pricing
However, despite the loss, the company tends aggressiveness by intangible assets is caused by
to operate throughout the year with continuous the difference in the use of ways of measuring
debt so that it would affect the profitability of the intangible assets, using Research and
company. A portion of the company's profit may Development. Less attractive government
be used to pay interest on the loan. With incentives related to research and development,
increasing interest costs, then earnings before tax which can be deductible expenses by taxpayers;
would be reduced. Therefore, indicated when the this causes in Indonesia, research and
debt increases, management would adjust the development investment is not compelling.
accounting figures to agree on restrictions on the Multinational corporations are more interested in
debt agreement. conducting research and development outside
According to article 6 paragraph 1 letter 3 of Indonesia, while Indonesia acts only as a user of
Indonesia Act number 36 of 2008 concerning the intangible assets. Therefore, the issue of more
Income Taxes, interest on loans represents prudent transfer pricing in Indonesia is the
deductible expenses on taxable income. The utilization of intangible assets in the form of
deductible interest expense may decrease the royalty fees.
company's taxable profit. A reduced taxable Some cases of transfer pricing through
profit would ultimately reduce the amount of tax intangible assets transactions creatively utilize
payable by the company. Therefore, reducing the variations of trademarks, trade names, trade
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secrets, brands, service marks, and intellectual Furthermore, financial leverage is positively
property. The parent company registered the associated with transfer pricing aggressiveness.
intangible assets made to transfer pricing to a The companies that use their capital structure use
country with a low tax rate or even a tax heaven more long-term debt closely related to profit
country. It licensed it to a subsidiary where shifting activities carried out by the company.
instead, the subsidiary had to pay an annual Also, the intangible asset is positively associated
royalty whose imposition could be reduced to the with transfer pricing aggressiveness. The
company's profit before tax. Furthermore, many intangible transactions that occur individually
large companies move intangible assets such as that generate data with the loss of data today is an
intellectual property, brands, and know-how that intangible transaction with an affiliated party as a
can make up their value to countries with low tax transaction, which is indicated intentionally
rates. Therefore, the alleged increase in intangible created to cause the load post.
corporate transactions indicates an increase in the This research has several limitations. The
aggressiveness of transfer pricing. data in this study use non-financial companies.
Intangible assets transfers are usually The results of this study may be different when
conducted by centralizing the ownership of using research data from companies in sectors
intangible assets of local companies to foreign- other than non-financial sectors and different
affiliated companies. This transfer creates research periods. Therefore, the results of this
problems not only about the identification of study cannot describe the overall condition of
intangible property but also how to assess the companies in Indonesia. The sample used in this
intangible property. study is relatively small because it only uses
Intangible identification would be difficult companies that have derivative transactions and
because not all intangible assets are protected by do not experience losses during the study period.
law, registered and recorded in the books. In the Also, the dependent variable in the form of
context of transfer pricing, each party should transfer pricing aggressiveness index with the
receive reasonable compensation from the sum score method is close to the subjectivity of
contribution they provide. This issue applies to the researcher. Data processing is performed by
all categories of intangible assets, without reading the information in the Notes to the
exception. Therefore, the disclosure of the Financial Statements, where possible information
existence of intangible assets transactions is related to related parties is not entirely disclosed.
required in the financial statements concerning For future research, it can use samples other
PSAK No. 19 IAI (2018) concerning Intangible than non-financial companies to be able to obtain
Assets. Some companies present their intangible and complete the picture of tax avoidance in
assets higher than firms operating in other various industries both in Indonesia or other
sectors. countries. Future research can also add or include
other variables that can also influence transfer
5. Conclusions, Limitations, and Implications pricing aggressiveness, such as directors' risk
Financial derivatives for both hedging and appetite, the use of tax consultants, CEO or BOD
speculative purposes are positively associated characteristics with the presence of BOD
with transfer pricing aggressiveness. It indicates members or female CEOs, background expertise,
that both activities in Indonesia have the same and family relations.
nature and are closely related to the
aggressiveness of transfer pricing activities References
carried out by the company. Badertscher, B., Katz, S. P., & Rego, S. O. (2009).
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