THE EFFECT OF CORPORATE GOVERNANCE,

PROFITABILITY, FIRM SIZE, AND LEVERAGE ON TAX

AVOIDANCE
(EMPIRICAL STUDY ON MANUFACTURING COMPANIES REGISTERED
ON IDX IN 2015-2018)

Baharudin Riko Pradana

31401606336

ACCOUNTING
ECONOMIC FACULTY
SULTAN AGUNG ISLAMIC UNIVERSITY
SEMARANG
2019
 TABLE OF CONTENT

TABLE OF CONTENT...............................................................................................................................2
CHAPTER I................................................................................................................................................4
INTRODUCTION.......................................................................................................................................4
1.1 Background of the Topic.................................................................................................................4
1.2 Research Problem............................................................................................................................5
1.3 Research Purposes...........................................................................................................................5
1.4 Research Benefits.............................................................................................................................5
CHAPTER II...............................................................................................................................................6
LITERATURE REVIEW............................................................................................................................6
2.1 Grand Theory..................................................................................................................................6
2.1.1 Agency Theory..........................................................................................................................6
2.1.2 Tax Avoidance...........................................................................................................................6
2.1.3 Corporate Governance.............................................................................................................6
2.1.4 Profitability...............................................................................................................................7
2.1.5 Firm Size....................................................................................................................................7
2.1.6 Leverage....................................................................................................................................8
2.1.7 Previous Research.....................................................................................................................8
2.2 Theoretical Framework and Hypothesis......................................................................................13
2.2.1 Hypothesis Development........................................................................................................13
2.2.2 Framework..............................................................................................................................15
CHAPTER III............................................................................................................................................16
RESEARCH METHODS..........................................................................................................................16
3.1 Operational definition of the variable and variable measurement............................................16
3.1.1 Dependent Variable................................................................................................................16
3.1.2 Independent Variable.............................................................................................................16
3.1.3 Population and Sample...............................................................................................................18
3.1.4 Sample Collection Method.........................................................................................................18
3.2 Analytical Technique.....................................................................................................................18
3.2.1 Descriptive Statistical analysis...............................................................................................18
 3.2.2 Hypothesis Testing..................................................................................................................18
BIBLIOGRAPHY...........................................................................................................................................21
 CHAPTER I

INTRODUCTION
1.1 Background of the Topic
For countries in the world, especially developing countries, taxes are one of the supporting
elements of the state revenue budget. The development of the country used for infrastructure,
education, health, and so forth comes from tax revenues. But that does not mean maximize
income from taxes is an easy matter, there are always obstacles that arise, one of which is tax
avoidance.

According to Rinaldi and Cheisviyanny (2015), Tax Avoidance is an effort to reduce tax debt
that is legal (Lawful), therefore the issue of tax avoidance is a complex and unique issue. The
low level of tax compliance in Indonesia is one indication of the practice of tax avoidance. Data
obtained from the Taxation Directorate revealed that the number of registered business entities
was 5 million, while those registered as taxpayers were only 1.9 million and those who paid
taxes / reported Notification (SPT) were only 520 thousand business entities with an SPT ratio of
around 10, 4 percent (www.pajak.go.id ,2014). Therefore it is very important to do research on
matters that affect the occurrence of tax avoidance.

The factors that influence tax avoidance are Corporate Governance (Jamei, 2017),
profitability (Rinaldi and Cheisviyanny, 2015), firm size (Ngadiman and Puspitasari, 2014), and
also leverage (Saputra and Asyik, 2017). However, several studies revealed there were factors
that showed inconsistent results. Jamei (2017) revealed that corporate governance has a
significant effect on tax avoidance. This is supported by the opinions expressed by Annisa and
Kurniasih (2012). But precisely Saputra and Asyik (2017) who research independent
commissioners and audit committees as corporate governance obtain results that negatively
affect tax avoidance. Rinaldi and Cheisviyanny (2015) say that firm size has a significant
negative effect on tax avoidance. Whereas Ngadiman and Puspitasari (2014) said that the results
significantly affect tax avoidance. Kurniasih and Sari (2013) conducted a study that obtained
results that leverage negatively affected tax avoidance. While Saputra and Asyik (2017) obtain
the opposite results. Thus, there is a research gap between these studies. And for profitability, the
research carried out by Anouar and Houria (2017) and also Saputra and Asyik (2017) both
obtained significant positive results.

This study aims to examine tax avoidance, with the variables that influence it. This study also
adds new variables that have not existed in previous studies.

1.2 Research Problem

There are many indicators that influence implementation of tax avoidance. This study
will use corporate governance, profitability, firm size, and leverage. So the formulation of the
problem in this study are:

1. Does corporate governance affect tax avoidance?

2. Does profitability affect tax avoidance?
3. Does the size of the company affect tax avoidance?
4. Does leverage affect tax avoidance?

1.3 Research Purposes

Based on the formulation that has been disclosed, the purposes of this study are:
1. To analyze that corporate governance has an effect on tax avoidance.
2. To analyze that profitability has an effect on tax avoidance.
3. To analyze that firm size has an effect on tax avoidance.
4. To analyze that leverage has an effect on tax avoidance.

1.4 Research Benefits

1. For academics
The results of this study are expected to be able to provide a more detailed and
detailed description of what factors influence the occurrence of tax avoidance.
2. For the community
The results of this study are hoped to be used as a reference to increase knowledge in
fields related to tax avoidance and as education to the wider community.
 CHAPTER II

LITERATURE REVIEW
2.1 Grand Theory
The theory that will be used in conducting this research is the Agency Theory. It
will connect between tax collectors as agents and taxpayers as pricipal. Where the
collector wants a large tax, while the payer expects a smaller tax.

2.1.1 Agency Theory

It is a concept that explains the contractual relationship between principals and
agents. The principals are those who give the mandate to other parties, namely agents, to
carry out all activities on behalf of the principals in their capacity as decision makers
(Jensen and Meckling in Saputra and Asyik, 2017).

2.1.2 Tax Avoidance

According to Mardiasmo (Reinaldi and Cheisviyanny, 2015) tax avoidance is
an effort to alleviate the tax burden by not violating existing laws. In essence, the
implementation of tax avoidance does not violate the rules that apply in Indonesia.
However, tax avoidance will have an impact on state revenues derived from corporate
taxes.
This tax avoidance is carried out by companies with the aim of minimizing
the level of tax payments that must be made and increasing the company's cash flow.
There is no legal violation committed by the company and vice versa will be obtained by
saving tax by regulating actions that avoid the application of tax imposition through
controlling the facts in such a way as to avoid the imposition of taxes that are greater or
not at all taxable. From the above understanding, it can be concluded that tax avoidance
is a business carried out by a company with the aim of being able to pay as little tax as
possible, by exploiting the weaknesses of taxation regulations in Indonesia.

2.1.3 Corporate Governance

Corporate governance is a set of rules aimed at regulating corporate governance
between shareholders, creditors, governments, employees, and internal and external
stakeholders in obtaining their rights.
 A rule in the structure of corporate governance can affect the way companies
fulfill their obligations in paying taxes, but on the other hand tax planning also depends
on the dynamics of corporate governance within the company itself (Friese, Link, and
Mayer in Saputra and Asyik, 2017).

2.1.4 Profitability
Profitability is an illustration of how the company's financial performance in
generating profits (Rinaldi and Cheisviyanny, 2015). In measuring the level of
profitability, there are several ratios, one of which is Return On Assets (ROA). ROA has
a relationship with the company's net income and t imposition of income tax for
companies (Kurniasih and Sari, 2013).
Often profitability ratios are used in making decisions of an operations
management as well as investors and creditors. For investors, profit is the only measure
of change in the value of a company's securities. For creditors, profit is a measurement of
operating cash flow which can later be used as a source of interest and principal
payments. (Saputra and Asyik, 2017)
According to Subakti (Rinaldi and Cheisviyanny, 2015), the influence of
company profitability on tax avoidance will have a positive relationship if the company
wants to make tax payments then it must be efficient in terms of the burden, so there is no
need to pay taxes above large amounts.

2.1.5 Firm Size

According to Brigham and Houston (Rinaldi and Cheisviyanny, 2015) the firm
size is a small scale that can be classified based on various methods, including the size of
income, total assets, and total equity. The firm size is generally categorized into 3 types,
namely large companies, medium companies, and small companies. Determination of
company size is based on the company's total assets. The greater the total assets, it shows
that the company has good prospects in a relatively long period of time. This also
illustrates that companies are more stable and more able to generate profits compared to
companies with small total assets.
Large companies will be in the spotlight of the government, so that it will create a
tendency for company managers to be aggressive or obedient (Kurniasih and Sari, 2013).
2.1.6 Leverage
The definition of leverage according to Sartono (in Kurniasih and Sari, 2013: 59)
is the use of debt to finance investments. Leverage is a ratio used to measure how much a
company uses debt in financing the company's operational activities. Leverage also
describes the relationship between total assets and ordinary share capital or shows the use
of debt to increase profits according to Husnan (in Kurniasih and Sari, 2013).
Godfrey, et al (in Ngadiman and Puspitasari, 2014) states that leverage is "the use
of debt to finance an entity, often measured as the amount of liabilities to assets".
Leverage shows the use of debt to finance investments and assets owned by the company.
Leverage can be interpreted as the company's ability to use assets that have a fixed value
to increase the level of income for the owner of the company. Leverage shows how far
the company is financed by debt or outsiders with the ability of companies that rely
solely on capital.

2.1.7 Previous Research

No Author Title Variabel Analitical Research Result

. Technique
1 Moses The effect Profitability Multiple linear 1.profitability has a
Dicky Refa of , leverage, regression negative effect on tax
Saputra and profitability corporate analysis, t test, avoidance.
Nur Fadjrih , leverage, governance, F test, the 2.leverage has a
Asyik and and tax coefficient of significant positive
(2017) corporate avoidance. determination. effect on tax
governance avoidance.
on Tax 3.corporate
avoidance governance for audit
committee has a
negative effect on tax
 avoidance, while
independent
commissioners have a
positive effect on tax
avoidance.

2. Tommy The effect ROA, Multiple linear 1.Firm size has a

Kurniasih of ROA, leverage, regression significant effect on
and Maria leverage, corporate analysis, tax avoidance.
M Ratna corporate governance, classic 2.Fiscal loss
Sari (2013) governance, firm size, assumption compensation has a
and firm and tax test, partial significant effect on
size on tax avoidance. test, tax avoidance.
avoidance. simultaneous 3.Leverage has a
test. negative effect on tax
avoidance.
4.Corporate
governance has a
negative effect on tax
avoidance.
3. Rinaldi and The effect Profitability Multiple linear 1. Profitability has a
Charoline of , Firm size, regression significant positive
Cheisviyann profitability fiscal loss analysis effect on tax
y (2015) , firm size, compensati avoidance.
and fiscal on, and tax 2. Firm size has a
loss avoidance. significant negative
compensati effect on tax
on on tax avoidance.
avoidance. 3. Fiscal loss
compensation has a
significant effect on
 tax avoidance.

4. Nuralifmida The effect Institutional The 1. Institutional

Ayu Annisa of corporate ownership, descriptive ownership has a
and Lulus governance the board of statistic, negative effect on tax
Kurniasih on tax commission classic avoidance.
(2012) avoidance ers, audit assumption 2. Board of
quality, test, multiple commissioners has a
audit linear significant effect on
committee, regression tax avoidance.
tax analysis, 3. The audit
avoidance. multicollinearit committee has a
y test. significant effect on
tax avoidance.
4. The quality audit
has a significant
effect on tax
avoidance.

5. Ngadiman The effect Leverage, Descriptive 1. Leverage has a

and of Institutional statistics, significant negative
Christianny Leverage, ownership, multiple linear effect on tax
Puspitasari Institutional firm size, regression avoidance.
(2014) ownership, tax analysis. 2. Firm size has a
and firm avoidance. significant positive
size on tax effect on tax
avoidance. avoidance.
3. Institutional
ownership has a
significant positive
effect on tax
 avoidance.

6. Reza Jamei Tax Board of Multiple linear 1. Board of

(2017) Avoidance commission regression commissioners has a
and ers, analysis. significant effect on
Corporate Independent tax avoidance.
Governance commission 2. Independent
Mechanism: ers, commissioners have a
Evidence Managerial significant effect on
from ownership, tax avoidance.
Tehran Institutional 3. Managerial
Stock ownership, ownership has a
Exchange Tax significant effect on
Avoidance tax avoidance.
4. Institutional
ownership has a
significant effect on
tax avoidance.

7. Dayday The Firm size, Multiple linear 1. Firm size has a

Anouar dan Determinant corporate regression positive effect on tax
Zaam of Tax debt, analysis avoidance.
Houaria Avoidance intragroup 2. An intangible asset
(2016) within transaction, has a positive effect
Corporate intangible on tax avoidance.
Governance asset, 3. Profitability has a
: Evidence profitability positive effect on tax
from , avoidance.
Moroccan multination 4. Corporate debt has
Groups ality, tax a negative effect on
 avoidance tax avoidance.
5. Intragroup
transactions have a
negative effect on tax
avoidance.
6. Multinationality
has a negative effect
on tax avoidance.

Saputra and Asyik (2017) conducted a study on the effect of profitability,

leverage and corporate governance consisting of audit committees and independent
commissioners on tax avoidance. The results of the study say that profitability has a
negative effect on tax avoidance. Then leverage has a significant positive effect on tax
avoidance. And for corporate governance, the audit committee has no effect on tax
avoidance, while for independent commissioners it has a significant effect on tax
avoidance. And then Kurniasih and Sari (2013) examined the effect of return on assets,
leverage, corporate governance that represented here by independent commissioners and
audit committees, company size, and fiscal loss compensation for tax avoidance. The
results of the study revealed ROA, company size and fiscal loss compensation affecting
tax avoidance. While leverage and corporate governance have no effect on tax avoidance.
Rinaldi and Cheisviyanny (2015) examined the effect of profitability, firm size,
and fiscal loss compensation on tax avoidance. The results of this study indicate that
profitability has a significant positive effect on tax avoidance. While the firm size has a
significant negative effect on tax avoidance. And compensation for financial losses has a
significant effect on tax avoidance. Annisa and Kurniasih (2012) examined the effect of
corporate governance on tax avoidance. Corporate governance as measured by
institutional ownership, a board of commissioners, audit committee and audit quality. The
results showed that institutional ownership did not affect tax avoidance. While the board
of commissioners, the audit committee and audit quality have a significant effect on tax
avoidance.
 Ngadiman and Puspitasari (2014) examined the effect of leverage, institutional
ownership, and firm size on tax avoidance. The results revealed that the leverage variable
and firm size had a significant negative effect on tax avoidance while institutional
ownership had a significant positive effect on tax avoidance. Jamei (2017) examined the
effect of corporate governance on tax avoidance. The results showed that the board of
commissioners, independent commissioners, managerial ownership and institutional
ownership had a significant effect on tax avoidance.
Anouar and Houaria (2016) examine the effect of company size, corporate debt,
intragroup transactions, intangible assets, profitability, and multinationality on tax
avoidance. The results showed that corporate debt, intragroup transactions, and
multinationals had a negative effect on tax avoidance. While the variable size of the
company, intangible assets, and profitability have a positive effect on tax avoidance.

2.2 Theoretical Framework and Hypothesis

2.2.1 Hypothesis Development
1. The Effect of corporate governance on tax avoidance

The tax-saving measures carried out by companies in Indonesia are intended not
to conduct tax evasion, but only to be able to minimize the tax burden by utilizing tax
loopholes in Indonesia (Suandy, 2008 in Annisa and Kurniasih, 2012).

According to research conducted by Saputra and Asyik (2017) who used audit
committees and independent commissioners in measuring the effect of corporate
governance on tax avoidance. The task of the audit committee in a company is to
anticipate fraud in financial statements carried out by management. Audit committees
that can control financial statements can create good corporate governance and can
lead to tax compliance towards the company.

While the function of independent commissioners is to balance between

shareholders and outside parties who have interests. The independent commissioner
also has the right to oversee management in carrying out accounting policies that will
affect the company's profits.
 From the explanation above, it can be concluded that good corporate governance
will create compliance in paying taxes.

H1: Corporate governance has a negative effect on tax avoidance.

2. The effect of profitability on tax avoidance

According to Kusumawati (in Rinaldi and Cheisviyanny, 2015) profitability is the

company's ability to generate profits in the future and is an indicator of the success of
the company's operations. According to Kasmir (in Rinaldi and Cheisviyanny, 2015)
profitability ratios are ratios to assess a company's ability to seek profits. This ratio
also gives a measure of the effectiveness of a company's management. This is
indicated by the profits generated by sales and investment income. ROA is a tool used
to measure net profits obtained from the use of assets. Kurniasih and Sari (2013)
conducted a study to determine the effect of ROA on tax avoidance and the results
showed that ROA had an effect on tax avoidance.

From the statement above, I obtained a hypothesis:

H2: Profitability has a positive effect on tax avoidance

3. The effect of firm size on tax avoidance

The definition of company size according to Riyanto (in Ngadiman and Puspitasari, 2014)
is the size of the company seen from the amount of equity value, sales value or asset value.
Large companies certainly have more expert staff than experts owned by small companies.
But that does not mean large companies use that power to carry out tax avoidance. Large
companies if they want to take tax avoidance actions will certainly think of the
consequences, including the spotlight of the government and the public. If large companies
take tax avoidance actions, they will certainly impact on the company's brand image, which
in turn will also affect the level of sales.

From the explanation above, we can take the hypothesis that:

H3: Firm size has a negative effect on tax avoidance

4. The effect of leverage on tax avoidance

 According to Kurniasih and Sari (2013), leverage is a ratio that measures the
ability of debt both long term and short term to finance company assets. Please note
that debt is one of the company's funding. Debt referred to is long-term debt. Long-
term interest expense will reduce the existing tax burden. The variable leverage is
measured by dividing the total long-term liabilities by the total assets of the company.
So that the larger the company's debt, the lower the company's profitability, which
also reduces the company's tax burden. Therefore, of course, the company will try to
continue to owe so as to minimize the tax burden.

So, I can take the hypothesis:

H4: Leverage has a positive effect on tax avoidance

2.2.2 Framework
Based on the theoretical foundation described above, the framework of this
research was formed. In the following research framework, it can be explained or
illustrated how the relationship between the dependent variable and the independent
variable. The dependent variable in this study is represented by tax avoidance. Whereas
in the independent variable there are four variables including Corporate Governance,
profitability, firm size, and also leverage.

Corporate
Governance

Profitability
Tax Avoidance

Firm Size

Leverage
 CHAPTER III

RESEARCH METHODS
3.1 Operational definition of the variable and variable measurement
3.1.1 Dependent Variable
The dependent variable is a variable that is affected as a result of the existence of
independent variables. In this study, the dependent variable is represented by tax
avoidance.
1. Tax Avoidance
For the dependent variable in this study is tax avoidance which can be measured by the
effective tax rate method or better known as the cash effective tax rate (CETR). As Dyreng
et.al (Saputra and Asyik, 2017) said, CETR is good for describing tax avoidance activities by
companies because using CETR can see cash flow for tax payments.

Payment of tax
CETR=
income before tax

3.1.2 Independent Variable

1. Corporate Governance

The first independent variable is corporate governance. Corporate governance can

be useful to increase added value for shareholders, in that sense, the better corporate
governance in the company, it will be greater the added value (Saputra and Asyik, 2017).
In this study will use two proxies, namely independent commissioners and audit
committees.

Total of Independen Commissioner

Independent Commissioners=
Total Komisaris

DK = The number of an audit committee in the company x in year t

 2. Profitability

Then the second independent variable is profitability which can be formulated

using the Return on Assets (ROA) method as follows:

Net income after tax

ROA= X 100 %
Total Asset

If the higher the percentage of ROA, it is the higher the company's profits will
also indicate the good level of management of company assets.

3. Firm Size

The third independent variable in this study is a firm size which can be measured
by the log total asset proxy as follows:

FSa= LogTAa

As many as greater the logarithmic number indicates that the greater the size of
the company or asset owned by the company.

4. Leverage

The last independent variable is the leverage that can be measured using a method
that is :

Total Debt
Total Debt to Total Asset Ratio ¿
Total Assets

3.1.3 Population and Sample

The population in this study is the manufacturing companies listed on the IDX. As for the
sample is the financial statements of 70 manufacturing companies listed on the Stock
Exchange in 2015-2018.
3.1.4 Sample Collection Method
This study uses the documentation method. The documentation method is a method
which is used to record data in the financial statements and the data taken from
manufacturing companies listed on the Indonesia Stock Exchange. This data is obtained from
the website www.idx.co.id.

In this study using secondary data sources. Secondary data sources are data obtained or
collected by researchers from various existing sources. Secondary data obtained in this study
were obtained from the Indonesia Stock Exchange website which can be accessed at
www.idx.co.id in the form of a company annual report.

3.2 Analytical Technique

3.2.1 Descriptive Statistical analysis
Descriptive statistical analysis will present information about the description of
each variable used. Presented from information on minimum values, maximum values,
mean values, standard deviation values for each research variable.

3.2.2 Hypothesis Testing

1. Multiple Linear Regression Analysis
Multiple linear regression analysis is a linear relationship between independent
variables which number two or more with the dependent variable. This analysis aims
to find out the direction of the relationship between the independent and dependent
variables whether each independent is positively or negatively related and predicts the
value of the dependent if the independent has increased or decreased. The forms of
multiple linear regression equations in this study are described as follows:

CETR = a + ß1ROA+ ß2DER +ß3UPa+ ß4KOA+ ß5KOM + e

Information :
CETR = Cash Effective Tax Rate
ROA = Profitability
 DER = Leverage
KOM = Independen Commissioner
KOA = Audit Commitee
UPa = Firm Size
a = Konstanta
ß1 –ß4 = Regression Coefficient
e = Error

2. Classic Assumption Test

a. Normality Test
Aiming to test whether, in the regression model, the residual confounding variable
has a normal distribution or not (Ghozali, 2006). Tests for normality data using
the Kolmogorov-Smirnov one sample test.
b. Multicollinearity Test
Aiming to test whether the regression model found a correlation between the
independent variables and other independent variables. A good regression model
must have no correlation between independent variables.
c. Heteroscedasticity Test
Aiming to test whether there are inequalities of residual variance from one
observation to another. The appropriate regression model is that there is a residual
variance equation, one observation to a fixed observation or called
homoskedasticity. If different it is called heteroscedasticity.
d. Autocorrelation Test
Aiming to test whether in the linear regression model there is a correlation
between disruptive errors in period t with interfering errors in the previous period.
A good regression model is free from autocorrelation (Ghozali, 2006).
3. Hypothesis Testing
a. Test Parameter t
The t parameter test is performed to determine whether the independent variables
individually have an influence on the dependent variable. Performed by looking at
 the significant value F on the output of the regression results with a significance
level of 0.05.

b. F Test (Model Feasibility)

Aim to find out the effect of independent variables simultaneously on the
dependent variable. Significant meaning is the relationship that occurs can apply
to the population.
c. Coefficient of Determination
It is an important measure in regression, because it is able to inform whether or
not the regression model is stimulated, or it can be called a number that can
measure how closely the regression line is estimated with actual data.

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