Jurnal Dinamika Akuntansi dan Bisnis Vol.
8(2), 2021, pp 128-144
Board Political Connection and Tax Avoidance: Ownership Structure as
A Moderating Variable
Ni Wayan Rustiarini1*, I Made Sudiartana2
1.2
Universitas Mahasaraswati Denpasar
*Corresponding author: rusti_arini@unmas.ac.id
https://dx.doi.org/10.24815/JDAB.V8I2.20760
ARTICLE INFO
Article history:
Received date: 2 May 2021
Received in revised form: 20 July 2021
Accepted: 2 August 2021
Available online: 18 September 2021
Keywords:
Institutional ownership, managerial
ownership, public ownership, tax
avoidance
Citation:
Rustiarini, N.W., Sudiartana, I.M., (2021),
Board Political Connection and Tax Avoidance:
Ownership Structure as A Moderating Variabel,
Jurnal Dinamika Akuntansi dan Bisnis, 8(2),
133-150
Kata Kunci:
Kepemilikan manajerial, kepemilikan
institusional, kepemilikan publik,
penghindaran pajak,
1. Introduction
The tax avoidance phenomenon is an issue that is
widely discussed in various countries. The condition
is marked by the emergence of significant figures in
the ‘Panama paper’ case and various global
companies, including Apple, Gucci, and Google
(Davis et al., 2015). In Indonesia, one of the
multinational cigarette companies is suspect’d of tax
evasion through PT. Bentoel International Investama
ABSTRACT
This study aims to examine the relationship between political connection and tax avoidance
and the role of ownership structure as a moderating variable. Corporate tax avoidance is
calculated using effective tax rate (ETR). The research population is manufacturing
companies listed on the Indonesian Stock Exchange from 2017 to 2019. Using purposive
method this study gathered data from 119 companies or 357 company-year observations.
This study revealed that political connection has a negative effect on ETR. This finding
indicates that the political connections may lead to nepotism practices with aim to reduce the
corporate tax burden. The managerial ownership strengthens the negative relationship
between political connection and ETR. However, institutional ownership weakens the
negative relationship between political connection and ETR. Contrary to these two results,
public ownership cannot moderate the political connection and ETR.
Koneksi dewan direksi dan penghindaran pajak: struktur kepemilikan
sebagai variabel moderasi
ABSTRAK
Penelitian ini bertujuan untuk menguji hubungan antara koneksi politik dan penghindaran
pajak dan peran struktur kepemilikan sebagai variabel pemoderasi. Penghindaran pajak
perusahaan dihitung dengan menggunakan effective tax rate (ETR). Nilai ETR yang lebih
rendah menunjukkan tingkat penghindaran pajak yang lebih tinggi. Populasi penelitian
adalah perusahaan manufaktur di Bursa Efek Indonesia tahun 2017 s.d. 2019. Penelitian ini
menggunakan metode purposive sampling untuk mendapatkan 119 sampel atau 357 data
selama tiga tahun pengamatan. Hasil penelitian membuktikan bahwa hubungan politik
berpengaruh negatif terhadap ETR. Temuan ini menunjukkan bahwa koneksi politik
mengarah pada upaya nepotisme dengan maksud mengurangi beban pajak perusahaan.
Kepemilikan manajerial memperkuat hubungan negatif antara hubungan politik dan ETR.
Namun, kepemilikan institusional melemahkan hubungan negatif antara koneksi politik dan
ETR. Bertentangan dengan kedua hasil ini, kepemilikan publik tidak dapat memoderasi
hubungan politik dan ETR.
(Kontan, 2019). Moreover, tax avoidance practice
leads to fraud (corruption) that involves tax officials'
bribery (CNN Indonesia.com, 2016). As a result, tax
avoidance practices focus on academics (Huseynov
et al., 2017; Mahaputra et al., 2018) and invite public
and mass media attention (Kanagaretnam et al.,
2016). Based on this phenomenon, empirical studies
on tax avoidance need to be explored.
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Tax avoidance practice is a complex
phenomenon because it involves internal and
external parties of the company. The company board
determines tax management strategy from an
internal perspective, both the board of directors and
commissioners (Wahab et al., 2021). Based on an
external perspective, tax management involves
external parties such as institutional and community
shareholders. Thus, politically connected company
boards are an essential predictor in the choice of tax
management strategies (Barford & Holt, 2013).
Meanwhile, the ownership structure plays a role in
aligning management and various stakeholders'
interests, mainly regarding saving corporate tax
payments (Kovermann & Velte, 2019).
This research contributes to filling four research
gaps. First, the Directorate General of Taxes reports
that the manufacturing industry is the highest income
tax payer in Indonesia. It shows the existence of
corporate taxpayer compliance (Kemenperin.go.id,
2018). However, several empirical findings indicate
tax avoidance practices in public companies. The
previous results by Mustika et al. (2018) reveal that
the average cash effective tax rate is lower than the
statutory tax rate. Other studies also prove that tax
payments are lower than the corporate tax rate
implemented in Indonesia (Mappadang et al., 2018;
Putra et al., 2019; Tanujaya & Valentine, 2020). This
finding supports the phenomenon that shows many
companies seeks to avoid taxes by reporting losses
continuously, one of which is the manufacturing
industry (Liputan6.com, 2016).
Second, tax avoidance practices cannot be
identified only based on company characteristics
(Francis et al., 2012). Considering tax avoidance as
a politically charged topic (Barford & Holt, 2013),
several researchers have linked tax avoidance to
corporate executives' political affiliations.
Nonetheless, the political connection factor has two
contradictory impacts: it can assist or create
nepotism (Adhikari et al., 2006). As a result, there
are inconsistencies in the previous results. Some
studies prove that political connection positively
affects corporate tax aggressiveness (Adhikari et al.,
2006; Wahab et al., 2021). However, other studies
found that the political connection reduces tax
avoidance (Ajili & Khlif, 2020; Putra &
Suhardianto, 2020). The empirical study's ambiguity
motivates researchers to re-explore the role of the
board political connection to tax avoidance practices
and add a moderating variable to this relationship.
Third, several literature studies show that the
ownership structure (managerial, institutional, and
public ownership) influences corporate taxation
policies. Nonetheless, other empirical studies
present conflicting research results. In managerial
ownership context, some studies have proven that
managerial ownership increasing tax avoidance
(Boussaidi & Hamed, 2015; Multazam &
Rahamwaty, 2018), while other studies have found
that managerial ownership has a negative effect on
tax avoidance (Pramudito & Sari, 2015; Sunarsih &
Oktaviani, 2016). Based on the institutional
ownership perspective, institutional investors
perform a monitoring process to reduces the
tendency for aggressive tax behavior (Wahab et al.,
2021; Zemzem & Ftouhi, 2013). On the other hand,
institutional shareholders want to minimize tax
payments to increase tax avoidance practices (Chen
et al., 2019; Huseynov et al., 2017; Khan et al.,
2016). Other findings explain no relationship
between institutional ownership and taxation
activities (Jamei, 2017; Sartaji & Hassanzadeh,
2014). This study examines the role of managerial
and institutional ownership in the context of tax
avoidance.
Fourth, this study also uses public ownership,
which has not been widely used in previous
empirical studies. Several findings reveal that public
shareholders want companies to contribute to
development through fair tax payments (Puspita &
Harto, 2014; Schwartz & Duhigg, 2013). Thus, there
is a negative relationship between public ownership
and tax avoidance (Chan et al., 2013). However,
other findings indicate that high public ownership
increases companies' likelihood of tax avoidance
(Alexander, 2019; Bauwhede et al., 2003). Contrary
to these two groups of findings, Iqbal et al. (2020)

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research failed to prove the relationship between
public ownership and tax avoidance. This research
can be a starting point for further research on public
ownership in public companies' tax evasion practices
in Indonesia.
This study aims to prove ownership structures'
role, namely managerial, institutional, and public
ownership, as moderating variables between
political connection and tax avoidance. Corporate
tax avoidance practices are calculated using the
Effective Tax Rate (ETR) indicator. The lower ETR
shows the rate of higher tax avoidance. This study
uses 119 manufacturing companies on the Indonesia
Stock Exchange for three years of observation. The
test results show that the political connection has a
negative effect on ETR. In connection with the
moderating variable's role, managerialownership
strengthens the negative relationship between
political connection and ETR. Meanwhile,
institutional ownership weakens the negative
relationship between political connection and ETR.
Contrary to these two results, public ownership
cannot moderate the political connection and ETR
relationship.
The results contribute to theory and practice.
Theoretically, these findings contribute to corporate
tax management literature, mainly political
connections in tax management strategies. This
study also provides an understanding of the role of
ownership structure in tax management. In practice,
these findings help manufacturing company
management to understand the impact of ownership
structure on corporate tax management policies.
Ownership structure plays a vital part in positioning
the interests of stakeholders and shareholders.
2. Literature review and hypotheses
development
Agency theory
Agency theory discusses a contract between
agent and principal. This contract aims to regulate
the rights and obligations between the two parties
(Jensen & Meckling, 1976). Agency conflicts begin
to emerge when appears different interests between
130
management and shareholders, such as tax
avoidance. From an agency perspective, tax
aggressiveness creates agency conflicts between
shareholders' interests, management, and possible
tax risks. The existence of information asymmetry
between principal and agent increases management
opportunities to do tax avoidance. In this case,
effective corporate governance is needed to monitor
management performance. From a tax-avoidance
perspective, corporate governance plays a role in
aligning stakeholders' interests in optimizing
company performance, primarily to streamline
corporate tax payments (Kovermann & Velte, 2019).
Political connection and tax avoidance
Tax avoidance is an act of tax planning by
taking advantage of existing regulatory weaknesses
(Wang et al., 2020). The board of directors has a
central role in managing company resources,
including selecting an efficient tax management
strategy to minimize taxable income (Frank et al.,
2009; Wahab et al., 2017). This strategy requires the
board of directors to manage taxes or take advantage
of tax authorities' affiliations (Taylor & Richardson,
2014).
Five conditions explain that the board of
directors with political connections tends to practice
more aggressive tax management (Kim & Zhang,
2016). First, companies with political connections
are usually protected by politicians to have a lower
risk of tax audit detection and avoid future litigation
risks (Ajili & Khlif, 2020). Second, the company's
ability to access information regarding
implementing future tax regulations allows
companies to implement tax strategies (Wahab et al.,
2017). Political connections allow companies to
obtain information regarding tolerance for
aggressive tax management (Ajili & Khlif, 2020;
Faccio, 2016). Third, the market demands little
transparency of companies with political affiliations.
As a result, it is difficult for regulators to identify its
actual financial condition (Christensen et al., 2015).
Fourth, companies can reduce political costs to
become tax aggressive (Faccio, 2016). Fifth, a
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company with political affiliation allows the
company to take risks, one of which is related to
aggressive tax management.
Some literature reveals that boards of directors
of companies with political affiliations tend to
engage in higher tax evasion activity. Managers are
not burdened with strict regulations and have a
higher chance of avoiding tax control (Habib et al.,
2017). This condition creates opportunities for
companies to minimize tax payments. Political
affiliation also reduces the risk of companies being
exposed by the media for tax evasion (Christensen et
al., 2015). If these actions are detected, politically
connected companies are also likely to avoid harsh
penalties (Li et al., 2016). Political affiliation causes
tax authorities not to enforce tax compliance
effectively (Lin et al., 2018). Therefore, companies
that are connected politically tend to adopt a more
aggressive tax strategy (Kim & Zhang, 2016; Wahab
et al., 2017), as well as making tax payments that are
much lower than other companies (Adhikari et al.,
2006; Taylor & Richardson, 2014). Thus, the
following hypothesis is formulated:
Ha1: Political connection has a negative effect on the
ETR.
Political connection, managerial ownership, and
tax avoidance
Managerial ownership is share ownership by
internal company parties who actively make
company business decisions, such as the board of
commissioners and directors. A literature review
shows that managerial ownership plays a role in
positioning management and shareholders' interests
(Jensen & Meckling, 1976). However, it is the fact
that management's interests often dominate, thus
creating agency problems. The existence of share
ownership by board members, directors, and
commissioners encourages them to protect their
financial interests (Boussaidi & Hamed, 2015). As a
result, management can make decisions that
optimize their benefits (Gotti et al., 2012), mainly in
tax avoidance practices.
Studies about managerial ownership and tax
avoidance still show conflicting findings. The
empirical study found that managerial ownership
significantly affects corporate tax aggressiveness
(Multazam & Rahamwaty, 2018). Managerial
ownership has also positively correlated with the
effective tax rate (Boussaidi & Hamed, 2015). Other
findings reveal that managerial ownership
decreasing tax avoidance (Pramudito & Sari, 2015).
This condition indicates that management's share
ownership can increase optimal supervision and
influence tax avoidance policies (Sunarsih &
Oktaviani, 2016). Contrary to previous studies, other
researchers have failed to prove a relationship
between managerial ownership and tax avoidance
(Jamei, 2017; Tijjani & Peter, 2020). This study
assumes that managerial ownership becomes a
strong incentive for management to make decisions
that maximize the company's wealth, including their
wealth. Management has the authority and
opportunity to make decisions that benefit
themselves (Mustapha & Ahmad, 2011). The
hypothesis formulated is:
Ha2: Managerial ownership strengthens the negative
relationship between political connections and ETR.
Political connection, institutional ownership, and
tax avoidance
Institutional ownership is one of the
organizational governance elements that oversee its
operational activities (Kovermann & Velte, 2019).
The large volume of shareholding motivates
institutional investors to monitor management
actions. Institutional shareholders are seen to
exercise optimal control over management actions,
particularly those related to tax avoidance (Ying et
al., 2015). Institutional investors also have the power
to discipline managers by preventing tax planning
activities. Other studies also reveal that institutional
ownership significantly reduces the effective tax
rate. The greater the institutional ownership, the tax
policy is less aggressive (Wahab et al., 2021;
Zemzem & Ftouhi, 2013). Other studies have failed

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to prove a relationship between institutional
ownership and tax evasion (Tijjani & Peter, 2020).
This study predicts that institutional ownership
reduces the positive effect of political connections
on tax avoidance. Institutional shareholders have
large shareholdings. This characteristic focuses them
on achieving long-term-oriented performance
(Khurana & Moser, 2012). Also, shareholders are
concerned about the impact of tax avoidance
practices on the company's reputation, mainly if
detected by the tax authorities (Hanlon & Heitzman,
2010). Tax avoidance detected by tax authorities
results in various risks, such as increasing tax
obligations, paying fines, and even damaging the
company's reputation (Hanlon & Heitzman, 2010).
Researchers assume that institutional shareholders
as the principal prefer to avoid the risks posed by tax
avoidance. Thus, institutional shareholders'
involvement in monitoring activities reduce the
influence of political connections on tax avoidance:
Ha3: Institutional ownership weakens the negative
relationship between political connection and ETR.
Political connection, public ownership. and tax
avoidance
Public ownership is the shares owned by public
investors, both individual and institutional (Michel
et al., 2014). In the tax avoidance context, there are
two conflicting views regarding the role of public
ownership. First, public ownership represents the
community's interests as one of its stakeholders. This
ownership expects the company to contribute to
development by paying taxes. The greater the public
ownership, the lower the tax avoidance (Puspita &
Harto, 2014). Thus, there is a negative relationship
between public ownership and tax avoidance (Chan
et al., 2013).
Contrary to this view, another view argues that
high public ownership increases companies' tax
avoidance (Abdullah et al., 2019). The community
has expectations of its future cash flows that increase
its market value (Bauwhede et al., 2003; Shevlin et
al., 2013). The community may allow companies to
implement tax planning strategies without violating
132
legal provisions (Alexander, 2019) and does not
damage the company's reputation (Christensen et al.,
2015). As a result, public ownership motivates
company management to manage revenue
opportunistically (Bauwhede et al., 2003).
In the relationship between political connection
and tax avoidance, it is predicted that public
ownership reduces the influence of political
connection on tax avoidance. When a company
shares ownership with the public, the company must
implement public accountability (Khan et al., 2016).
High public ownership increases stakeholder
pressure for companies to carry out financial
management transparently and accountable,
including paying taxes. If companies practice tax
avoidance, this action can trigger public anger and
assume that it does not contribute to the state
(Schwartz & Duhigg, 2013).
Also, tax avoidance practices can increase
corporate risk (Scholes et al., 2014). Thus, there is a
negative relationship between public ownership and
tax avoidance (Chan et al., 2013). This study predicts
that public ownership reduces the positive effect of
political connection and tax avoidance. Thus, the
hypothesis formulated is:
Ha4: Public ownership weakens the negative
relationship between political connection and ETR.
Political Tax
connection avoidance
Ownership structure:
1. Managerial ownership
2. Institutional ownership
3. Public ownership
Figure 1. Conceptual Framework
The relationship between political connection
variables, managerial ownership, institutional
ownership, public ownership, and tax avoidance is
presented in Figure 1.
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3. Research method
Population and sample
The research population is all manufacturing
companies on the Indonesian Stock Exchange. This
study used a purposive sampling method with the
following criteria: a) registered manufacturing
companies for 2017-2019; b) the company's annual
report is accessible; c) the company has the data
needed; d) the data is normally distributed. Based on
these criteria, there were 119 company samples or
357 observational data for the three years.
Measurement of research variables
This study uses a political connection as an
independent variable. Political connection is a
condition that indicates a political relationship
between the directors or commissioners and external
parties in the company, in which both parties benefit
from the political relationship. The criteria used to
identify the occurrence of political relations are if the
board of directors or board of commissioners is: 1) a
member of the people's representative council,
member of the executive, or an official in a
government institution, member of the military, or a
political party; 2) former members of the people's
representative assembly, former members of the
executive branch, or former officials in government
institutions, former members of the military, or
former members of political parties (Antonius &
Tampubolon, 2019; Supatmi et al., 2019). The
measurement uses a dummy variable, namely the
board of directors with a political connection, code
1, and code 0 if otherwise.
This study's dependent variable is tax
avoidance, which is defined as a company activity
aiming to reduce corporate tax payments (Hanlon &
Heitzman, 2010). The indicator used the Effective
Tax Rate (ETR). ETR is seen as the correct
measurement because it can detect indications of tax
deductions through loopholes in the applicable
legislation and tax shelters (Dyreng et al., 2017).
ETR is calculated by dividing the company's income
tax expense with profit before tax (Gaaya et al.,
2019; Tijjani & Peter, 2020). ETR measurement
results have the opposite function of tax avoidance
(Gaaya et al., 2019). A higher ETR value indicates
lower tax avoidance behavior and vice versa (Frank
et al., 2009).
The moderating variable is ownership structure,
consisting of managerial ownership, institutional
ownership, and public ownership. Managerial
ownership is share ownership owned by the
company's board of directors or commissioners
(Berke-Berga et al., 2017). The measurement of
managerial ownership is carried out using dummy
variables because of the limited number of
companies with this type of ownership. Using the
percentage of shares as a measurement indicator will
result in many companies not meeting the specified
criteria. If the directors and commissioners have
share ownership, then the value is given 1, and vice
versa. Institutional ownership implies the percentage
of shares owned by institutional investors, such as
banks, insurance companies, or investment
companies. The measurement of this variable uses
the percentage of shares owned by institutional
investors compared to its total number in circulation
(Tijjani & Peter, 2020). Public ownership is share
ownership by public investors (society). This
variable is measured using the percentage of shares
owned by the public compared to its total number of
shares in circulation (Michel et al., 2014).
This study uses two control variables, namely
company size and leverage. Larger companies tend
to be more involved in tax avoidance than smaller
companies (Gaaya et al., 2019; Lin et al., 2014;
Richardson et al., 2013). However, other empirical
studies suggest that large companies have less
aggressive tax behavior to maintain their reputation
(Gaaya et al., 2019; Richardson et al., 2015).
Therefore, this study controls for the role of size in
corporate tax avoidance behavior. The firm size
variable is measured using the natural logarithm of
total assets (Gaaya et al., 2019). The second control
variable is leverage. Previous empirical studies
revealed a positive relationship between leverage
and tax avoidance (Badertscher et al., 2013;
Richardson et al., 2015). In this study, the level of
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corporate leverage is measured using the debt to variables also show a low mean value, namely 0.19
equity ratio, as tested in previous studies (Tijjani & (19.00%). Contrary to managerial ownership, the
Peter, 2020). institutional ownership variable has a relatively high
mean value of 63.24%. Meanwhile, the average size
Technical data analysis of public ownership is 24.17%. The tax avoidance
This study examines the ownership structure's variable proxied by ETR has an average value of
role, namely managerial ownership, institutional 0.19 (19.00%).
ownership, and public ownership. The ownership is Table 1. Descriptive statistics
a moderating variable in the relationship between Variable N Min. Max. Mean
Std.
Deviation
political connection and tax avoidance. The data
Political 357 .00 1.00 .27 .44
analysis tool used to test the research hypothesis is connection
moderated regression analysis. The statistical model Managerial 357 .00 1.00 .19 .40
ownership
is formulated in the following equation: Institutional 357 10.41 99.21 63.24 21.69
ownership
Equation Model 1: Public 357 .79 70.60 24.17 14.34
ownership
TA=β0+β1PC+β2FirmSize+β3Lev+e….(1)
Effective 357 -.33 .59 .19 .15
Equation Model 2: tax rate
TA=β0+β1PC+β2MO+β3IO+β4PO+β5PC*MO+β6 Firm size 357 11.17 29.11 14.97 4.43
Leverage 357 -6.58 9.85 2.77 2.21
PC*IO+β7PC*PO+β7Firm_Size+β8Lev+e …… (2) Valid N 357
Where: (listwise)
TA = Tax avoidance Source: Statistic test output (2021)
β0 = Constant Compared to the statutory tax rate in 2017-2019
β1- β7 = Regression coefficient of 25.00%, corporate tax payments are lower than
PC = Political connection the corporate tax rate applicable in Indonesia. This
MO = Managerial ownership figure indicates that there is tax avoidance in
IO = Institutional ownership manufacturing companies in Indonesia. Meanwhile,
PO = Public ownership firm size and leverage variables have an average of
PC* MO = The interaction between political 14.97 and 2.77.
connection and managerial
Hypothesis test results
ownership
This study conducted a classical assumption
PC*IO = The interaction between political
test, namely normality, multicollinearity,
connection and institutional
heteroscedasticity, and autocorrelation. This study
ownership
excluded nine companies that had outlier data.
PC*PO = The interaction between political
Furthermore, the Kolmogorov-Smirnov test showed
connections and public ownership
that all observed data were normally distributed (α>
Firm_Size = Firm size
0.05). Relates to the multicollinearity test, the results
Lev = Leverage
show a tolerance value of more than 0.1 and a VIF
e = Error
value of less than 10. Thus, there is no
4. Result and discussion multicollinearity in the regression model.
Descriptive statistics Heteroscedasticity testing was carried out using the
Table 1 shows that the political connection Glejser test. The test results show that all
variable has an average of 0.27. This figure reflects independent variables have a significance above
that the board political connection has a low value, 0.05 or no heteroscedasticity. The autocorrelation
which is only 27.00%. Managerial ownership test results showed that the Durbin-Watson value
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was 1,894, with a du value of 1,863 and a 4-du value 0.000. These results indicate that a board of directors
of 2,137. Thus, there is no autocorrelation. After and commissioners with political connections can
performing the classical assumption test, the next increase tax avoidance. The lower the ETR value,
test is to test Model 1, presented in Table 2. the higher of company tax avoidance. Thus, the test
Table 2 shows that the board political results accept the first hypothesis. The next test is to
connection has a negative effect on ETR. The test the moderation effect formulated in Model 2,
political connection indicates the negative presented in Table 3.
coefficient direction with a significance value of
Table 2. Model 1 test results
Unstandardized coefficients Standardized coefficients
Variables t Sig Conclusion
Beta Std.Error Beta
(Constant) 27.883 2.457 11.348 .000
PC -24.330 1.337 -.697 -18.201 .000 Ha1 is supported
Firm Size -.001 .001 -.019 -.482 .630
Leverage -.003 .003 -.050 -1.257 .210
R .698
R Square .487
Adjusted R Square .483
F significant value .000
Variable dependent: ETR
Source: statistics output (2021)
Table 3 presents the interaction test results for 51.10%. Other factors influence the remaining
the three ownership structure types: managerial 48.9%. Furthermore, this study identified the types
ownership, institutional ownership, and public of moderating variables, shown in Table 4. Table 4
ownership. The statistical test results present an shows that the interaction test results for the political
Adjusted R Square value of 51.10%. This figure connection and managerial ownership variable on
indicates that the independent and moderating ETR have a negative coefficient and a significance
variable influencing the tax evasion variable is value of 0.038.
Table 3 Model 2 test results
Standardized
Variables Unstandardized Coefficients Coefficients t Sig
B Std.Error Beta
(Constant) 30.431 3.936 7.732 .000
PC -47.561 9.108 -1.362 -5.222 .000
MO -1.910 2.045 -.049 -1.969 .049
IO .000 .000 -.035 -.674 .501
PO -.001 .001 -.097 -.934 .351
PC_MO -4.269 3.506 -.073 -2.148 .038
PC_IO .003 .001 .508 2.644 .009
PC_PO .003 .001 .278 1.217 .224
Firm Size .000 .001 .013 .324 .746
Leverage -.003 .003 -.043 -1.080 .281
R .724 Adjusted R Square .511
R Square .524 F significant value .000
Variable dependent: ETR
Source: statistics output (2021)
Where: IO = Institutional ownership
ETR = Effective tax rate PO = Public ownership
PC = Political connection Firm_Size = Firm size
MO = Managerial ownership Lev = Leverage
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The results imply that managerial ownership connection variables affects the ETR (α = 0.009).
strengthens the negative relationship between Therefore, institutional ownership cannot be a
political connection and ETR. Testing the predictor or explanatory variable, only as a
managerial ownership moderation variable shows moderating variable. In this research model, the
that this variable can significantly affect the ETR, institutional ownership variable acts as pure
both alone (α = 0.049) and interacting with the moderation (Solimun et al., 2017). Thus, these
political connection variable (α = 0.038). This result findings are consistent with the third hypothesis.
implies that this variable has a dual role, namely, an The interaction test results between the political
explanatory/predictor variable and a moderating connection and public ownership variables on the
variable. Therefore, managerial ownership is a ETR reveal an insignificant statistical number,
quasi-moderation variable (Solimun et al., 2017). which is 0.224. This empirical finding proves that
Thus, the results support the second hypothesis. public ownership variables do not affect ETR, both
Testing the interaction variables of political alone (α = 0.351) and interacting with political
connection and institutional ownership on ETR has connections (α = 0.224). In this case, the public
a positive coefficient direction and a significance ownership variable does not act as an predictor
value of 0.009. This statistical result means that variable or moderating variable. Public ownership
institutional ownership weakens the political variables only have the potential as moderating
connection's negative influence and the ETR. The variables, both theoretically and empirically.
results also confirm that institutional ownership acts Therefore, public ownership is a potential
as pure moderation. The independent test results moderation or homologous moderation (Solimun et
show that institutional ownership does not al., 2017). Thus, these statistical results do not
significantly affect ETR (α = 0.501). The interaction support the fourth hypothesis.
between institutional ownership and political
Table 4 Summary of test result for moderation variable
Unstandardized Standardized
Moderation
Variables coefficients coefficients t Sig Remark
Type
B Std.Error Beta
PC → ETR -47.561 9.108 -1.362 -5.222 .000
Quasi
MO → ETR -1.910 2.045 -.049 -1.969 .049 Ha2 Accepted
Moderation
PC*MO → ETR -4.269 3.506 -.073 -2.148 .038
PC → ETR -47.561 9.108 -1.362 -5.222 .000
IO → ETR .000 .000 -.035 -.674 .501 Ha3 Accepted Pure Moderation
PC*IO → ETR .003 .001 .508 2.644 .009
PC → ETR -47.561 9.108 -1.362 -5.222 .000
Ha4 Homologiser
PO → ETR -.001 .001 -.097 -.934 .351
Rejected Moderation
PC*PO → ETR .003 .001 .278 1.217 .224
Source: Statistic output (2021)

This study also controls for firm size and leverage
factors that are considered to influence tax avoidance
practices. The test results in Table 4.3 show that the
firm size variable has a significance value greater
than 0.05, namely 0.746 and 0.281. Thus, these two
variables do not affect corporate tax avoidance.
Political connection and tax avoidance
Based on the testing of the first hypothesis
result, the political connection board is proven to
have a negative effect on ETR. This figure indicates
that directors and commissioners with political
connections increase tax avoidance practices. The
lower ETR value implies that companies tend to do
tax avoidance. Companies with political affiliations
generally lack transparency in managing the
company (Kim & Zhang, 2016). It is not uncommon
for these companies to receive guarantees or
preferential treatment from the government (Faccio,
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Rustiarini, Sudiartana / Jurnal Dinamika Akuntansi dan Bisnis Vol. 8(2), 2021 pp. 128-144
2016). The existence of political connections will
protect company management from the risk of
litigation in the future Management experience in the
political realm also influences its strategy in
managing its tax payments (Putra & Suhardianto,
2020). Politically connected board members will
take advantage of this condition to benefit from tax
avoidance (Zhang et al., 2017). Company boards
affiliated with tax regulators also have a low risk of
tax detection (Kim & Zhang, 2016). Another
advantage is that companies have a network to
access tax regulations and law enforcement efforts
(Ajili & Khlif, 2020). Previous empirical findings
prove that companies have higher tax avoidance
behavior when politically affiliated with tax
regulators (Taylor & Richardson, 2014). Boards of
directors with political connections with tax
authorities tend to reduce tax compliance
enforcement efforts (Lin et al., 2018). As a result,
companies with political affiliation have lower tax
payment effectiveness than companies without
political affiliation (Adhikari et al., 2006; Kim &
Zhang, 2016; Wahab et al., 2017).
Political connection, managerial ownership, and
tax avoidance
The second hypothesis testing results show that
managerial ownership strengthens the negative
relationship between the political and effective tax
rates. These statistics indicate that share ownership
by the company's internal parties also determines
strategic decisions and company performance
(Multazam & Rahamwaty, 2018). Managerial
ownership encourages management to save their
company's financial interests (Boussaidi & Hamed,
2015). In this case, managerial ownership aligns the
interests of principals and agents and the company's
interests with themselves. Management's self-
interest often dominates in the company. As a result,
managers tend to make corporate strategic decisions
that optimize their benefits (Gotti et al., 2012), one
of which is corporate tax management. The greater
the percentage of shares owned by the company
board, the greater the board's potential to make
decisions that can maximize their wealth as
shareholders (Kamardin, 2014).
In the context of taxation, managerial ownership
can align the company's interests to make tax savings
with the interests of management to improve the
company's cash position. This study's results note
that the percentage of managerial ownership in the
sample companies is relatively small. Chen and Yu's
(2012) findings reveal that when management has a
minor shareholding in the company, its
dysfunctional behavior increases. Management has
an incentive to falsify disclosure of financial
statements because reported earnings will form the
basis for determining the manager's remuneration. It
is also the case with corporate tax management
policies. Managerial share ownership provides an
opportunity for company managerial parties with
political connections to make financial decisions that
benefit the company and the management itself. The
company board considers that tax avoidance
measures will save the company's cash, using other
operational activities. Thus, managerial ownership
strengthens the negative relationship between the
board political connection and ETR.
Political connection, institutional ownership, and
tax avoidance
Testing the third hypothesis proves that
institutional ownership weakens the negative
relationship between political connection and
effective tax rate. Institutional shareholders
generally have high share ownership. In this study,
the average institutional share ownership is 63.24%
which indicates high ownership. In this case,
institutional share ownership does not only minimize
agency conflicts between principal and agent
(Wahab et al., 2021). Institutional investors have a
strong incentive to monitor management
performance. Institutional shareholders discipline
and motivate managers to maximize firm value in
the long term by preventing tax planning activities
(Tijjani & Peter, 2020).
Institutional ownership also influences the
company's management strategy (Minnick & Noga,

Ni Wayan Rustiarini, I Made Sudiartana / Jurnal Dinamika Akuntansi dan Bisnis Vol. 8(2), 2021 pp. 128-144
2010). Institutional shareholders' presence improves
the monitoring function, particularly in fulfilling
corporate tax obligations and responsibilities as
good citizens (Wahab et al., 2021) conducted by
institutional investors will increase as their holdings
increase (Ying et al., 2015). Institutional ownership
can require politically affiliated companies to
properly carry out tax obligations not to lose political
benefits or gains (Christensen et al., 2015; Mills et
al., 2012). Given that tax avoidance activities
increase the company's potential and risk exposure
(Scholes et al., 2014), institutional investors tend to
avoid tax aggressive behavior (Wahab et al., 2021;
Zemzem & Ftouhi, 2013). Shareholders focus more
on the impact of tax avoidance practices on company
reputation (Hanlon & Heitzman, 2010). High
institutional shareholders' presence encourages
companies to increase company loyalty to the
government through tax payments (Putra &
Suhardianto, 2020). The supervision process by
institutional ownership intensively can mitigate
political connections on tax aggressiveness. Thus,
institutional investors can reduce the negative effect
of the board political connection on corporate tax
aggressive behavior.
Political connection, public ownership, and tax
avoidance
The fourth hypothesis's statistical testing results
show that public ownership variables do not affect
the relationship between political connection and
effective tax rate. Previous research has found two
different views regarding the role of public
ownership in tax avoidance. The first view states that
public ownership represents the interests of society.
Generally, people expect companies to contribute to
the state through tax payments (Chan et al., 2013;
Puspita & Harto, 2014). However, another view
argues that high public ownership increases
companies' likelihood of tax avoidance (Abdullah et
al., 2019). This condition is motivated by high public
expectations of future cash flows to increase its
market value (Shevlin et al., 2013). Companies can
138
implement tax planning strategies as long as they do
not violate legal provisions (Alexander, 2019).
However, the results contradict the previous
result. This study failed to prove that public
ownership reduces the negative effect of the board
political connection on tax avoidance. This condition
is because public ownership does not substantially
influence corporate strategic decisions, particularly
in the corporate tax management strategy. In this
study, the average number of public ownership was
24.17%. This figure indicates that the community
has not played a significant role in the supervisory
function of management decision-making. Also,
communities may not focus on corporate tax
management strategies and ignore corporate tax
avoidance practices. The public is generally more
concerned with the profit that the company receives
to increase its shares' market value.
5. Conclusions
Tax avoidance practice is a complex
phenomenon because it involves corporate boards
and shareholders. The presence of company boards
with political connections is considered in choosing
a tax management strategy. Also, tax management
policies must consider the ownership structure to
align company management and stakeholders'
interests. This study aims to identify ownership
structures' role, namely managerial, institutional,
and public ownership, as moderating variables in the
relationship between board political connection and
tax avoidance. Corporate tax avoidance practices are
calculated using the ETR indicator. The lower the
ETR value, the higher the company tax avoidance.
The test results reveal that the political connection
lowers the ETR value and indicates high tax
avoidance. This finding also confirms that political
connections within the company are not merely a
provision of assistance but also creates nepotism.
Therefore, the process of political lobbying by
corporate boards reduce the company's tax burden.
The presence of managerial ownership also
strengthens the negative influence of political
connections on ETR. Thus, managerial ownership is
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Rustiarini, Sudiartana / Jurnal Dinamika Akuntansi dan Bisnis Vol. 8(2), 2021 pp. 128-144

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