Effects of good corporate governance, ownership structure, political connections on tax aggressiveness of manufacturing companies listed in Indonesia Stock Exchange

M.S. Kurniawan, B.P. Sutjiatmo & R. Wikansari

Politeknik APP Jakarta, Jakarta, Indonesia

K. Haryono

Edinburgh Napier University, Edinburgh, Scotland, UK

ABSTRACT: This research aims to provide empirical evidence of the effects of good corporate governance, ownership structure, and political connection on tax aggressiveness.

1 INTRODUCTION

Companies’ main purpose is to make profit. In doing so, good corporate governance is one of the most important aspects (Desai & Darmapala 2007).

National committee on governance policy (KNKG) is an organization that publishes guidelines for imple­mentation of good corporate governance in Indonesia. KNKG states there are three important elements in the application of good corporate governance, there are board of committee, board of commissioners, board of directors, and audit committee (KNKG 2006).

In agency theory, one of the most frequently occurring agency conflicts was a conflict between company an owner and management. This conflict occurs because of differences in the interests; the company owner wants the addition of wealth from company profits, while management wants to gain benefit from the facilities provided by the company that sometimes can reduce company profit (Watt & Zimmerman 1986, Godfrey et al.

Another type of agency conflict is a conflict between controlling shareholders and non-controlling shareholders. This conflict occurs because of differ­ences in interest between controlling and non-control­ling parties. The controlling parties want to maximize their wealth using company assets which sometimes harms non-controlling parties. In companies with family ownership, commonly the family own the control of company, despite the fact that family own­ership is more effective organizational structure com­pared with other type of structure to overcome agency conflicts between company owners and man­agement. This is because company owner is likely to place people on the board of directors or board of commissioners as representative of company owner, who are usually parts of the family (Randoy & Goel 2003, Gaaya et al. 2017).

Political connections are important resources for companies in developing countries. Political connec­tions provide an option for companies to resolve issues related to law and taxes (Rajan & Zingales 1998, Leuz & Gee 2006). Commonly in Indonesia, retired soldiers, retired policemen, retired senate members, members of political parties become dir­ectors or commissioners in a company.

2 LITERATURE

2.1 Agency theory

In agency theory, there are two types of agency con­flicts, conflict between company owners and the management and conflict between controlling share­holders and non-controlling shareholders. These con­flicts can be resolved by the establishment of a board of commissioners and audit committee that can rep­resent shareholders in overseeing operations of the company. Conflicts between controlling shareholder and non-controlling shareholder occurs because of the interest of controlling shareholders to transfer company assets into their assets, so it may harm the

non-controlling shareholders (Watts & Zimmerman 1986, Godfreyetal.

2.2 Good corporate governance

Good corporate governance will help companies maintain sustainability, business efficiency, reduce the possibility of companies violating legislation, laws, and related regulations (IICG 2012).

Good corporate governance can be implemented properly if supported by the company’s organs that perform their duties and functions as they must do. According to KNKG, there are 3 important organs in the company including:

a. General meeting of shareholders

This meeting is one of the most important agendas for the company and the owners of the company because the ultimate decision making in the com­pany is taken during this meeting (KNKG 2006).

b. Boardofcommissioners

The board of commissioners is the organ of the company responsible for ensuring the proper implementation of corporate governance in the company, overseeing and advising management with the help of audit committee, and audit com­mittee themselves help board of commissioners oversee and advise on management (KNKG 2006).

The relations between board of commissioners and tax aggressiveness is the board of commis­sioners responsible for overseeing the operation of the company by management in accordance with rules and laws, including rules and laws in tax. Thus, the existence of board of commissioners can reduce agency conflicts between company owners and management. In Indonesia the board of com­missioners of a company usually serves as the board of director or commissioners in other com­panies; that can cause difficulty in coordination between each member board of commissioners, so it can be assumed that the larger size of the board of commissioners will inhibit the function of the board of commissioners to conduct supervision. The larger size of the board of commissioners can lead to a greater tax aggressive action by company (Annisa & Kurniasih 2013).

c. Audit committee

The audit committee is tasked with assisting the commissioners in overseeing the operations of the company whether it is in compliance with applicable laws and regulations.

d. Board of Directors (BoD)

Board of Directors is the organ of the company responsible for company operations. Board of directors are appointed in general meeting of shareholder. Board of directors are responsible to shareholders. The bonus plan hypothesis stated that one of objectives of management with the bonus plan is to maximize the bonus she/he earns, one way to maximize management bonus with increased company profit and minimize amount of tax using tax aggressive policy (Watt & Zimmerman 1986, Godfrey et al. 2010).

2.3 Family ownership

Company with family ownership is one of the most effective types of corporate organizations because family firms have clear long-term goals, have almost absolute and clear policies, tend to maintain family name reputation, and with some of family members becoming directors or commissioners make firm man­agement more likely effective (Chen et al. 2010). In Indonesia, majority of companies are owned by family or government (Dyanti et al. 2012).

There are two opinions concerning relationship between family ownership and tax aggressive action. The first opinion states that companies with family ownership will tend to reduce agency conflicts between controlling shareholders and non-controlling shareholders (Shleifer & Vishny 1986). Companies with family ownership will tend to have views for the future and minimize actions that will harm the com­pany and damage family name such as tax avoidance action (Chen et al. 2010).

2.4 Political connections

Businesses in Asia are characterized with a connection system consisting of bankers, politicians, and members of government (Rajan & Zingales 1998). Company with political connections will generally find it easier to get credit from bank and leniency in law and tax­ation (Bliss & Gull 2012). In Indonesia, politics and business have been inseparable since the early Indo­nesian independence era. For example, many former military and police officers, former members of parlia­ment, or politicians were appointed to the board of dir­ectors or commissioners (Leuz & Gee 2003).

Kim and Zhang (2015) state that there are 5 reasons why companies with political connections are more likely to engage in tax aggressive action than compan­ies with no political connections: First, companies with political connections tend to have less control than companies with no political connections. This is due to the fact that companies with political connec­tions tend to rely on assistance from their political connections. Second, companies with political connec­tions tend to have wider access than those without pol­itical connections to changes in tax rules, so they can anticipate the rules earlier than others. Third, compan­ies with political connections will tend not to be finan­cially transparent as they have protections from their political connections. Fourth, companies with political connections will be more tax aggressive than those with non-political connections. Fifth, companies with political connections tend to be associated with the possibility of tax aggressive action due to conse­quences of their risk averse decision making.

3 RESEARCH DESIGN

3.1 Sample and data collection

The samples were chosen by using a purposive sam­pling technique based on the following criteria: being a manufacturing company listed on Indonesia Stock Exchange, publishing a complete annual report in the 2016 period, using rupiah (IDR) currency in report­ing, and having a positive profit value. The number of samples was 64 companies.

3.2 Variable measured

3.2.1 Boardofcommissioners

This variable is measured using number of commis­sioners in a company.

3.2.2 Board of Directors

This variable is measured using number of directors in a company.

3.2.3 Audit committee

This variable is measured using number of audit committee in a company.

3.2.4 Family ownership

This variable is measured using the presence of the shareholding family members serving as board of commissioners or board of directors. If any family members become board of commissioner or board of directors, it is measured with value of 1, whereas if none it is measured with value of 0.

3.2.5 Political connection

This variable is measured by the presence of retired military officers, retired police officers, former mem­bers of the parliament, members of political parties in the board of commissioners and board of direct­ors. Any presence of these figures in the board of commissioners and board of directors is valued 1, and no presence is valued 0.

3.2.6 Tax aggressiveness

This variable is measured by using effective tax rate (ETR), which is obtained by the following formula:

Table 1. Sample Selection.

Table 2. Descriptive Statistics.

Table 3. Regression test results.

director variable has a minimum value of 2, maksi- mum value of 16, mean of 5.54, and standard devi­ation of 2.85. The audit committee variable has a minimum value of 3, maximum value of 6, mean of 3.4, and standard deviation 0.812. In Indonesian Stock Exchange rules, each company must have an audit committee with a minimum of 3. Table 1 show that the audit comittee variable has a mean of 3.4 and hence indicates that manufacturing companies in Indonesia tend to appoint audit committees in min­imal account, or just to meet requirements set by the regulator. The family ownership variable has a min­imum value of 0, maximum value of 1, mean of

0. 51, standard deviation of 0.503. This implies that the majority of manufacturing companies in Indo­nesia are owned by family. The political connection variable has a maximum value of 1, minimum value of 0, mean of 0.29, and standard deviation of 0.460, indicating that most of sample companies do not have BOD/BOC with political affiliation. The tax aggressiveness variable has a maximum value of 4.96, minimum value of 0.02, mean of 0.3, and standard deviation of 0.614.

Table 3 shows that the board of commissioners positively and significantly affected tax aggressive­ness, indicating that larger size of the board of commisioners will inhibit the function of the board of commissioners to conduct supervision. The board of directors did not significantly affect tax aggressiveness. The audit committee did not significantly affect tax aggressiveness. This is due to the fact that most sample companies appoint an audit committee in minimum size as shown in Table 2, only to meet aplicable regulations. The family ownership positively and significantly affected tax aggressiveness. Political connections did not significantly affect tax aggressiveness because in the context of this study politicians who served as directors or commissioners in com­panies tend to conduct good business practices for the future of their political carreers.

3 CONCLUSIONS

This study investigates the effect of board of com­missioners, board of directors, audit committee, family ownership, and political connections on tax aggressiveness. This study used 64 sample of manufacturing companies listed in Indonesia Stock Exchange. Using linear regression, we found an evidence that board of commissioners positively and significantly affected tax aggressiveness, that board of directors did not significantly affect tax aggressiveness, that audit committee did not signifi­cantly affect tax aggressiveness, family ownership significantly and positively affected tax aggressive­ness, and political connections did not significantly affect tax aggressiveness.

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