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  • Tax Avoidance Creates Company Risks

Tax Avoidance Creates Company Risks

  • 11 October 2018, 08:57 WIB
  • By: Marwati
  • 2530
Penghindaran Pajak dapat Munculkan Risiko bagi Perusahaan

The numerous figure of taxpayers who take tax amnesty showed the high phenomenon of tax avoidance in Indonesia.

Indeed, this type of tax avoidance is beneficial to companies but it also creates risks. One theory related to this phenomenon is agency theory saying that tax avoidance is an activity that can facilitate opportunistic management, such as profit manipulation, and it may disadvantage asset owners and creditors.

“When making the opportunistic decision, management ignores the interest of owners so the owner faces risks related to tax avoidance,” said Dewi Kusuma Wardani in her doctoral promotion at Faculty of Economics and Business UGM on Wednesday (10/10).

Dewi explained agency theory became a theory that is believed to be able to explain the impact of tax avoidance. This theory, however, is challenged by stewardship theory saying that tax avoidance does not affect company risk, even affects negatively.

According to Dewi, Indonesia has the characteristics that made agency conflict high. The characteristics are concentrated ownership that makes it difficult for external groups to become shareholders, the thin limit between shareholders and control that causes weak accountability and monitoring structure, unclear ownership structure, and insufficient company entity.

“The four characteristics makes management able to make opportunistic decision, including tax avoidance,” she said.

She found that weak corporate governance and high financial constraint can enhance the positive influence of tax avoidance tendency towards company risk. Beyond this, tax avoidance tendency does not affect company risk.

This is due to the low law enforcement in Indonesia so detection risk of tax abuse is also low. The length of time between the period of company doing tax avoidance until the verdict that proves it guilty and being sanctioned is long so they cannot be arrested by volatility of tax payment 5 years after the act.

“The research supports the theory that the mechanism that can resolve the second type of agency is good governance, namely the presence of independent commissioners sufficient to protect the interest of the shareholders of majority of shares,” said  Dewi.

She opined that government needs to issue clear regulations that when companies avoid taxes, the ones to be sanctioned are not just the company, but also owners, management, and consultants that has given advice on tax avoidance strategies to the company. This is expected to minimise the case of premeditated tax avoidance covered by financial services, namely audit services by reputable public accountant.

“This law has to be accompanied by strict law enactment so it can make them disinclined of doing it again,” she concluded.

 

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