Transfer Pricing, Thin Capitalization, and Intangible Assets' Impact on Tax Avoidance: Evidence from Indonesian Manufacturing Firms  (2022-2024)

Disya Yuke Farhana; Enggar Diah Puspa Arum; Ilham Wahyudi; Wiralestari Wiralestari

doi:10.61132/jeap.v3i2.2225

Authors

Disya Yuke Farhana Universitas Jambi
Enggar Diah Puspa Arum Universitas Jambi
Ilham Wahyudi Universitas Jambi
Wiralestari Wiralestari Universitas Jambi

DOI:

https://doi.org/10.61132/jeap.v3i2.2225

Keywords:

Intangible Assets, Manufacturing Firms, Tax Avoidance, Thin Capitalization, Transfer Pricing

Abstract

This study examines the effect of transfer pricing, thin capitalization, and intangible assets on tax avoidance among manufacturing companies listed on the Indonesia Stock Exchange (IDX) during 2022-2024. Using a purposive sampling method, 90 firms were selected, yielding 262 firm-year observations after removing 8 outliers from an initial pool of 270. Tax avoidance is proxied by the Cash Effective Tax Rate (CETR); transfer pricing by the Related Party Transaction ratio (RPT); thin capitalization by the Debt-to-Equity Ratio (DER); and intangible assets by the ratio of intangible assets to total assets. The results indicate that transfer pricing has a significant negative effect on tax avoidance, thin capitalization has a significant negative effect on tax avoidance, and intangible assets do not significantly affect tax avoidance. The model is jointly significant (F = 25.422; p < .001) with an Adjusted R² of 21.92%, indicating that 21.92% of the variation in tax avoidance is explained by the three independent variables. These findings carry important implications for tax authorities seeking to strengthen oversight of related-party transactions and the capital structures of multinational enterprises.

Downloads

Download data is not yet available.

References

Anindita, R. I., Irawan, F., Firmansyah, A., Wijaya, S., Qadri, R. A., Sumantri, J., Andriani, A. F., & Mahrus, M. L. (2022). The impact of thin capitalization rules on capital structure and tax avoidance. Journal of Governance and Regulation, 11(2), 8–14. https://doi.org/10.22495/jgrv11i2art1

Borkowski, S. C., & Gaffney, M. A. (2021). FIN 48, uncertain tax positions, and tax aggressiveness: Multinational trends. Journal of International Accounting, Auditing and Taxation, 43, 100388. https://doi.org/10.1016/j.intaccaudtax.2021.100388

Duhoon, A., & Singh, M. (2023). Corporate tax avoidance: A systematic literature review and future research directions. LBS Journal of Management & Research, 21(2), 197–217. https://doi.org/10.1108/LBSJMR-12-2022-0082

Dye, R. A. (1985). Disclosure of nonproprietary information. Journal of Accounting Research, 23(1), 123–145. https://doi.org/10.2307/2490910

Hanlon, M., & Heitzman, S. (2010). A review of tax research. Journal of Accounting and Economics, 50(2–3), 127–178. https://doi.org/10.1016/j.jacceco.2010.09.002

Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1016/0304-405X(76)90026-X

Kalra, A., & Afzal, M. N. I. (2023). Transfer pricing practices in multinational corporations and their effects on developing countries’ tax revenue: A systematic literature review. International Trade, Politics and Development, 7(2), 82–102. https://doi.org/10.1108/itpd-04-2023-0011

Ministry of Finance of the Republic of Indonesia. (2024). Performance Report of the Directorate General of Taxes 2023. Jakarta: Ministry of Finance.

Kristina, D., & Muhyarsyah. (2023). The effect of profitability, tunneling incentive, debt covenant, and intangible assets on transfer pricing decisions with tax minimization as moderating variables. Journal of Economics, Finance and Accounting Studies, 5(1), 145–158. https://doi.org/10.32996/jefas.2023.5.1.14

Kurniasih, L., Yusri, Y., Kamarudin, F., & Sheikh Hassan, A. F. (2023). The role of country by country reporting on corporate tax avoidance: Does it effective for the tax haven? Cogent Business and Management, 10(1), 2159747. https://doi.org/10.1080/23311975.2022.2159747

Mahardika, R., & Irawan, F. (2022). The impact of thin capitalization rules on tax avoidance in Indonesia. Jurnal Pajak Indonesia (Indonesian Tax Review), 6(2S), 651–662. https://doi.org/10.31092/jpi.v6i2S.1965

Modigliani, F., & Miller, M. H. (1963). Corporate income taxes and the cost of capital: A correction. The American Economic Review, 53(3), 433–443. https://www.jstor.org/stable/1809167

Naruli, A., Kusumaningarti, M., & Agustin, A. I. (2022). Pengaruh transfer pricing dan aset tak berwujud terhadap penghindaran pajak [The effect of transfer pricing and intangible assets on tax avoidance]. Jurnal Ilmiah Cendekia Akuntansi, 7(4), 111–125. https://doi.org/10.32503/cendekiaakuntansi.v7i4.2920

Nurdiansyah, R., & Masripah. (2023). Factors causing tax avoidance practices in multinational companies: Evidence from Indonesia. International Journal of Research in Business and Social Science, 12(3), 391–398. https://doi.org/10.20525/ijrbs.v12i3.2565

OECD. (2012). Thin capitalisation legislation: A background paper for country tax administrations. Paris: OECD Publishing.

OECD. (2022). OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022. Paris: OECD Publishing. https://doi.org/10.1787/0e655865-en

OECD. (2023). OECD/G20 Base Erosion and Profit Shifting Project – Global Anti-Base Erosion Model Rules (Pillar Two). Paris: OECD Publishing. https://doi.org/10.1787/782bac33-en

Minister of Finance Regulation No. 169/PMK.010/2015 on the Determination of the Debt-to-Equity Ratio for Corporate Income Tax Calculation Purposes.

Minister of Finance Regulation No. 172/PMK.03/2023 on the Application of the Arm’s-Length Principle in Related-Party Transactions.

Rizkillah, A. A., & Putra, J. R. (2022). Pengaruh intangible asset, good corporate governance dan transfer pricing dengan moderasi tax avoidance [The effect of intangible assets, good corporate governance, and transfer pricing moderated by tax avoidance]. Jurnal Pendidikan dan Kewirausahaan, 10(3), 699–712. https://doi.org/10.47668/pkwu.v10i3.473

Saputra, W. D., Izati, E. N., & Reskino, R. (2023). Dynamics of tax avoidance in ASEAN: Thin capitalization, inventory intensity, and ownership of intangible assets moderate by profit management. Indonesian Interdisciplinary Journal of Sharia Economics (IIJSE), 6(2), 1480–1495. https://doi.org/10.31538/iijse.v6i2.4435

Sebele-Mpofu, F., Mashiri, E., & Schwartz, S. C. (2021). An exposition of transfer pricing motives, strategies and their implementation in tax avoidance by MNEs in developing countries. Cogent Business & Management, 8(1), 1944007. https://doi.org/10.1080/23311975.2021.1944007

Sumekar, D. R., Mulyani, S., & Nuridah, S. (2023). Analisis pengaruh thin capitalization, komite audit dan kepemilikan institusional terhadap tax avoidance pada perusahaan sektor keuangan di Bursa Efek Indonesia tahun 2020–2022 [Analysis of the effects of thin capitalization, audit committee, and institutional ownership on tax avoidance in IDX financial sector companies, 2020–2022]. INNOVATIVE: Journal of Social Science Research, 3(5), 4533–4541.

Tax Justice Network. (2023). State of Tax Justice 2023. Bristol: Tax Justice Network. https://taxjustice.net/reports/the-state-of-tax-justice-2023/