Tax revenue is the primary source of state income. In the 2019 state budget realization, tax revenue accounted for 78.9%, or approximately IDR 1,545.3 trillion, of the total income of IDR 1,957.2 trillion. These funds are essential for infrastructure development and public welfare. However, tax collection often encounters challenges due to differing perspectives between the government and businesses. While the government aims to maximize tax revenue, companies strive to minimize tax payments, viewing them as a burden that reduces net profit.
One method companies use to reduce tax burdens is tax avoidance. Tax avoidance involves exploiting loopholes in tax regulations to minimize tax obligations without breaking the law. Although legal, tax avoidance can result in significant losses for the government by decreasing state revenue. According to the 2020 Tax Justice Network report, Indonesia incurred losses amounting to IDR 67.6 trillion due to corporate tax avoidance.
In an increasingly competitive business environment, companies need effective strategies to manage risks and ensure sustainability. A key factor influencing tax avoidance strategies is the role of top executives, particularly the Chief Executive Officer (CEO). CEOs hold substantial responsibility for determining company policies, including tax strategies.
CEO power refers to the CEO’s ability to make strategic decisions that impact the company. Finkelstein (1992) categorizes CEO power into four types: ownership power (shareholding), structural power (formal position), expert power (expertise), and prestige power (social connections). This study focuses on three categories: ownership power, expert power, and prestige power, as structural power is irrelevant in Indonesia’s two-tier system context.
Expert power is measured by the CEO’s tenure, with longer tenures indicating greater knowledge and experience, enhancing their ability to make strategic decisions, including tax avoidance. Prestige power is assessed based on the CEO’s education level, with higher education levels correlating with more rational and cautious risk-taking in taxation. Ownership power is measured by the CEO’s shareholding, with CEOs owning shares more likely to act in the company’s and shareholders’ best interests.
Zunianto et al. (2024) conducted a quantitative study on manufacturing companies listed on the Indonesia Stock Exchange from 2015 to 2019. Using purposive sampling, they selected samples based on specific criteria, utilizing annual financial reports obtained from the Indonesia Stock Exchange’s official website. Descriptive statistical analysis revealed that the average CEO tenure was 123 months, with a minimum of 2 months and a maximum of 576 months. Additionally, 31.6% of CEOs held a master’s degree or higher, while the rest had education below a master’s degree. The average CEO shareholding was 2.03%.
Pearson correlation tests showed a positive relationship between CEO tenure and tax avoidance measured by CETR, while CEO education also had a positive relationship with tax avoidance measured by ETR. CEO ownership did not show a significant relationship with tax avoidance. Control variables such as profitability (ROA) and leverage (LEV) also showed significant relationships with tax avoidance. Multiple linear regression analysis indicated that CEO expert power (measured by CEO tenure) and CEO prestige power (measured by CEO education) positively correlated with tax avoidance, whereas CEO ownership power negatively correlated with tax avoidance. These results align with the theory that CEOs with longer tenures and higher education levels are more inclined to take risks, including tax avoidance strategies.
This study empirically demonstrates that CEO power significantly influences tax avoidance in Indonesian manufacturing companies. CEO expert power and prestige power positively correlate with tax avoidance, while CEO ownership power negatively correlates. These findings provide theoretical and practical contributions for companies and the government in formulating tax policies. The study also has limitations, such as the use of secondary data and a focus on manufacturing companies. Future research could expand the sample to other sectors and employ different research methods to strengthen these findings.
Practically, this research offers significant benefits for business practices and policymaking, especially regarding tax avoidance and corporate management. The Directorate General of Taxes can enhance tax policies and regulations by understanding the impact of CEO power on tax avoidance.
Companies can leverage these findings to develop recruitment and CEO development strategies that promote tax compliance, strengthen oversight and corporate governance systems. Enhancing transparency and accountability in financial and tax reporting, and implementing rigorous internal audits, will help companies avoid penalties and maintain their reputation. Effective communication with shareholders about tax policies and corporate social responsibility will boost trust and a positive corporate image. Consequently, companies adhering to tax regulations can use compliance as an added value in branding and marketing, managing risks associated with tax avoidance, and ensuring long-term business sustainability.
Source Journal : https://journal.perbanas.ac.id/index.php/tiar/article/view/3700