The Impact of Corporate Governance and Fiscal Loss Compensation on Tax Avoidance Policies: Indonesian Banking Sector

2.1 Tax avoidance

Tax avoidance is a tax planning strategy to maximize shareholder wealth. Tax is one of the most important corporate obligations, with the hope that the heterogeneity of directors significantly influences corporate tax avoidance behavior [12]. Tax avoidance [8-10], saves the company's cash flow from the obligation to pay taxes to maximize the receipt of dividends that will be distributed to shareholders, indicating that the owner of the company will try to maximize wealth. Cash savings increase the company's cash flow, which offers opportunities for further investment to enhance the firm’s value. Tax avoidance [11] is carried out because this action is still permissible and violate the law. It is done to minimize the tax liability of the business. However, tax avoidance can potentially reduce state revenue in the tax sector.

Corporate tax avoidance can be done by implementing tax management. The application of tax management in companies requires good corporate governance. The implementation of corporate governance [11, 12] is motivated by problems with the corporate governance structure. The corporate governance structure within a company aims to create good, effective, and efficient corporate governance. The application of corporate governance in determining tax policy will be used by companies concerning corporate income tax payments [13]. This study utilizes institutional ownership, independent commissioners, audit committees, and audit quality as proxies for the corporate governance elements. Fiscal loss compensation is another element that may impact tax evasion. Compensation for financial losses is a pattern of compensating for company losses after the bookkeeping, and then according to the decision, there is a fiscal loss. Companies that experience fiscal losses in one period will be given tax relief. These losses can be carried forward over the next five years, and the company's profit will be used to reduce the amount of compensation for these losses.

2.2 Institutional ownership, independent commissioners, audit committees, audit quality, and fiscal loss compensation

Institutional ownership [14-17] is shared ownership owned by parties or institutions outside the company. Monitoring the company's success is crucial to ensuring shareholders' confidence in their investments. The concept of tax management, as elucidated in the study [18-20], is directed towards the regulation of taxes. This emphasizes the accurate fulfillment of tax responsibilities while also seeking opportunities to economize on the amount of taxes disbursed.

The amount of monitoring provided by institutional investors is highly influenced by the magnitude of the investment. Institutional ownership holds strong control from external companies; the greater the shareholder from external parties, the higher the supervision carried out [18-20]. The existence of control from external parties will ensure that the company's management decides on policies, maximizing shareholders' welfare. Therefore, the company requires a monitor from an external party to monitor each party with different interests. Thus,

H1: Institutional ownership significantly and negatively impacts tax avoidance.

Independent commissioners are members of the board who professionally have an independent attitude or do not only consider what the corporation wants regarding all policies made by the directors. Its existence in a company will impact management performance in disclosing broader information. The aims of tax management [19, 20] can be realized via the tax management function. This function encompasses tax planning, implementation of tax responsibilities, and tax control. The role of an independent commissioner pertains to the implementation of tax responsibilities.

Under IDX regulations, an independent commissioner is a person who is not associated in any way with the controlling shareholder, the board of directors, or the commissioners and who does not have a directorship in a business connected to the owner's business [13, 21, 22]. If at least thirty percent (30%) of the commissioners' members are committed to protecting minority owners, the amount invested in each firm must be equivalent to the number of shares held by non-controlling shareholders. Thus,

H2: Independent commissioners significantly and negatively impact tax avoidance.

A committee within a corporation constituted, appointed, and removed by the board of commissioners is called an audit committee under POJK No. 55/POJK 04/2015. According to IDX’s rules, every business must establish an audit committee with at least three members chaired by an independent commissioner. The role of the audit committee in tax management is focused on strategizing tax obligations. This tax planning is designed to guarantee that the tax savings directed to the state comply with tax regulations while being effectively executed [20].

Its efforts support the board of commissioners' oversight of the company's internal and external audits and the preparation of financial reports. To avoid information asymmetry, the audit committee in corporate governance is charged with ensuring that company management has been carried out in line with applicable laws and business ethics [23-28]. Its existence might shed light on concerns about the company's internal control, accounting, and financial policies. Thus,

H3: The audit committee significantly and negatively impacts tax avoidance.

Audit quality is governed by the corporate governance principle of transparency. When the auditor examines the client's financial statements, there is a chance that violations in the client's accounting system will be found and reported in the audited financial statements. It is known as audit quality. An auditor must remain professional in the auditing and accounting fields. The professional attitude of an audit can be proven by prioritizing independence as a work ethic. Independence means that when an auditor works, he is free and is not under pressure or influence from a party because an auditor is responsible for serving the company by checking its financial statements. Sunarsih and Handayani [29] state that financial reports will be more trusted and considered of higher quality if the company audits its financial statements using a Public Accounting Firm belonging to the Big Four. The resulting audited report displays the true company’s value so that company managers have a lower fraud level. Research of Sunarsih and Handayani [29] strengthens the opinion of Kanagaretnam et al. [30] that because a corporation is less likely to alter profits for tax purposes if its audit is of higher quality, audit committees negatively impact tax avoidance. Thus,

H4: Audit quality significantly and negatively impact tax avoidance.

Tax loss is a reduction between income and expenses that can take into account income tax provisions. Fiscal loss compensation is a pattern of compensation that can be obtained if corporate or individual taxpayers, after bookkeeping, if, according to a tax decision passed by the Directorate General of Taxes or according to the Annual Notification Letter, a fiscal loss is detected. Calculating compensation for losses can be regulated in the tax regulation Article 6, paragraph 2 No. 17 of the 2000 Income Tax Law. The process of computing fiscal loss compensation accessible to taxpayers is outlined in the following dataset.

During the tax year of 2020, PT X incurred a fiscal deficit amounting to IDR 2 billion. Over the subsequent five tax years, PT X's fiscal gains (or losses) are detailed in Table 1 below.

Table 1. PT X's fiscal gains (or losses) between 2021-2025

The unutilized fiscal loss of IDR 200 million from the 2020 tax year will lapse and cannot be offset against fiscal gains in the 2026 tax year. Conversely, the fiscal loss of IDR 500 million from the 2022 tax year remains available for compensation against fiscal profits in both the 2026 and 2027 tax years.

Compensation for fiscal losses can also be used as a way of tricking people into avoiding their tax obligations [5, 6, 28, 29]. Thus,

H5: Compensation for fiscal losses significantly and positively impacts tax avoidance.

The findings of the statistical description of each variable employed in this study are presented in Table 2. Institutional ownership has a mean value of 0.679706 as well as a median value of 0.656676. It implies that the mean value is greater than the median value, indicating that the average value of financial sector companies has large institutional ownership. PT Tifa Finance Tbk had a maximum value of 0.996452 in 2021. Meanwhile, PT Asuransi Ramayana Tbk had a minimum value of 0.205658 in 2021. Independent commissioners have a mean value of 0.513361 as well as a median value of 0.500000. It suggests that the mean value is more significant than the median value, meaning that the average value of financial sector companies has many independent commissioners. The maximum value for independent commissioners is 0.750000, which occurs in two companies: PT Asuransi Bina Dana Artha Tbk in 2017-2020 and PT Asuransi Ramayana Tbk. Meanwhile, the minimum value for independent commissioners is 0.250000 for Trust Finance Indonesia Tbk in 2019.

For the audit committee, the mean value is 3.651852, as well as the median is 3.000000. It denotes that the mean value is more significant than the median value, indicating that the average financial sector company has many audit committees. The highest score for the audit committee is 10.00000, and this value is possessed by the company PT. Bank Rakyat Indonesia Tbk in 2020. In comparison, the minimum score for the audit committee is 2.00000, which happened to PT. State Savings Bank Tbk in 2019 and PT Asuransi Ramayana Tbk in 2017 and 2018. In addition, audit quality has a mean value of 0.666667 as well as a median value of 1.000000. It suggests that the mean value is lower than the median value, denoting that the average financial sector company has a small audit quality. Meanwhile, the maximum value obtained is 1.00000, owned by 19 companies, whereas the minimum value of 0.00000 is owned by 8 companies.

Moreover, tax loss compensation has a mean value of 0.044444 as well as a median value of 0.000000. The highest score for compensation for financial losses is at PT. Trimegah Sekuritas Indonesia Tbk and PT Wahana Ottomitra Multiartha Tbk in 2016. Then, for tax avoidance, the mean value is 0.242158 as well as the median is 0.239972. It implies that the mean value is more significant than the median value, indicating that the average financial sector company has a large tax avoidance. While the maximum value of 0.86461 is owned by PT Wahana Ottomitra Multiartha Tbk in 2017, the minimum value of 0.025433 is owned by PT. Bina Dana Artha Tbk Insurance in 2018.

Testing for the model specification used in this study was carried out by carrying out the Chow and Hausman tests. Based on Table 3, the Common Effect Model and the Fixed Effect Model are contrasted in the first test using the Chow test. The first test results of the selected Fixed Effect Model have a probability value of less than 5%. The second test uses the Hausman test by comparing the Fixed and Random Effect Models (as shown in Table 4). In this regard, the Fixed Effect Model was chosen as the best model with a probability value of less than 5%.

Table 3. Descriptive statistics

Table 4. Model specification test result

Table 5. Hypothesis test

Note: ***p<.01,** p<.05,* p<.1

4.1 The impact of institutional ownership on tax avoidance

Derived from the data in Table 5, the link between institutional ownership and tax avoidance exhibits a significance value of 0.3692. The regression analysis results prove that institutional ownership has not effects tax avoidance, so H1 is rejected. The amount of institutional ownership has little impact on how corporations evade paying taxes. Shares with institutional ownership come from organizations responsible for overseeing how well managers run their businesses. Banks, pension funds, insurance firms, and other institutions are among the in question. The higher share ownership by institutions means that the tax burden paid by companies will also be higher, and this will encourage financial sector companies to use corporate governance mechanisms in proxies for institutional ownership as a tool to take tax-saving measures.

Institutional ownership in agency theory is expected to reduce agency conflicts between shareholders acting as principals and company managers acting as agents. Company managers have more information to reference to decide and run the company than shareholders. A high return rate on investment will be the focus of shareholders, so shareholders will try to reduce costs, which are considered a reduction in profits that will be distributed to shareholders, and the costs in question are tax burdens. A high percentage of institutional ownership will more easily influence management, which has much information to support company managers in tax avoidance.

Much of the information is only for internal consumption by management and is not available to institutional investors. Public ownership is typically in the minority, making it impossible for it to be used as a monitoring or intervention tool or to significantly affect the agent's discipline in carrying out the principal's wishes. This study’s results align with those [30, 33, 34], which state that institutional ownership has no impact on efforts to evade taxes.

4.2 The Impact of independent commissioners on tax avoidance

Extracted from the data presented in Table 4, the relationship between independent commissioners and tax avoidance demonstrates a significant value of 0.0038, and the nature of this relationship is negative. The regression analysis results prove that the independent commissioner negatively and significantly impacts tax avoidance in financial sector companies, so H2 is accepted. In other words, the more the number of independent commissioners in the company reduces tax avoidance practices. A company’s independent board of commissioners supervises the directors in achieving company goals. With an increasing number of independent commissioners, supervision will be stronger. Independent commissioners in agency theory are expected to lower agency problems between investors as principals and company managers as agents.

Independent commissioners play a balancing role in carrying out supervision and controlling all actions taken by company managers to protect minority shareholders. The fact that it exists will reassure investors that they will get a return on their investment. Large profit earnings are, therefore, necessary to assure investors' projected returns while limiting the company's tax burden.

This study’s results corroborate with those [13, 35, 36], stating that tax avoidance is significantly impacted negatively by an independent commissioner. Management will make thoughtful judgments and conduct the business openly under the supervision of an impartial board of commissioners to reduce tax evasion.

4.3 The impact of audit committee on tax avoidance

Extracted from Table 4, the relationship between the audit committee and tax avoidance is characterized by a significant value of 0.0001, and this link exhibits a negative direction. The regression analysis results prove that the audit committee negatively impacts tax avoidance in financial sector companies, so H3 is accepted. It means that audit committee members formed by the board of commissioners to assist in their duties play a role properly so that they can improve oversight of manager performance. An audit committee cannot be added solely to comply with government regulations regarding guidelines and establishing an audit committee. According to studies [22, 23, 25], the audit committee is crucial in assisting the board of commissioners in expressing opinions on accounting, internal control, and financial policies.

In agency theory, the audit committee is expected to lower agency issues between investors as principals and company managers as agents. The audit committee members will reduce tax avoidance practices in companies if they have background and expertise in accounting. The field of accounting or finance expertise will better understand loopholes in tax regulations and how to avoid risks so they can provide useful advice to generate greater profits or returns for shareholders.

4.4 The impact of audit quality on tax avoidance

Drawn from the data within Table 4, the link between quality and tax avoidance is associated with a significance value of 0.7491. The regression analysis results prove that audit quality has no effect on tax avoidance in financial sector companies. Therefore, the plausible hypothesis (H4) is rejected, meaning that the financial statements audited by KAP The Big Four and KAP non-The Big Four do not guarantee audit quality and will be more trusted not to practice tax avoidance by companies. The researcher suspects that it is not only the KAP The Big Four which provides good results that have high credibility, but all KAPs carry out audits in accordance with applicable and enforced guidelines and regulations, as the purpose of an external audit is to identify important factors that offer a response in the form of action.

Audit quality in agency theory is expected to reduce agency issues between investors as principals and company managers as agents. Its application can reduce agency costs, namely the amount of costs incurred to reward external auditors in auditing the company's financial statements. The tax authorities are more likely to trust businesses that use KAP The Big Four audit services since they are trusted with high work integrity, always apply existing regulations, and are of good quality. However, if the corporation can offer KAPs more and better welfare advantages, a KAP with a high reputation may engage in dishonest behavior to increase their welfare. The above research results are consistent with studies [31, 32], stating that tax evasion strategies are unaffected by audit quality.

4.5 The impact of fiscal loss compensation on tax avoidance

Based on the information obtained from Table 4, the relationship between fiscal loss compensation and tax avoidance is marked by a significant value of 0.0000, and the nature of this relationship is positive. The regression analysis results prove that fiscal loss compensation positively impacts tax avoidance in financial sector companies. Hence, the proposed hypothesis (H5) is accepted, meaning that the higher the fiscal loss compensation, the more it will encourage companies to practice tax avoidance. Compensation for financial losses is transferring compensation for financial losses from one period to another experienced by a company. Companies that lose money in one accounting period are given tax relief.

A tax loss from one tax year can be offset against income from the next year for up to five years. For five consecutive years, because the taxable gains will be utilized to lower the amount of financial loss compensation, the corporation will not have to pay as much in taxes. Management may use fiscal loss compensation to implement tax avoidance measures. The results are in line with studies [6, 13, 37, 38].