The Impact of Corporate Governance toward Tax Management

The Impact of Corporate Governance toward Tax Management Bernad Hasiholan and Dwi Martani University of Indonesia

Contents 1 Introduction 2 Theory and Hypothesis 3 Research Method 4 Data Analysis and Discussion 5 Conclusion and Suggestion

Introduction § This study aims to determine whether corporate governance has effect on tax management which is measured by effective tax rate. § As an expense tax reduce the income and shareholder wealth. § Tax compliance will increase the firm reputatioan § Firms manage income to reduced their tax payment by tax management activities. § Byrnes and Levelle (2003), big companies in US made tax management by lowering the effective tax rate

Introduction § Tax management was influenced by corporate governance (Minnick and Noga, 2010). § Tax management was complex and induce opprotunity behavior from management. § High level uncertaintay of tax management and usually doesn’t provide direct impact to company § Corporate governance tend to reduce ETR. § The research replicate to Minnick and Noga 2010 with adaptation to the Indonesian data. § Unify the board compensation. § Simplify the ETR measurement

Tax Management Process of business organizing To reduced tax paid or manage optimal cash flow of tax The activities permitted by tax law and regulation – tax avoidance Not permitted by law – tax evasion. Zain(2005)

Tax Management § Several strategies to reduce tax legally – tax avoidance. § Scholes et al (2002) built a conceptual framework of tax management § All parties consider the consequences of the planned transaction to all parties that will be affected by the transaction § All tax consider not only explicit taxes, but also the implicit tax § All cost requires policy makers to realize that the tax is just one of many costs in the business, and all charges will be taken into account when making plans

Boox Tax Difference Accounting Standard Tax Regulation Accounting recognition & Measurement Differences Permanent Temporary Statutory tax ≠ Effective Tax Rate Defferred Tax § Asset / Liability § Expense / Income

Tax Management Measurement Statutory tax rate stated by tax authority • Tax paid by firms not equall with the statutory tax rate there are some differences between accounting and tax recognition Effective tax rate the actual tax to be paid (tax payable) or tax expense devided by profit before tax • Current effective tax rate current tax (tax payable) • Effective tax rate tax expense current tax + defferred tax Gillman et al. (2002) suggested that statutory tax rate should be equal to an effective tax rate if there is tax incentives • Tax shield interest expense • Tax credit some allowable deductile expenses

Effective Tax Rate - ETR § Companies in the same nation have the same statutory tax rate. § But, there are companies that have ETR higher than statutory tax or lower than statutory tax. § Inequality ETR due to differences between accounting and tax recognition. § Income increasing in economic benefits not resulting from contributions by equity holder. § Income increasing in economic benefit that earn or receipt from Indonesia or outside that use for consumption or increasing of wealth (Indonesian Income Tax Regulation). • Income exception, final tax income • Any deductible and non deductible expense

Effective Tax Rate Shackelford et al. , 2007 Financial Statement • Contract with other parties • User have lack of information Tax Management • Lower income lower tax • Better cash flow Management Choices • Optimize the trade off by fullfill the contract and minimize tax paid

Corporate Governance is often associated with the company's financial performance is better in the future Company reputation compliance to the law Company performance more efficient and profitable Indonesia two board systems Number of board commissioners Percentage of Independent commissioners Compensatio n Corporate Governance

Number of Board Commisoners Tax management is influenced by corporate governance, Desai dan Dharmapala (2006), Erickson et al. (2006) • Serves as an internal control to served to protect the interest of shareholder. • Effectiveness of overshight function Optimal number of board commissioners depend on firms characteristic, Coles et al. , 2008 • The larger the companies are, the more advisers will be required. Less of board of commissioners reduces ETR, Minnick dan Noga, 2010, Bhagat and Black (1999) • the fewer the number of commissioners will make the council more focus to convince management to invest in tax management. • the low number of commissioners will produce slightly better oversight functions

Percentage of Independent commissioners Bhagat and Black (1999) More independent commissioner better oversight function pressure managament to tax efficient lower ETR Minnick dan Noga, 2010 Compensation will influence firm overal performance include effective tax planning.

Compensation Amstrong et al. , 2009 Rego dan Wilson, 2009 Compensation and shorterm tax management have correlation Jensen dan Murphy, 1990 Compensation will influence firm performance

Hipothesis H 1 H 2 H 3 The number of commissioners is positively related to tax management characterized by increasingly lower effective tax rate The percentage of independent commissioners is positively related to tax management which is characterized by the lower of effective tax rate The amount of compensation for the board of commissioners and directors has a positive impact toward tax management characterized by the lower of effective tax rate

Sampel Selection Non financial firms Completed financial and corporate governance information Using rupiahs as financial reporting currency (Sari dan Dwi Martani, 2010) Positive income (Minnick dan Noga, 2010) 0 < CETR and GETR < 1, (Zimmerman, 1983; Omer et al. , 1993) (Stickney and Mc. Gee, 1982; Gupta and Newberry, 1997)

Research Model

Descriptive Statistics Variable GETR_T 1 CETR_T 1 BOARD INDEP COMP SIZE ROA LEV Maximum 0. 8354 0. 8575 0. 8247 10. 0000 1. 0000 0. 1817 13. 9990 0. 3391 6. 6857 Median Minimum 0. 2650 0. 0485 0. 2973 0. 0485 0. 2598 0. 0000 0. 2984 0. 0000 5. 0000 2. 0000 0. 4000 0. 1667 0. 0064 0. 0002 12. 1743 10. 8438 0. 0646 0. 0010 0. 8969 -1. 4696 Average 0. 2799 0. 3141 0. 2798 0. 3114 4. 5372 0. 4135 0. 0110 12. 2114 0. 0816 1. 0907 Std. Deviation 0. 0946 0. 1115 0. 1134 0. 1128 1. 6687 0. 1124 0. 0168 0. 6654 0. 0665 1. 0075

Anova Analysis Variable BOARD INDEP COMP SIZE ROA LEV GETR Average p-value ANOVA Above Below Direction (one tail) Median 0. 27 0. 29 0. 0988 0. 27 0. 29 0. 0593 0. 27 0. 29 0. 3024 0. 26 0. 3 0. 0079* 0. 25 0. 31 0. 0000* 0. 28 + 0. 2707 CETR Average Above Below Variable Median BOARD 0. 281 INDEP 0. 27 0. 29 COMP 0. 27 0. 29 SIZE ROA LEV 0. 26 0. 25 0. 29 0. 27 0. 31 0. 27 Direction + p-value ANOVA (one tail) 0. 4151 0. 0702** 0. 2048 0. 0000* 0. 1024

Regression of GETR Variable C GETR_T 1 BOARD INDEP COMP SIZE ROA LEV Expectation - Coeff 3. 1095 -0. 1564 0. 0058 -0. 0684 -1. 3249 -0. 2220 -1. 1284 0. 0338 Std. Error 0. 0097 0. 0000 0. 0000 t-Statistic 322 -2690527 973363 -392154 -450336 -385248 -5012157 712880 Prob. (onetail) 0. 0000* 0. 0000* R-squared Adjusted R-squared F-statistic Prob(F-statistic) 0. 7938 0. 5568 3. 3490 0. 0000

Regression of CETR Variable C CETR_T 1 BOARD INDEP COMP SIZE ROA LEV Expectation - Coeff 4. 8150 -0. 3834 -0. 0122 -0. 0402 -1. 4055 -0. 3487 -1. 3258 0. 0013 Std. Error 0. 0075 0. 0000 0. 0000 t-Statistic 643 -6537266 -792424 -253336 -706302 -790719 -6063654 34203 Prob. (one tail) 0. 0000* 0. 0000* R-squared Adjusted R-squared F-statistic Prob(F-statistic) 0. 8599 0. 6988 5. 3376 0. 0000

Summary Regression GETR CETR BOARD + - INDEP - - COMP - - ETR T-1 - - SIZE - - ROA - - LEV + +

Hipothesis 1 - GETR Positive Correlation between GETR and number of board Shackelford et al. (2007) • Commissioners prefer to accounting income compare to tax reduction • Commissioners maintain firm reputation by compliance to tax law

Hipothesis 1 –CETR Negative Correlation between CETR and number of board Coles et al. , 2008 • Management focus on tax paid not only tax expense because tax paid relate to current cash flow

Hipothesis 2 - ETR Negative correlation between percentage of independent commissioners and GETR Bhagat and Black, 1999 • Independend commissioners increase monitoring Minnick and Noga, 2010 • Independend commissioners cause the firm more focus on overall performance

Hipothesis 3 - ETR Positive correlation between compensation and GETR Sari and Martani, 2010 • Weak of corporate governance practice in Indonesia Core et al. , 1998 • Firms that have weak CG have higher aagency problems so the executives compensate with higher salary Bebchuk and Fried, 2004 • Management avoid flutuated compensatioan and tend to be risk averse

Conclusion § Tax management plays an important role in determining the amount of the tax burden of companies and the amount of tax paid by the company. § This study found that the number of commissioners has a positive effect on the effective tax rate based on the tax expense, but a negative effect with the effective tax rate based on the amount of taxes paid. § The percentage of independent commissioners negatively affects toward the effective tax rate. § The amount of compensation for the board of commissioners and directors negatively affects the effective tax rate.

Conclusion GETR CETR BOARD Shackelford et al. , 2007 Coles et al. , 2008 INDEP Bhagat dan Black, 1999 Minnick dan Noga, 2010 Sari dan D. Martani, 2010 Hermawan, 2009 COMP Sari dan D. Martani, 2010 Minnick dan Noga, 2010 Core et al. , 1998 Rego dan Wilson, 2009 Bebchuk dan Fried, 2004 Jensen dan Murphy, 1990

Sugestion for Future Research Variabel Data Measurement Time Period Expand the insustry Tax Management Corporate Governance

Thank you martani@ui. ac. id