Corporate governance, foreign operations and transfer pricing practice: the case of Indonesian manufacturing companies

Abstract

This research investigated several factors that contribute to international tax avoidance using the transfer pricing mechanism for manufacturing companies listed on the Indonesian Stock Exchange. The factors were: 1) foreign sales; 2) corporate governance, measured by the size of the board of commissioners and percentage of independent commissioners; 3) foreign investor ownership. The size of the company was employed in this research as a control variable. This exploratory research employed quantitative methods. Using purposive sampling, data were obtained from 27 manufacturing companies' financial statements over a three-year period (2013–2015). The data were analysed using binary logistic regression. The results show that the size of the company positively affects transfer pricing, as does foreign ownership, but foreign sales do not. The size of the board and percentage of independent commissioners negatively affect transfer pricing. This research proved that transfer pricing practice was induced by a practice of global/multinational corporations and the strengthening of corporate governance is a must to reduce the practice of aggressive tax avoidance.