Does Transfer Pricing Moderate the Effect of Deferred Tax Assets and Deferred Tax Expenses on Accrual Earnings Management of Firms in Indonesia?

Abstract

The purpose of this study is to analyze (a) the effect of deferred tax assets on accrual earnings management; (b) the effect of deferred tax expenses on accrual earnings management; (c) the role of transfer pricing as a moderator variable to strengthen the effect of deferred tax assets on accrual earnings management; and (d) the role of transfer pricing as a moderator variable to strengthen the effect of deferred tax expenses on accrual earnings management. The samples consist of 160 manufacturing companies listed in Indonesia Stock Exchange (IDX). The study utilizes the financial statements from 2012 to 2018. This study presents that (a) deferred tax assets influence accrual earnings management; b) deferred tax expenses affect accrual earnings management; c) transfer pricing does not strengthen the effect of deferred tax assets on accrual earnings management; and d) transfer pricing does not strengthen the effect of deferred tax expenses on accrual earnings management. This study contributes to accounting studies, tax authorities and regulators, and accounting policy makers. Firstly, this research contributes to the development of accounting studies on the role of transfer pricing as a moderator of the effect of deferred tax assets and deferred tax liabilities on earnings management. Secondly, the results of this study can make a consideration for tax authorities and regulators in addressing company management actions to minimize the amount of tax paid by utilizing policies according to PSAK. It is worth considering how to sanction companies that deliberately reduce the amount of tax that should be paid. It is necessary to conduct tax investigation by the Directorate General of taxes on companies that are indicated to have practiced accrual earnings management with the aim of reducing the tax burden. Thirdly, accounting policy makers need to consider how management reduces the tax that should be paid through accounting policies that are allowed under PSAK and transfer pricing mechanism.