Independent Corporate Governance Organs Activities and Tax Avoidance Activities: Evidence from Indonesia

Oktavia .

doi:10.24912/ja.v24i2.697

Abstract

This study aims to examine the effect of independent corporate governance organs activities (i.e. the level of busyness and political connections of independent corporate governance organs) on tax avoidance activities. By using a sample of manufacturing companies and panel data analysis, this study finds evidence that: (i) The busyness level of independent directors and audit committee have a positive effect on tax avoidance activities. This indicates that the more positions or jobs hold by independent directors and audit committees, thus their duties to monitor the company may be neglected and in turn they are unable to detect that the company is engaged in aggressive tax avoidance; (ii) Political connections of independent directors and audit committees have a positive effect on tax avoidance activities. This suggests that independent directors and audit committees can take advantage from their political connections to make a politics lobby that can reduce the corporate tax burden.

Highlights

Good and effective corporate governance can reduce a firm’s management activities that are opportunistic and may harm shareholders
These results indicate that the level of busyness of independent directors and level of busyness of the audit committees have a positive effect on the level of tax avoidance
In accordance with the arguments formed in this study, the busyness of an independent corporate governance organ can be an obstacle to the realization of a good corporate governance mechanism

Summary

Introduction

Good and effective corporate governance can reduce a firm’s management activities that are opportunistic and may harm shareholders. As a firm’s corporate governance grows better and effective, monitoring the firm's management activities becomes more efficient. Research conducted by Raja et al (2014) and Gunawan & Situmorang (2016) found that the existence of audit committees in firms reduces opportunistic earnings management activities The argument for this finding is that the existence of an audit committee may cause the firm’s management feeling supervised inducing it to become more careful in carrying out its duties. As absolute value of high discretionary accruals indicates a high practice of earnings management, these findings indicate that the busier independent directors become, the less time they have to monitor the firm’s management activities, inducing the management to carry out more earnings management activities

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