Relationship of Political Connection and Tax Aggressiveness: Empirical Evidence from Indonesia

Abstract

We analyse the determinants of tax aggressiveness practices on companies which listed on the Indonesia Stock Exchange. Literature shows the political connection is an important factor that affects the company tax policy making. The analysis results of 844 companies which were listing on the Indonesia Stock Exchange period 2012–2016 indicate that the directors who have political connection tend to avoid tax aggressiveness. This indicates the existence of 'bureaucratic incentive effect'. However, in large companies, directors who have political connections is more aggressive in tax practice. It indicates the existence of 'political favouritism effect' in large companies, because executives may be able to utilise their political connections to lobby the government about tax aggressiveness practices (e.g., avoiding tax audits and asking fine reduction). In addition, large companies have relatively higher bargaining power on the government, because they have a larger contribution in the national economy than small companies.