Abstract
Purpose The purpose of this paper is to analyze the effect of internal control on tax avoidance analyzing internal (family ownership) and external (environmental uncertainty) factors on the effectiveness of internal control in preventing tax avoidance. Design/methodology/approach First, the authors examine the direct effect of the effectiveness of internal control on tax avoidance. Second, the authors examine the effect of moderation of family ownership and environmental uncertainty on the relationship of the effectiveness of internal control on tax avoidance. Third, the authors divide the full sample into two groups, high and less effectiveness of internal control to examine the direct effect of internal control effectiveness on tax avoidance and when considering moderating variables. Fourth, the authors use two different measures of the effectiveness of internal control. Findings This research found that effective internal control can reduce tax avoidance. Family ownership affects the relationship between internal control and tax avoidance, but environmental uncertainty does not influence the relationship between internal control and tax avoidance. Practical implications Internal control increases compliance with rules and policies, so companies must design and implement effective internal control to prevent tax avoidance activities in violation of tax regulations. Originality/value In contrast to previous studies, this study measures the effectiveness of internal control using the index of internal control practice disclosure and considers internal and external factors that can affect the effectiveness of internal control to prevent tax avoidance.
Highlights
Tax expense is an operational cost that reduces company profits, so tax planning is a way to increase reported profits (Lee and Kao, 2018)
Management tends to reduce the amount of tax burden to increase profit after tax (Gaaya et al, 2017) to obtain compensation and bonuses. In line with this concept, this study considers that tax avoidance, both in the context of tax planning and tax evasion, has a tax risk because it is related to government regulations which can lead to fines or penalties for violating existing regulations
The average cash effective tax rate (CETR) value on companies with high effective is 36 percent higher than less effective groups (32 percent). These results provide an early indication that companies with effective internal control mechanisms are less likely to do tax avoidance than companies with below-average effectiveness
Summary
Tax expense is an operational cost that reduces company profits, so tax planning is a way to increase reported profits (Lee and Kao, 2018). The management carries out tax planning because this cost component is quite high and the company does not benefit directly from the taxes paid. The reason that is often cited is that management has an incentive to carry out tax planning, namely, diverting tax costs to increase company value (Rezaei and Ghanaeenejad, 2014). There is an opinion that tax planning is done for the benefit of management, such as increasing management compensation and bonuses (Armstrong et al, 2015). Aggressive tax planning is classified as tax avoidance, and most studies use the agency problem perspective in discussing tax avoidance (Gaaya et al, 2017); from this perspective, tax avoidance is illegal (Lee et al, 2015; Rezaei and Ghanaeenejad, 2014). The aggressive tax avoidance must be prevented, and if it is proven to violate the rules, it will be subject to penalties and loss of reputation and in the long run, hamper business sustainability
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