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Effects of Political Connections and Corporate Governance on Tax Aggressiveness

Arja Sadjiarto, Florencia, Olivia Nevanda

Petra Christian University, Indonesia

We investigate whether political connections and corporate governance have any effects on tax aggressiveness in service and banking sector in Indonesia. Corporate governance act as the independent variable on the first model, and as moderating variable on the second model. Tax aggressiveness is measured using effective tax rates. Political connection is measured with the amount of any connection between the company and its board member's political background. While the measurement of corporate governance are among others: board independence, board size, CEO duality, institutional ownership, and external auditor's reputation. We took the samples service companies and banks listed on the Indonesia Stock Exchange for the period 2013-2017. The analysis used in this study is the multiple linear regression analysis. The finding is that political connection does not influence tax aggressiveness in both sectors. In the service sector, corporate governance measured with CEO duality and institutional ownership has a negative effect on tax aggressiveness, while the other measurements have no effect. While in banking sectors, board size has a negative effect, institutional ownership and external auditor's reputation have a positive influence. Corporate governance did not moderate the influence of political connections on tax aggressiveness in both sectors.

The governmental purpose of maximizing revenue from taxes is not the same as the company purpose as a taxpayer, in which the company attempts to minimize the tax burdens, so it gets higher net income. The actions of tax-saving conducted by a number of companies in Indonesia are aimed not to do tax evasions, but considerably to the purpose of saving many tax expenses paid by the company by way of utilizing gaps available within tax regulations in Indonesia (Suandy, 2014, Pranoto, and Widagdo, 2016).

Wahab, Ariff, Marzuki, Zuraidah, & Sanusi (2017); Wicaksono (2017); Pranoto & Widagdo (2016); Boussaidi & Hamed (2015); Putri (2014); Mulyadi, Anwar, & Krisma (2014); Kim dan Zhang(2013), investigated the influences of political connection and corporate governance towards tax aggressiveness. According to Wahab, Ariff, Marzuki, Zuraidah, & Sanusi (2017), they found that political related positively towards tax aggressiveness. The more who have political connections, so it can enable to do tax aggressiveness. Good governance can prevent the company from practicing company tax aggressiveness policies. Corporate governance not only have an effect on tax aggressiveness but also moderating the effect of political connection toward tax aggressiveness (Wahab et al. 2017) negatively. Whereas according to Pranoto & Widagdo (2016), political connection probably may be used by the taxpayer for helping to reduce the possibilities of tax inspections or reduce any tax sanctions by utilizing the relationship with government officials.

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