Determinants of transfer pricing decisions in Indonesia manufacturing companies

Abstract

This research aims to investigate tax expenses, tunneling, and bonus on transfer pricing decisions in Indonesia. The practice of transfer pricing as one form of tax avoidance may threaten state revenues. This research is quantitative research with multiple linear regression models with panel data. The samples used in this research are manufacturing companies listed on the Indonesia Stock Exchange (IDX). The type of data used in this study is secondary data in the form of financial statements of companies listed on IDX from 2011 to 2015. The samples are selected using a purposive sampling method with the number of samples of 50 companies. The results suggest that tax expenses and tunneling are negatively associated with transfer pricing decisions while the bonus is not associated with transfer pricing decisions.

The Determinants of Manufacturing Firms' Transfer Pricing Decisions in Indonesia

“…Moreover, based on Indonesian manufacturing firms' characteristics, an effective mechanism for corporate governance with most of commissioners meeting requirements and with overstating profits of bonus mechanism is still very rare. This study's findings support research by (Susanti & Firmansyah 2018), showing that the bonus mechanism does not affect transfer pricing. If companies shift profits to related enterprises, the effects decrease bonuses and deteriorate the company's reputation through an opportunistic act such as aggressive tax avoidance by transfer pricing.…”

“…Besides, research from Azzura & Pratama (2019) and Nuradila & Wibowo (2018) has shown that tunneling incentives have a major impact on Indonesia's transfer pricing. While the business becomes a public enterprise, the group's influence is still significant (Susanti & Firmansyah, 2018). Because in Indonesia, firms have consolidated shareholding and broad company influence tunneling for transfer pricing, can be easily enforced.…”

“…It is consistent with the second model using the TPI proxy. According to Susanti & Firmansyah (2018), the controlling party's influence will trigger tunneling activities for group companies. The decline in tunneling incentives is also aligned with the low average transfer pricing using TPI in model 2.…”

The Effect of Tunneling Incentive to Transfer Pricing Decision with Tax Minimization As a Moderating Variable

“…This phenomenon said by Mispiyanti (2015) can cause the fiscal authority in this case the Directorate General of Taxes (Direktorat Jendral Pajak) assumes that the purpose of transfer pricing is to avoid taxes. Susanti & Firmansyah (2018) also said that transfer pricing is often used in the case of shifting profits from companies in countries with higher tax rates to affiliated companies in countries with lower tax rates, so it can be concluded that from the government's view of transfer pricing it is believed will result in a reduced potential for tax revenue from a country. Regulations regarding transfer pricing have been made by the fiscal authority very comprehensively, but in reality, cases of tax violations have been found through a transfer pricing scheme.…”

“…Conglomerate companies are owned by majority shareholders who also own shares in other related companies, this causes tunneling activities to provide benefit to majority shareholders(Susanti & Firmansyah, 2018) Mutamimah (2009). states that tunneling incentive is a behavior of majority shareholders who transfer company assets and profits for their own benefit, but minority shareholders also bear the costs that used by majority shareholder to transferring assets and profits.Chan et al (2016) in his research stated that tunneling was caused by the majority ownership of controlling shareholders and inadequate corporate governance.…”