The Influence of Political Connection on Tax Avoidance

Abstract

The upper echelon theory and rent-seeking theory propose conflicting arguments related to the relationship between a firm’s political connection and tax avoidance. This research aims to examine the relationship between a firm’s political connection and tax avoidance. The 1,079 samples used in this research are public companies with positive income in the 2014-2018 period. By using regression analysis, this research finds that political connection has a negative relationship with tax avoidance, implying that political connection increases tax payment. This research contributes to providing supporting evidence for upper echelon theory by finding that management’s political experience or the intention to maintain a positive image of politically connected management improves tax obedience

Board Political Connection and Tax Avoidance: Ownership Structure as A Moderating Variable

“…It is not uncommon for these companies to receive guarantees or preferential treatment from the government (Faccio, 2016). The existence of political connections will protect company management from the risk of litigation in the future Management experience in the political realm also influences its strategy in managing its tax payments (Putra & Suhardianto, 2020). Politically connected board members will take advantage of this condition to benefit from tax avoidance (Zhang et al, 2017).…”

“…Shareholders focus more on the impact of tax avoidance practices on company reputation (Hanlon & Heitzman, 2010). High institutional shareholders' presence encourages companies to increase company loyalty to the government through tax payments (Putra & Suhardianto, 2020). The supervision process by institutional ownership intensively can mitigate political connections on tax aggressiveness.…”

“…Some studies prove that political connection positively affects corporate tax aggressiveness (Adhikari et al, 2006;Wahab et al, 2021). However, other studies found that the political connection reduces tax avoidance (Ajili & Khlif, 2020;Putra & Suhardianto, 2020). The empirical study's ambiguity motivates researchers to re-explore the role of the board political connection to tax avoidance practices and add a moderating variable to this relationship.…”

Corporate Governance, Political Connection, Family Ownership and Tax Aggressiveness in Indonesia

“…This conflict can be explained through the Agency Theory, especially type III (Pratiwi, Subekti, & Rahman, 2019). Previous studies have shown that tax aggressiveness can be influenced by diversification of company types (Zheng, 2017), incentive pay for executives (Huang, Ying, & Shen, 2018), company characteristics (K. S. Dewi & Yasa, 2020), political connection (Putra & Suhardianto, 2020), company's ownership structure (Bimo, Prasetyo, & Susilandari, 2019), and corporate governance (Kerr, Price, Roman, & Romney, 2021).…”

“…Government's involvement in companies through political connection is believed to be able to reduce agency conflicts between companies and the government. Politically connected companies tend to be more compliant with tax regulations and avoid tax aggressiveness (Putra & Suhardianto, 2020) because they get more optimal supervision from the government (Lestari & Putri, 2017) and try to maintain their image by avoiding high-risk actions such as tax aggressiveness (Anggraeni, 2018). Therefore, the following hypothesis was formulated.…”