What Drives Tax Avoidance? Profitability and Governance in Indonesia’s Manufacturing Sector

Abstract

This study takes a look at the manufacturing firms listed on the Indonesia Stock Exchange (IDX) from 2021 to 2023 and how tax avoidance is related to all these other aspects. Among these considerations are the company's size, profitability, audit committee make-up, percentage of independent commissioners, and ownership by institutions. Although tax avoidance is legally permitted, it remains controversial due to its potential to reduce state tax revenues and signal weak corporate governance. The variables examined represent financial performance and governance structures to explore their impact on tax behavior. The study employs a quantitative approach using a causal-comparative design. A total of 59 manufacturing firms were selected through purposive sampling, resulting in 177 firm-year observations. Secondary data were obtained from audited annual reports. The natural logarithm of total assets is used to evaluate firm size, return on assets (ROA) is used to reflect profitability, and the effective tax rate (ETR) is used to show tax evasion. The data analysis validated the model using multiple linear regression and conventional assumption tests. The data demonstrate that profitability significantly enhances tax avoidance, indicating that highly successful enterprises are more inclined to reduce their tax liabilities through avoidance strategies. Corporate size, the proportion of independent commissioners, institutional ownership, and the audit committee do not significantly impact tax evasion operations. The findings indicate that the rules and systems within a company might not be strong enough to stop aggressive tax practices, as profit motives tend to take priority in how managers make tax decisions. This research adds to what is already known about the causes of tax avoidance in developing countries. Furthermore, it provides regulators and business stakeholders with pragmatic insights to enhance regulations and bolster oversight, thereby improving governance efficacy and increasing tax compliance.