The Influence of Tax Aggressiveness on the Disclosure of Corporate
Social Responsibility: A Study of Manufacturing Firms Listed on the
Indonesian Stock Exchange 2011–2015
Distya Prasita Setyoari and Heru Tjaraka
Department of Accounting, Faculty of Economics and Businessy, Universitas Airlangga, Surabaya, Indonesia
heru_tjaraka@yahoo.co.id
Keywords: Disclosure Of Corporate Social Responsibility (CSR), Tax Aggressiveness (ETR).
Abstract: This study aims to examine the influence of tax aggressiveness on the disclosure of corporate social
responsibility (CSR) and is a replica of a previous study carried out by Lanis and Richardson (2013). Tax
aggressiveness is measured by using the effective tax rate (ETR), which serves as the independent variable,
while corporate social responsibility (CSR) serves as the dependent variable. Variables such as company
size (SIZE), leverage (LEV), capital intensity (CAPINT), market-to-book ratio (MKTB), and return on
assets (ROA) are used as the control variables. Manufacturing companies listed on the Indonesian Stock
Exchange (IDX) for the period 2011–2015 made up the sample for this study, which yielded a total of 175
companies. Hypothesis testing in this study was done by using multiple regression analysis, with the
assistance of SPSS software (version 20). The results show that tax aggressiveness is significantly related to
the disclosure of corporate social responsibility (CSR). Companies that have a higher level of tax
aggressiveness are therefore inclined to make greater CSR disclosures.
1. INTRODUCTION
Government effort alone is far from adequate if
Indonesia is to eradicate or alleviate poverty. In
2014, the Asian Development Bank reported that
11.2% of the Indonesian population was living
below the poverty line, leaving it as the fifth poorest
country in the Southeast Asian region. In regard to
poverty alleviation, the Indonesian government has
sought to develop policies to lessen poverty, yet it
remains pervasive; one reason for this is that poverty
alleviation ought to be the concern of all parties and
not only the state apparatus. According to Radyati
(2008, p. 6), companies, through CSR disclosure
programs, could help to reduce national poverty. In
this regard, Untung (2009, p. 2) explains that, in an
era of decentralization, the momentum towards CSR
disclosure programs can be seen as a form of private
sector involvement in empowering the poor to climb
the social ladder.
In order to improve the efficacy of poverty
alleviation and encourage the role of the private
sector in this regard, the Indonesian government has
taken the initiative by issuing several regulations on
CSR in Indonesia: Law no. 40 (2007) Article 74,
concerning limited liability companies, and Law no.
25 (2007) Article 15(b), concerning investment, as
well as the implementation of CSR disclosures,
which are regulated by Government Regulation no.
47 (2012) Article 4 (on corporate social
responsibility and the environment). With regard to
the above regulation, it is clear that every limited
liability company is required to disclose its CSR
program.
Furthermore, there are several perspectives
regarding CSR disclosure. According to Wibisono
(2007, p. 79), the reason that companies apply CSR
can be classified into three categories. The first
reason is the simple aim to boost the company’s
image, for example, as experienced by PT Lapindo
Brantas, which fulfilled its social responsibility to
victims as compensation for the mudflow disaster it
caused. The second reason is the fulfilment of
obligations, since CSR disclosure requirements are
enshrined in regulations, laws, and other rules,
which exist to compel companies to comply.
Concrete examples of this are certain states in the
USA that have begun implementing eco-labeling for
furniture products, in addition to lending by banks in
Europe to companies that implement CSR well. The
Setyoari, D. and Tjaraka, H.
The Influence of Tax Aggressiveness on the Disclosure of Corporate Social Responsibility - A Study of Manufacturing Firms Listed on the Indonesian Stock Exchange 2011–2015.
In Proceedings of the Journal of Contemporary Accounting and Economics Symposium 2018 on Special Session for Indonesian Study (JCAE 2018) - Contemporary Accounting Studies in
Indonesia, pages 235-240
ISBN: 978-989-758-339-1
Copyright © 2018 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved
235
third reason is because of a genuine impulse arising
from within (i.e. an internal driver). In this sense, the
company realizes that, for business continuity,
financial health is not the only requirement for
ensuring the sustainable growth of the company, but
that social and environmental responsibility are also
important. In the end, the three reasons outlined
above result in a positive impact on the formation of
corporate image. On the other hand, companies face
political costs and are in the spotlight of the
government and the wider community. Thus, any
reason motivating companies to disclose their CSR
can be considered appropriate.
Understanding the need to contribute to the
surrounding community in the form of CSR, firms
are also subject to the obligation of paying taxes for
all business facilities and licenses that the
government have provided and which have
contributed to the success of the business. The
greater the income generated by the company within
a certain period, the greater the tax that must be paid
to the state. However, for profit-oriented firms, taxes
are a burden that will reduce corporate profits. In
this regard, companies budget for the funds for these
two important burdens, i.e. tax and CSR, in addition
to seeking ways to reduce the tax burden by being
aggressive with regard to taxation. Corporate tax
aggressiveness, therefore, relates to reducing taxable
income through tax planning, either by means of tax
avoidance or tax evasion (Frank et al., 2009).
In spite of its profitable outcome in reducing tax
for the firm, aggressiveness towards the tax burden
is counterproductive with regard to the expectations
of society and the government, and it is contrary to
the theory of legitimacy. Corporate tax
aggressiveness can be considered as a socially
irresponsible activity (Erle & Schon, as cited in
Lanis & Richardson, 2012). However, according to
Winda et al. (2015), companies who have an
aggressive tax strategy can still act in accordance
with the theory of legitimacy by disclosing
additional information related to CSR in order to
restore the company’s reputation.
Several previous studies have discussed the
relationship between CSR disclosure and tax
aggressiveness. Lanis and Richardson (2013)
suggest that the effective tax rate (EFT) is one of the
proxies used as a tax aggressiveness tool. In
addition, firm size, leverage, capital intensity, the
market-to-book ratio, and return on assets can be
used as control variables to measure corporate CSR
disclosure. The results of the regression analysis
indicate that the higher the level of corporate tax
aggressiveness, the higher the level of CSR
disclosure of a company.
Moreover, manufacturing firms were chosen as
the sample for this study because, compared to other
sectors, they constitute a larger proportion of the
economy; in addition, in their activities,
manufacturing companies need a high level of
effective management, which is demonstrated by the
resulting profits. In addition, problems in
manufacturing firms are more complex and have a
considerable impact on the surrounding
environment, which is an aspect of CSR disclosure.
However, the most important reason for the five-
year data retrieval in this study is the absence of
previous research using 2015 manufacturing
company data. The study period was determined for
this time period on the grounds that 2015
represented the most recent data available to the
researchers in the form of annual reports. In this
sense, while the study was completed in 2017, the
latest BEI database was updated in 2015, containing
annual reports and financial statements for 2015. In
addition, the annual reports and audited annual
financial statements on the Indonesian Stock
Exchange are only published four–five months after
the end of the calendar year. Further, tax laws,
which are amended every year, are another reason
for using data from this particular period. It is also
hoped that the results generated from this research
can represent the most up-to-date information for the
development trends of manufacturing companies
that take aggressive tax action and make social
responsibility disclosures.
Understanding the need to examine the
correlation between tax aggressiveness and the level
of corporate social responsibility disclosure, this
research aims to examine the question of how tax
aggressiveness influences the disclosure of corporate
social responsibility.
2 THEORETICAL BASIS AND
HYPOTHESIS DEVELOPMENT
2.1 Theoretical Basis
2.1.1 Legitimacy Theory
Legitimacy theory states that, in order for a firm to
obtain legitimacy, corporate management must align
with society, the government, and community
groups (Gray et al., 1995). Legitimacy can be
regarded as a benefit or potential source of survival
JCAE Symposium 2018 – Journal of Contemporary Accounting and Economics Symposium 2018 on Special Session for Indonesian Study
236
for a company, so when there is a difference
between corporate values and social values, which is
often called a “legitimacy gap,” it can affect the
company’s ability to continue its business activities
in addition to threatening the company’s position.
Furthermore, O’Donovan (as cited in Ghozali &
Chariri, 2007, p. 413) suggests that if a legitimacy
gap arises, firms need to evaluate their social value
and harmonize with the existing values in society or,
if necessary, change according to legitimacy tactics.
Thus, in order to reduce the legitimacy gap,
companies are required to identify activities under
their control that impact on the public and that have
the power to legitimize the company (Neu et al., as
cited in Ghozali & Chariri, 2007, p. 413).
In the context of this study, legitimacy theory
underlies the influence of the wider community that
can determine the activities of a company.
Companies that tend to follow aggressive tax
policies will be perceived negatively by the public,
which companies would consider as damaging. For
this reason, the company will then disclose its social
responsibility information in order to provide
legitimacy for their corporate activities in the eyes of
society.
2.2 Hypothesis Development
Several studies have examined the relationship
between corporate social responsibility disclosure
and tax aggressiveness. Guthrie and Parker (as cited
in Lanis & Richardson, 2013) undertook research in
relation to the tax aggressiveness of mining
companies in Australia. According to the theory of
legitimacy, companies that engage in tax
aggressiveness require the disclosure of additional
information about CSR in order to meet people’s
expectations. However, the results of the study
suggest no correlation between tax aggressiveness
and CSR disclosure.
A similar study was conducted by Deegan et al.
(as cited in Lanis & Richardson, 2013), who
analyzed the annual reports of tax-aggressive
companies in Australia. The results of this study,
which related CSR disclosure to media coverage,
show that there is a relationship between the
community, with regard to certain social and
environmental issues, and CSR disclosures in annual
reports Therefore, this study contradicts the research
of Guthrie and Parker (1989).
Deegan et al. (2002) conclude that there is a
relationship between theories of legitimacy and the
act of tax aggressiveness. Moreover, Lanis and
Richardson (2013) examined the effect of tax
aggressiveness on CSR disclosure in order to test the
theory of legitimacy and found significant results.
In testing the theory of legitimacy, the absence of
consistent results regarding the relationship between
tax aggressiveness and CSR disclosure leads us to
propose the following hypothesis:
H
1
: Tax aggressiveness has a significant
influence on corporate social responsibility
disclosure.
3 RESEARCH METHODOLOGY
3.1 Types and Data Sources
Secondary data was utilized in this study, which was
taken from several sources, including financial
reports and annual reports of manufacturing
companies listed on the Indonesian Stock Exchange
for the period 2011 to 2015. Data used in this
research was retrieved from www.idx.co.id, and
information regarding the daily stock prices of
manufacturing companies was retrieved from
www.finance.yahoo.com. In order to calculate the
market-to-book value ratio, stock prices at the end or
beginning of the fiscal year were used.
3.2 Operational definition and
measurement of variables
3.2.1 Disclosure of corporate social
responsibility
Disclosure of corporate social responsibility relates
to the process of disclosing information associated
with the activities of the company and its effects on
society and the environment. CSR disclosure is
measured using the Global Reporting Initiative (GRI
3.1), an indicator with 84 disclosures, including
economic performance (9 indicators), environmental
performance (30 indicators), labor performance (15
indicators), human rights performance (11
indicators), social performance (10 indicators), and
performance (9 indicators). The formula for CSR
disclosure measurement is:
CSRI
J =
ΣXij
nj
The Influence of Tax Aggressiveness on the Disclosure of Corporate Social Responsibility - A Study of Manufacturing Firms Listed on the
Indonesian Stock Exchange 2011–2015
237
3.2.2 Tax aggressiveness
Tax aggressiveness relates to the act of minimizing,
in a legal or illegal way, a company’s tax burden.
The main proxy in this study is the effective tax rate
(ETR). The ETR proxy can be calculated as follows:
ETR =
Incometaxexpense
Earningsbeforetax
A low ETR indicates that the income tax expense
is smaller than the income before taxes, which
means the level of tax aggressiveness of a company
is high because, as taxpayers, they are paying a
small amount of tax (not taxable).
3.2.3. Company size
Company size relates to the size of a company as
measured by the total assets owned. According to
Lanis and Richardson (2013), company size can be
measured by the total natural logarithm of the assets
because it will have a better stability level than using
other proxies, and it is more likely to be continuous
across periods. The formula for company size is as
follows:
Size = Naturallogoftotalassets
3.2.4 Leverage
Leverage is a ratio that demonstrates the ability of
the company to meet its obligations, whether long-
or short-term debt. The approach used by Lanis and
Richardson (2013) to calculate leverage is as
follows:
LEV =
Totalamountofdebt
Totalassets
3.2.5 Intensity of capital
Intensity of capital is a description of how much of a
company’s wealth is invested in its fixed assets
according to how much assets the company owns.
For Lanis and Richardson (2013), capital intensity
can be calculated as follows:
CAPINT =
Totalnetfixedassets
Totalassets
3.2.6 Market-to-book ratio
The market-to-book ratio measures the company’s
growth in the future. This ratio makes a comparison
between the value/price of the stock market and the
book value of the company, which is obtained from
the difference between the value of the assets held
by the company and the value of its liabilities. In
Lanis and Richardson (2013), the market-to-book
ratio is measured as follows:
MKTB =
Marketvalue
Bookvalue
3.2.7. Return on assets
Return on assets (ROA) relates a company’s
profitability before tax to total assets (Hakston &
Milne, 1996). In this sense, profitability refers to
how much of a company’s profits are generated
from the total assets owned by the company. For
Lanis and Richardson (2013), ROA is measured as
follows:
ROA =
EarningsbeforetaxEBIT
Totalassets
3.3 Research Model
The methods of data analysis employed in this
study are as follows:
= 0 1 2 3
45
6
Information:
TCSR : Total CSR disclosed by
the company on the
company’s financial
statements
Α0 : Constants
Β1, β2, β3, β4, β5, β6 : The coefficients of each
variable
ETR : Corporate tax
aggressiveness
SIZE : Company size
LEV : Leverage
CAPINT : Intensity of capital
MKTB : Market-to-book ratio
ROA : Return on assets
e : error
JCAE Symposium 2018 – Journal of Contemporary Accounting and Economics Symposium 2018 on Special Session for Indonesian Study
238
4 RESULT AND DISCUSSION
The results of the hypothesis testing by using
multiple regression analysis, as well as a
simultaneous hypothesis test (F-test) and a partial
test (T-test), can be seen in Table 2.
Table 2: Multiple Linear Regression Results
Variable
REGRESSION MODEL
Coefficien
t
Std.
Error
T Sig.
Constant -0,461
0,12
7
-
3,63
7
0,00
0
ETR -0,202
0,10
0
-
2,03
0
0,04
4
SIZE 0,135
0,01
7
7,97
6
0,00
0
LEV -0,128
0,07
3
-
1,74
7
0,08
3
CAPINT 0,186
0,06
5
2,87
5
0,00
5
MKTB 0,005
0,00
2
2,90
0
0,00
4
ROA -0,125
0,10
6
-
1,17
6
0,24
1
The
correlation
coefficient
(R)
0,638
Coefficient
of
determinatio
n (R2)
0,407
Test F 19,246
Significance
F
0,000
Source: SPSS Data Results
Based on the results of the calculations in Table
2, the multiple linear regression equation can be
formulated as follows:
TCSR = - 0,461 - 0,202 ETR + 0,135 SIZE - 0,128
LEV + 0,186 CAPINT + 0,005 MKTB - 0,125 ROA
+ 0,153
The T-test value for the tax aggressiveness
variable (ETR) is -2.030, with a significance level of
0.044. The value of the t table is 1.97419, and since -
2.030 > 1.97419, this meets the criteria of t test > t
table. The value of this significance is also smaller
than 0.05, so it can be concluded that tax
aggressiveness significantly influences corporate
social responsibility disclosure, which is in
accordance with the research hypothesis that tax
aggressiveness has an influence on corporate social
responsibility disclosure. The research results are
also consistent with those of Lanis and Richardson
(2013), which suggest that tax aggressiveness
significantly influences corporate social
responsibility disclosure. Furthermore, this indicates
that companies involved in tax aggressiveness will
disclose CSR in order to gain legitimacy from the
public. In this sense, the aim of greater CSR
disclosures is to alleviate any public concerns that
may arise from the negative impact of the
company’s tax aggressiveness on society, in addition
to demonstrating that they meet the expectations of
society in another way, i.e. by fulfilling their social
responsibilities.
5 CONCLUSION
The regression results in this research are in
accordance with the initial hypothesis proposed, i.e.
tax aggressiveness influences corporate social
responsibility disclosure. Moreover, the control
variables employed, including firm size, leverage,
capital intensity, market-to-book ratio, and return on
assets, displayed both significant and non-significant
results with regard to CSR disclosure. More
specifically, firm size, capital intensity, and market-
to-book ratio have a significant impact on corporate
social responsibility disclosure, while leverage and
return on assets have no effect on corporate social
responsibility disclosure.
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