Tax Avoidance in Indonesian Capital-Intensive Industries: The Roles of Profitability, Transfer Pricing, and Thin Capitalization

Abstract

Abstract:

Research aims: This study examines the influence of profitability, transfer pricing, and thin capitalization on tax avoidance among energy and basic materials companies listed on the Indonesia Stock Exchange (IDX). The study is motivated by inconsistent findings in prior research and the importance of understanding corporate tax behavior in capital-intensive industries.

Design/Methodology/Approach: A quantitative approach was employed using secondary data obtained from annual reports of 19 companies during the 2020–2024 period, resulting in 95 firm-year observations. The hypotheses were tested using multiple linear regression analysis. Research findings: The results indicate that profitability has a significant negative effect on tax avoidance, suggesting that more profitable firms tend to adopt less aggressive tax strategies. Thin capitalization has a significant positive effect on tax avoidance, indicating that greater reliance on debt financing increases opportunities to reduce taxable income through interest deductions. In contrast, transfer pricing does not significantly affect tax avoidance. The model explains 12.4% of the variation in tax avoidance.

Theoretical contribution/Originality: This study extends the tax avoidance literature by providing evidence from Indonesian energy and basic materials firms and supports Agency Theory and Trade-Off Theory in explaining corporate tax behavior. Practitioner/Policy implications: The findings offer insights for regulators and corporate stakeholders in evaluating tax compliance and financing policies.

Research limitations/Implications: The study is limited to two sectors and a five-year observation period. Future research is encouraged to employ panel-data approaches and include additional determinants of tax avoidance. Keywords: Tax Avoidance; Profitability; Transfer Pricing; Thin Capitalization