Leverage, Political Connections, and Tax Avoidance in the Energy Sector

Abstract

Research aims:

This study seeks to analyze whether leverage, political connections, and firm size influence tax avoidance behavior among energy sector companies listed on the Indonesia Stock Exchange (IDX) over the 2021–2023 period.

Design/Methodology/Approach:
A quantitative research design is adopted using panel data derived from 37 energy firms, generating 111 firm-year observations. Tax avoidance is proxied by the Cash Effective Tax Rate (CETR). Panel regression analysis is applied to evaluate the association between the explanatory variables and corporate tax avoidance.

Research findings:

The empirical results show that leverage is positively associated with tax avoidance, indicating that firms with higher debt levels tend to engage more actively in tax-reducing strategies. Conversely, political connections and firm size do not exhibit statistically meaningful effects. The explanatory variables account for 15.1% of the variation in tax avoidance, implying that additional factors may also shape corporate tax behavior.

Theoretical contribution/Originality:

This study enriches the agency and political connection literature by offering empirical evidence from a capital-intensive industry context. The findings underscore that financial structure plays a more prominent role in influencing tax avoidance than political affiliation or organizational scale.

Practitioner/Policy implication:

The results suggest that tax authorities and regulators should pay closer attention to firms with high leverage, as debt financing arrangements may systematically create incentives for tax minimization.

Research limitation/Implication:

This study is constrained by a relatively limited observation period and the exclusion of firms reporting losses. Future research may broaden the time horizon and incorporate governance-related variables to provide a more comprehensive understanding of corporate tax avoidance dynamics.