Analysis of Tax Aggressiveness and Financial Reporting Aggressiveness

on Public Companies in Indonesia 2010-2014Rina Indah Sari Ginting rinaindahsg@gmail.com

and Dwi Martani dwimartani@yahoo.com

Universitas Indonesia, Depok 16424, Indonesia

ABSTRACT

In this paper, we investigate the relationship between tax aggressiveness and financial

reporting aggressiveness in Indonesia-listed companies. The sample used in this study were 157

manufacturing and non manufacturing company during 2010-2014 period. Using discretionary

permanent differences (DTAX) and abnormal book tax differences (ABTD) as proxies, we find

that there is strong positive correlation between tax aggressiveness and financial reporting

aggressiveness. This shows that there is no trade off in decisions related to earnings

management and tax management. The results also show that ABTD able to measure tax

aggressiveness and showed consistent results with DTAX proxy.

Keywords: tax aggressiveness, financial reporting aggressiveness, financial reporting, permanent

differences, abnormal book tax differences.

1. Introduction

The quality of financial statements is important to stakeholder in making decisions related

to investment, credit and improves market efficiency. It depends on the usefulness of information

presented in the financial statements and how the company's management to prepare financial

statements in accordance with applicable rules and principles. In practice, the intended use of the

financial statements may create incentives for the management company to manipulate financial

statements in order to report the company's best performance and meet the expectations of

stakeholders. Examples of financial manipulation in the company are earnings management and

tax management. Stakeholders are using net profit to evaluate the performance of management

and forecasting the company's profitability in the future. Therefore, to increase the confidence of

stakeholders, companies are trying to manage their net income profit which is often called by

financial reporting aggressiveness. Although it can provide benefits to the company, but financial

reporting aggressiveness actions can have negative impacts for the company through the

payment of taxes. Wherein, the higher the profits of the company, the higher the tax expense of

the company to be paid. Frank et al (2009) states that the tax planning by lowering the value of

the taxable income, either through tax evasion or not, is referred to tax aggressiveness. Tax

aggressiveness can be done in various ways, including finding a gap (loopholes) contained in the

tax laws so often referred to as tax avoidance, tax sheltering and tax management (Hanlon and

Heitzman, 2010).

Frank et al (2009) conducted a research on the relationship of tax and financial reporting

aggressiveness in America using permanent differences as the measurement. Frank et al (2009)

found that there is a strong positive relation between these two constructs. It means that the

company able to increase the level of corporate profits but reported a low tax payment.

Furthermore, Hanlon and Heitzman (2010) states that the tax evasion, in this study referred as

tax aggressiveness, showed a significant result by measuring the content of permanent

differences therein. In addition to discretionary permanent differences (DTAX) which has been

used Frank et al (2009), there is another way to measures tax aggressiveness, the proxy abnormal

book tax differences (ABTD) developed by Tanya and Fifth (2012).

Previous research has been carried out in Indonesia (2014) with the use of permanent

differences (DTAX) as a method of measurement of tax aggressiveness. However, based on a

review of the literature, our study is the first to examine abnormal measurement study book tax

differences as the measurement of tax aggressiveness and examine the relationship with the

aggressive financial reporting. Our results show that tax aggressiveness is significantly related

with financial reporting aggressiveness in Indonesia institution. We also find that both of our

permanent differences measurement, DTAX dan ABTD, show the consistent result to measure

tax aggressiveness as stated by Heitzman and Hanlon (2010). The result of this study provide

important implications for user of financial reporting such as regulators, auditor and investors.

Our findings can help investors to evaluate the quality of financial statement and auditor can

carry out more effective audits by focusing on firms with positive relation between tax

aggressiveness and financial reporting aggressiveness. The analysis of this study also assist

regulators to enhance the credibility of book and tax reporting.

2. Literature Review

2.1 Quality of Financial Reporting

The financial statements of a company contains a lot of information that can be used by

stakeholders to assist the decision making process. That requires that the financial statements

have a good quality information that can be used to make the right decision. The quality of a

company's financial reporting depends on how much information is presented can be useful and

is based on the conceptual framework, the basic principles and accounting purposes. In practice,

the preparation of the financial statements cannot be separated from the pressure for management

to meet the expectations of users of financial statements. Then the management used to do the

earning management to maximize profits and increase the value of the company's market value.

This earnings management activities will impact the difference in taxable income and hide the

actual condition of the company. At which time the company reported accounting profit is higher

than the burden of the tax to be paid will be higher also. Such conditions indicate a tradeoff

between earnings management activities and management of corporate taxes.

2.2 Financial Reporting Aggressiveness

Frank et al (2009) states that the activities aimed at increasing the company's profit with

earnings management, whether appropriate or not in accordance with generally accepted

accounting principles known as the financial reporting aggressiveness. Therefore, in this study,

financial reporting aggressiveness have the same context with earnings management. Financial

reporting aggressiveness or earnings management in general do some specific techniques. Some

earnings management techniques are taking a bath, income minimization, income maximization

and income smoothing. (Scott, 2009)

Aggressive financial reporting can be measured with various measurement models.

However, the most commonly used proxy is discretionary accruals. Discretionary accruals is the

residual value of the accrual revenue. Revenue accrual is the difference arising from operating

income to operating cash flow in the same period. Selection of operating cash flow as a proxy is

because the opportunity for the company to manipulate earnings from operating currents are

lower than others. Therefore the differences between the two are considered capable of detecting

earnings management action by the company. Several measure that usually used in detected

aggressive financial are Model Jones (1991), Dechow et al (1995), Kasznik (1999) and Kothari

(2005).

2.3 Tax Aggressiveness

Broadly, tax avoidance is define as the reduction of explicit taxes ( Hanlon and Heitzman,

2010 ;Dyreng et al., 2008). But tax avoidance is influenced by the attitudes and opinions of

individuals, therefore the tax aggressiveness represents a continuum of tax planning strategies of

the company. Different people will have different opinions about the degree of aggressiveness of

a transaction. So those tax planning behavior of the company and can be discuss in various terms

such as tax aggressiveness, tax sheltering, tax evasion or non-compliance. However, Hanlon and

Heitzman (2010) emphasizes that the definition of tax aggressiveness are not limited to specific

measurement methods. Commonly tax avoidance measure by several methods such as effective

tax rate, long run effective tax rate, book tax differences, discretionary or abnormal measure of

tax avoidance, unrecognized tax benefits and tax shelter firms.

2.4 Prior Research

 Frank et al (2009) is the first literature conducted research about the relationship of tax

and financial reporting aggressiveness. Using their own of proxy of discretionary permanent

differences (DTAX), Frank et al (2009) include that tax and financial reporting aggressiveness

are significantly and positively related. It indicates that there is nonconformity between financial

accounting standards and tax law allows firm to manage book income upward and taxable

income downward. Similar studies have also been carried out in Indonesia by Kamila (2014)

and Ridha (2014). The results show that there is no tradeoff between tax and financial reporting

aggressiveness in Indonesia’s manufacturing company.

By following Frank et al (2009) approach, Tang and Fifth (2012) develop ABTD and

NBTD measures that does not generate temporary differences into account the uniqueness of

Chinese accounting and tax system. Tang and Firth (2012) using estimation models that can

divide the book-tax differences into two sources, normal and abnormal book tax differences.

Normal book-tax differences (NBTD) is estimated by regression of total BTSs on discretionary

items and using the unexplained portion of BTDs as measure of ABTD. NBTDs are book-tax

differences originating from differences in accounting and taxation rules, whereas abnormal

book-tax differences (ABTD) sourced from earnings management and tax evasion. Tang

research results and Firth (2012) showed that NBTD positive effect on earnings of the relevance

and relevance ABTD negatively affects earnings. The research results proved that ABTD

negative effect on earnings because it contains information of relevance earnings management

and tax management.

2.5 Hypothesis Development

Prior results of studies in the United States show that from 1990 to 2000 there was an

increase in book tax difference, and consistently with the increase in book tax gap, there is

evidence that the accounting rules provide an opportunity for management to adjust the gain of

the company without affecting taxable income. This is prove that firm able to manage book

income upward without affecting higher taxable income (Philips et al., 2003; Hanlon, 2005) and

suggest that firm have the opportunity to engage in tax and financial reporting aggressiveness in

the same reporting period (Frank et al, 2009).

H1. Tax aggressiveness measured by discretionary permanent differences (DTAX)

positively related to financial reporting aggressiveness.

H2. Financial reporting aggressiveness positively related with tax aggressiveness measured

by discretionary permanent differences (DTAX).

Hanlon and Heitzman (2010) states that there are various methods that can be used to

measure tax aggressiveness. One of them is to use the content of the company's permanent

differences. In addition to the measurement method DTAX conducted by Frank et al (2009),

Tang and Fifth (2012) develop another measurement using company's permanent differences

called abnormal book tax differences (ABTD). So it can be said that ABTD can be used as

another method to measure tax aggressiveness and find the relationship of tax and financial

reporting aggressiveness as prior research of Frank et al (2009).

H3. Tax aggressiveness measured by abnormal book tax differences (ABTD) positively

related to financial reporting aggressiveness.

H4. Financial reporting aggressiveness positively related with tax aggressiveness

measured by abnormal book tax differences (ABTD).

3. Research design

This study uses tax aggressiveness measurement adaptation by Frank et al (2009) and

Kamila (2014). However, in this study there is the addition of ABTD develop by Tang and Fifth

(201) as independent variable.

3.1 The effect of tax aggressivenss on financial reporting aggressiveness

The research model to measure the relationship of tax on financial reporting aggressiveness

use two models of discretionary permanent differences (3.1) and abnormal book tax differences

(3.2). The research model used in this study are as follows :

DAC C ¿=α 0+α1 DTA X ¿+α 2 PTRO A¿+α3≤V ¿+α4 LC FD ¿+α 5 FO RD¿+α 6 SIZ E¿+ε¿ (3.1)

DAC C ¿=α 0+α1 ABT D¿+α 2 PTRO A ¿+α3≤V ¿+α 4 LC FD¿+α 5 FO RD¿+α6 SIZ E¿+ε ¿

(3.2)

where :

DACCit dicretionary accrual DTAXit dicretionary permanent differencesABTDit abnormal book tax differencesPTROAit pretax income diveide by total asset at year t-1LEVit sum of long term debt divided by total assetLCF_Dit dummy variable that equals 1 when an entity reported loss carryforwadsFOR_Dit dummy variable that equals 1 when the value of foreign income > 0SIZEit natural log of total assets

Models 3.1 and 3.2 are used to test hypotheses 1 and 3. Hypothesis 1 and 3 are acceptable

if there is significantly positive correlation between tax and financial reporting aggressiveness.

3.2 The effect of financial reporting aggressiveness on tax aggressiveness

The research model to measure the relationship of financial reporting aggressiveness on tax

aggresivenss use two models of discretionary permanent differences (3.3) and abnormal book tax

differences (3.4). The research model used in this study are as follows :

DTA X¿=α0+α1 DAC C ¿+α 2 PTRO A¿+α3≤V ¿+α4 LC FD ¿+α 5 FO RD¿+α 6 SIZ E¿+ε¿

(3.3)

ABT D¿=α0+α 1 DAC C¿+α 2 PTRO A ¿+α3≤V ¿+α 4 LC FD¿+α 5 FO RD¿+α6 SIZ E¿+ε ¿

(3.4)

Models 3.3 and 3.4 are used to test hypotheses 2 and 4. The hypothesis are acceptable if

there is significantly positive correlation between financial reporting and tax aggressiveness.

3.3 Variable Operationalization

3.3.1 Dependent Variables

The dependent variable in this study is the value of the financial reporting aggressiveness

for models 3.1 and 3.2 and tax aggressiveness for models 3.3 and 3.4 . The research model used

in this study are as follows :

Measuring Financial Reporting Aggressiveness

To measure financial reporting aggressiveness in this study, we use the Modified - Jones

model ( Dechow et al . 1995) as our proxy according to prior research of Frank et al (2009 ). The

research model are as follows :

T AC C¿=α0+α 1 ( ∆ℜV ¿−∆ A R ¿)+α 2 PP E¿+ε¿ (3.5)

where :

TACCit total accruals = ((EBEIit +TTEit) – (CFOit+ITPit))EBEIit earning before extraorndinary itemTTEit total tax expenseCFOit cash flow from operating activitiesITPit income tax paid∆REVit change in sales from year t-1 to year t∆ARit change in account receivables from year t-1 to year tPPEit gross property, plant and equipmentԑit discretionary accruals

Measuring Tax Aggressiveness

The proxy used in this study are DTAX adopted by Frank et al (2009) and Kamila (2014)

and ABTD developed by Tang and Fifth (2012). The research model are as follows :

PERMDIFFit = α0 + α1INTANGit + α2UNCONit + α3MIit + α4CSTEit + α5∆NOLit +

α6LAGPERMit + εit (3.6)

where :

PERMDIFFit permanent differences divided by total aset at t-1INTANGit goodwill and other intangibles divided by total aset at t-1UNCONit consolidated net income (loss) divided by total aset at t-1MIit Minority net income or loss divided by total aset at t-1CSTEit current state tax expense divided by total aset at t-1∆NOLit changes in net operating loss carryforward divided by total aset at t-1LAGPERMit permanent differences in year t-1 divided by total aset at t-1εit discretionary permanent differences

PERMDIFF equation is processed by regression of data into two industrial grups,

manufactur and non manufactur company. The discretionary permanent differences is the

residual value of PERMDIFF’s equation regression.

BTD it = β0 + β1 ∆INVit + β2 ∆REV it + β3 NOL it + β4 TLU it + β5 BTD it-1 + ԑ it

( 3.7)

BTDit book tax differences ∆INVit changes in gross fixed asset from year t-1 to year t∆REVitt change in sales from year t-1 to year tTLUit the value of tax losses utilizedBTDit-1 book tax differences from year t-1ԑit error term

BTD equation is processed by regression of data inti two industrial grups, manufactur and

non manufactur company. The discretionary permanent differences is the residual value of

BTD’s equation regression.

3.3.2 Indipendent variabel.

Independent variables used role in this study consisted of the main independent variables

and control variables. The main independent variables used in the model 3.1 and 3.2 is tax

aggressiveness and the 3.3 and 3.4 models are financial reporting aggressiveness. The main

independent variable measurement method for each model has been described previously .

Controlling independent variable in this study is the pretax return on assets (PTROA) , leverage

(LEV) , dummy loss carry forward (LCF_D) , dummy operational activities abroad (FOR_D)

and firm size (SIZE).

4. Empirical results

4.1 Research samples

The population of this research is companies listed on the Stock Exchange during the

period 2010-2014. Selection of the sample using purposive judgment sampling. The clasification

of the industries are based on JASICA Index in IDX Fact Book Companies in the industrial

sector of agriculture, mining , property , real estate , construction , and finance are excluded from

the study because it is governed by special tax regulations. Data and information obtained from

DataStream , Eikkon and the company's financial statements.

4.2 Econometrics Test

Model Test Panel is used to determine statistical panel models that are considered in

accordance with the characteristics of the research model. The results for Chow Test show that

the four main models have a value of F-stat 0.000 or less than alpha. Therefore, the regression

model that should be used is the model FE (Fixed Effect). Further LM Test showed that the study

results should use the model RE (Random Effect) for F stat has a value below alpha. Hausman

Tests showed that the 1,2 and 4 have the following results alpha or 0,05 and show that the model

should be used in the equation is the FE models. Meanwhile model 3 shows the results of 0.1290

which means a better model used is the model RE. Econometrics test results show that the model

is free from multikolinearitas research, but has a problem of heteroskedasticity and

autocorrelation. Therefore, to solve this problem, it is used commands Generalized Least Square

(GLS) in STATA to be used as a data analysis of the research results.

4.3 Regression Test

4.3.1 The effect of tax aggressiveness on financial reporting aggressiveness

The effect of tax aggressiveness on financial reporting aggressiveness was tested with two

models. Regression results of models 3.1 are shown in Table 4.1. The results showed that the

value of F stat on the measurement model shows the results of 0.0000 or less than α . This shows

that with a 99% confidence level can be said that H0 is rejected . The coefficient of

determination , or r2 worth 0.1435 or 14,35 on DPERM measurements showed that the

discretionary permanent differences can be explained by the major independent variables and

control variables in research methods about 14.35%. Stat p - value indicates the significance of

the relationship between variables included in the research model . With a value of 0.000

indicates that the first hypothesis is accepted or earnings management activities of companies

affected by corporate tax management activities.

Table 4.1

The effect of tax aggressiveness with DTAX proxy on financial reporting aggressiveness

DACC it =α0 + α1DTAXit + α2PTROAit + α3LEVit + α4LCF_Dit + α5FOR_Dit + α6SIZEit + εit

Hypothesis Coeff t-stat p-valueDPERM + .3002203 6.50 0.000***PTROA - .174766 9.36 0.000***

LEV + -.0078229 -1.06 0.296 LCF-D + -.0130299 -2.62 0.095*FOR-D + .0

339230.60 0.380

SIZE - -.0040113 -2.90 0.074*CONS .0632194 2.16 0.139

N 785R-square 0.1435

F-statistics 0.0000*** significant at alpha 1%

** significant at alpha 5%

* significant at alpha 10%

where :

DACCit discretionary accrual

DTAXit discretionary permanent differences

ABTDit abnormal book tax differences

PTROAit pretax income divide by total asset at year t-1

LEVit sum of long term debt divided by total asset

LCF_Dit dummy variable that equals 1 when an entity reported loss carryforwads

FOR_Dit dummy variable that equals 1 when the value of foreign income > 0

Regression results of models 3.2 are shown in Table 4.2. The results shows the value of F

stat on showed similar results with model 3.1, that is 0.0000 or smaller than α. This is means that

H0 is rejected. The coefficient of determination, or r2 worth 0.1445 % or 14:45 on ABTD

measurements means that ABTD can be explained by the major independent variables and

control variables in research methods around 14.45%. The p-value stat with a value of 0.000

indicates that the second hypothesis is accepted or tax aggressiveness measured by abnormal

book tax differences (ABTD) positively related to financial reporting aggressiveness.Table 4.2

The effect of tax aggressiveness with ABTD proxy on financial reporting aggressiveness

DACCit =α0 + α1ABTDit + α2PTROAit + α3LEVit + α4LCF_Dit + α5FOR_Dit + α6SIZEit + εit

Hypothesis Coeff t-stat p-valueABTD + .2521715 6.78 0.000***

PTROA - .1827347 10.1 0.000***LEV + -.0063209 -0.86 0.333

LCF-D + -.0169055 -3.42 0.043**FOR-D + .0038373 0.70 0.365SIZE - -.0045051 -3.26 0.050**

CONS .0835633 2.90 0.074N 785

R-square 0.1445F-statistics 0.0000

*** significant at alpha 1%** significant at alpha 5%* significant at alpha 10%where :

DACCit discretionary accrual

DTAXit discretionary permanent differences

ABTDit abnormal book tax differences

PTROAit pretax income divide by total asset at year t-1

LEVit sum of long term debt divided by total asset

LCF_Dit dummy variable that equals 1 when an entity reported loss carryforwads

FOR_Dit dummy variable that equals 1 when the value of foreign income > 0

4.3.2 The effect of financial reporting aggressiveness on tax aggressiveness

Models 3.3 and 3.4 show the results of financial reporting aggressiveness effect’s on tax

aggressiveness. Results of regression presented in Table 4.3 and Table 4.4. Results of regression

model 3.3 and 3.4 4 show that the value of F stat is 0.000 or less than α ( 0.05 ) . This suggests

that the main independent variable and the independent variables significantly influencing the

value DPERM and ABTD. The r2 value in model 3.3 is 0.2150 , or 21.5 % . This value indicates

that the level of discretion permanent differences can be explained by 21.5 % . through the

independent variables of the company. While the value of the coefficient of determination r2 for

model 3.4 indicate that abnormal levels of book tax differences can be explained by 14,50 %

through independent variables .Table 4.3

The effect of financial reporting aggressiveness on tax aggressiveness with DTAX proxy

DTAX it = α0 + α1DACCit + α2PTROAit + α3LEVit + α4LCF_Dit + α5FOR_Dit + α6SIZEit + εit

Hypothesis Coeff t-stat p-valueDACC + .0442028 6.50 0.000***PTROA - .1570568 23.44 0.000***

LEV + -.0105168 -3.76 0.030**LCF-D + -.0111278 -5.86 0.001***FOR-D + .0115501 5.44 0.003***SIZE - -.0025043 -4.72 0.009***

CONS .0759007 6.84 0.000N 785

R-square 0.2150F-statistics 0.0000*** significant at alpha 1%** significant at alpha 5%* significant at alpha 10%where :

DACCit discretionary accrual

DTAXit discretionary permanent differences

ABTDit abnormal book tax differences

PTROAit pretax income divide by total asset at year t-1

LEVit sum of long term debt divided by total asset

LCF_Dit dummy variable that equals 1 when an entity reported loss carryforwads

FOR_Dit dummy variable that equals 1 when the value of foreign income > 0

Through this results, we found that there is positive correlation with a 99% confidence

level that the discretionary accruals influence the aggressiveness of tax with DTAX

measurement. Similar results are also shown in Table 4.4 which shows the value of 0.01 which

means there is positive corelation with a 99% confidence level that the discretionary accruals

influence the aggressiveness of tax with DTAX measurement. This results dismissed the

assumption that there is a trade off between tax and financial reporting aggressiveness in the

company. This means that company can increase profits without increasing tax paid or company

using the opportunity to do tax and earning management in the sama reporting period ( Frank et

al, 2009).

Table 4.4 The effect of financial reporting aggressiveness on tax aggressiveness with ABTD

proxy

ABTDit = α0 + α1DACCit + α2PTROAit + α3LEVit + α4LCF_Dit + α5FOR_Dit + α6SIZEit + εit

Hypothesis Coeff t-stat p-valueDACC + .0572474 6.78 0.000***PTROA - .1543425 18.56 0.000***

LEV + -.0184254 -5.30 0.004***LCF-D + .0021973 0.94 0.320FOR-D + .0119543 4.54 0.011**SIZE - -.0010009 -1.52 0.224

CONS .0092842 0.68 0.368N 785

R-square 0.1450F-statistik 0.0000

*** significant at alpha 1%** significant at alpha 5%* significant at alpha 10%where :

DACCit discretionary accrual

DTAXit discretionary permanent differences

ABTDit abnormal book tax differences

PTROAit pretax income divide by total asset at year t-1

LEVit sum of long term debt divided by total asset

LCF_Dit dummy variable that equals 1 when an entity reported loss carryforwads

FOR_Dit dummy variable that equals 1 when the value of foreign income > 0

4.2.3 Consistency of Measuring Tax Aggressiveness

Measurements tax aggressiveness in this study using permanent differences (DPERM) and

abnormal book tax differences (ABTD). Table 4.5 shows the comparative influence of DPERM

and ABTD on financial reporting aggressiveness and comparison of the effect of the financial

reporting aggressiveness on both proxy. Research results shows that both proxies have the same

F stat value for all the equations. The positive coefficient and the same value of significancy

(0,001) showed that consistently DPERM and ABTD show that tax aggressiveness influence the

financial reporting aggressiveness and vice versa. Control variables effect on the research results

also show a similar value between DPERM and ABTD proxy.

Table 4.5

Comparison Measurement of Tax Aggressiveness on Financial Reporting Aggressiveness

Hypothesis

DPERM ABTD

Coeff p-value Coeff p-valueDPERM/ABTD

+ .3002203 0.000*** .2521715 0.000***

PTROA - .174766 0.000*** .1827347 0.000***LEV + -.0078229 0.333 -.0063209 0.030**

LCF-D + -.0130299 0.043** -.0169055 0.001***FOR-D + .0033923 0.365 .0038373 0.003***SIZE - -.0040113 0.050** -.0045051 0.009***

CONS .0632194 0.074 .0835633 0.000N 785 785

R-square 0.1435 0.1445F-statistik 0.0000 0.0000

Comparison Measurement of Financial Reporting Aggressiveness on Tax AggressivenessHypothesis

DPERM ABTDCoeff p-value Coeff p-value

DACC + .0442028 0.000*** .0572474 0.000***PTROA - .1570568 0.000*** .1543425 0.000***

LEV + -.0105168 0.030** -.0184254 0.004***LCF-D + -.0111278 0.001*** .0021973 0.320FOR-D + .0115501 0.003*** .0119543 0.011**SIZE - -.0025043 0.009*** -.0010009 0.224

CONS .0759007 0.000 .0092842 0.368N 785 785

R-square 0.2150 0.1450F-statistik 0.0000 0.0000

Through research it can be said that ABTD as proxy to measuring tax aggressiveness show

the consistent result with DPERM . The result refers to prior research by Hanlon and Heitzman

(2010 ) which states that the various method of measurement of tax aggressiveness with

permanent differences content show consistent results. But in this study ABTD can not be said

to be better in measuring the tax aggressiveness compared with DPERM proxy because we need

to do further research.

5. Conclusions and recommendation

5.1 Conclusion

The purpose of this study is to investigate the relationship between tax and financial

reporting aggressiveness on public companies in Indonesia. The results show that there is a

positive and significant relation between tax and financial reporting aggressiveness. This

indicates that in accordance with the study of Frank et al (2009), a public company in Indonesia

does not face the problem of trade-offs in decision making related to the value of net income and

tax payment. This may be an indication that the accounting rules and taxation Indonesia has

loopholes that can be exploited by companies to manage their book tax income.

The results also showed that aggressiveness measurement using a permanent tax

differences (DPERM) or abnormal book tax differences (ABTD) showed consistent results. This

proves that the content of permanent differences in both proxies are able to be used as a method

of measuring tax aggressiveness in accordance with the research done by Hanlon and Heitzman

(2010).

5.2 Research implications

The implications of this research for the regulator is that the results show that in

accordance with previous studies that companies in Indonesia does not have a tradoff in doing

the tax and financial reporting aggressiveness. This indicates that the company can reduce

taxable income without reducing net income for accounting purposes. So the regulator needed to

increase awareness in examinations because of of tax and financial reporting aggressiveness

increasingly difficult to detect. Furthermore, for academics , through the study found that ABTD

measurement showed consistent results with DPERM . Thus, ABTD can be used as an

alternative method of measuring the tax aggressiveness or tax avoidance . This research can also

be used as a reference for future research.

5.3 Limitations and Suggestions

Due to limited time , the study was conducted within only 5 years period. Therefore ,

further research is recommended to add the study period for the activities of tax and financial

reporting aggressiveness can be seen more reliably. The model is limited research on the model

of aggressiveness taxes by Frank et al (2009 ) and Tang and Fifth ( 2012) as well as a model of

financial reporting aggressiness by modified Jones ( Dechow et al, 1995). Further research can

be done using different measuring methods. This study also limited to controlling only five

control variables, which are PTROA , LEV , LCF_D , FOR_D and SIZE. Further research can

add the control variables such as family ownership structure , the effectiveness of corporate

governance and changes in corporate tax rates .

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