JEMA: Jurnal Ilmiah Bidang Akuntansi dan Manajemen, 17(1) 2020, 78-87

http://dx.doi.org/10.31106/jema.v17i1.3609, ISSN (Online) 2597-4017

Does capital intensity, inventory intensity, firm size, firm

risk, and political connections affect tax aggressiveness?
Sugeng1*, Eko Prasetyo2, Badrus Zaman3
1
Department of Accounting, Faculty of Economics, Universitas Nusantara PGRI Kediri,
Kediri, Indonesia
2
Department of Accounting, Faculty of Economics and Business, Universitas Kahuripan
Kediri, Kediri, Indonesia
3
Department of Accounting, Faculty of Economics, Universitas Nusantara PGRI Kediri,
Kediri, Indonesia
*Corresponding Author(s) Email: sugengprismakat@gmail.com

ABSTRACT

Tax aggressiveness is one of a critical issue in the world of JEL Code:

taxation. Many companies do tax planning to minimize H26
their tax abilities. This study aims to examine how capital
intensity, inventory intensity, firm size, firm risk, and DOI:
political connections, relate to the tax aggressiveness of 10.31106/jema.v17i1.3609
manufacturing listed companies in Indonesia, an emerging
economy of Southeast Asia. This study combined the tax Article History:
aggressiveness factor from different perspectives into one Received 2019-07-24
model. This study used purposive sampling with Reviewed 2019-11-30
manufacturing companies listed in Indonesia Stock Revised 2019-12-25
Exchange during 2015-2017 and experienced a Accepted 2020-01-28
consecutive profit as the main criteria. Panel data
regression used as a data analysis technique. The result
shows that there is a significant effect between capital Licensed:
intensity, political connection, and tax aggressiveness. The CC-BY
relationship between inventory intensity, firm size, firm
risk, and tax aggressiveness failed to prove in this study.
This result is consistent across several measures of tax
aggressiveness.

Keywords: Capital Intensity; Inventory Intensity; Firm

Size; Firm Risk; Political Connection; Tax
Aggressiveness

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Introduction

Although, tax is one of the important sources for the country to finance their
expenditures (both for expenditure routine and development expenditure). The fact that the
ratio of Indonesia tax revenue which is below the standards of ASEAN countries indicates
that there is some gap that needs to be explored (Subadriyah & Aliyah, 2018). Carolina et al.
(2014) argued that for companies, tax is a burden that can reduce the company’s net income.
Companies tend to be aggressive in taxation and looking for ways to reduce their burden
through various tax planning treatment both legally (tax avoidance) or even illegal.
Several factors can influence the tax aggressiveness of companies. Dunbar et al. (2010)
argue that capital intensity (company investment in fixed asset) correlates with overall tax
planning opportunities. Richardson et al. (2016) added that capital intensity is positively
associated with tax aggressiveness due to the accelerated depreciation charges based on a
fixed asset. Thus, inventory-intensive firms should be negatively associated with tax
aggressiveness which means the larger the inventory level of companies, the smaller the tax
avoidance intention (Stickney & McGee, 1982).
On the other hand, Lanis & Richardson, (2012), Sari & Tjen (2016), and Devi et al.
(2018) concluded that firm size is positively and significantly affect tax aggressiveness which
means that the larger the size of the firm the more aggressive the tax policy. Guenther et al.
(2017) add firm risk as a determinant of corporate tax aggressiveness and tax avoidance. He
concluded that there is a positive correlation between firm risk, tax aggressiveness, and tax
avoidance. Kim & Zhang (2016), Abdul Wahab et al. (2017), and Ying et al. (2017) included
political connections as another predictor of tax aggressiveness. They concluded that
politically connected firms would be more aggressive in their tax policy rather than non-
political connected firms.
Briefly, there are five factors at least that can enhance the tax aggressiveness intention of
the company namely capital intensity, inventory intensity, firm size, risk, and political
connections. Interestingly, there are 3 of the five factors mentioned above still debatable
since there is another research that concluded differently. For inventory intensity in an
example, research from Savitri & Rahmawati (2017) found that the inventory intensity per se
does not influence tax aggressiveness which is contradictory with Stickney & McGee (1982)
and Nurfauzi & Firmansyah (2018) conclusion. Recent research from Rusydi (2013) and Ann
& Manurung (2019), also show the different conclusion. While Rusydi (2013) concluded that
firm size has no influence on tax aggressiveness, Ann & Manurung (2019) stated that firm

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JEMA: Jurnal Ilmiah Bidang Akuntansi dan Manajemen, 17(1) 2020, 78-87
http://dx.doi.org/10.31106/jema.v17i1.3609, ISSN (Online) 2597-4017

size has a negative and significant effect on tax aggressiveness. Therefore, the fact that there
is a different conclusion of the effect of inventory intensity, firm size, firm risk on tax
aggressiveness needs to be explored. This research aims to analyze capital intensity,
inventory intensity, firm size, firm risk, and political connections on tax aggressiveness of
listed manufacturing companies in the Indonesia Stock Exchange (2015-2017). This study
chose the manufacturing sector since it has the greatest contribution compared with other
sectors.

Literature Review

Capital Intensity

Lubatkin & Chatterjee (1994) stated that capital intensity is often considered as
representative of firm operating leverage. Nugraha & Mulyani (2019) defined capital
intensity as the amount of fixed asset investment activities carried out by companies.
(Stickney & McGee, 1982) added that capital intensity can be measured as gross plant
assets/total assets, net plan asset/total asset, depreciation and amortization expense/number of
employees, gross plan assets/number of employees. The formula used in this research is;
𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠
𝑪𝑎𝑝𝑖𝑡𝑎𝑙 𝐼𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦 = (1)
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

Dunbar et al. (2010) and Richardson et al. (2016) concluded that capital intensity has a
positive relationship with tax aggressiveness.
H1: There is a significant relationship between capital intensity and tax aggressiveness.

Inventory Intensity

Inventory intensity considered one of the most crucial firm-specific characteristics that
can influences tax aggressiveness. Devi et al. (2018) defined inventory intensity as the level
of investment that occupied by the company on its inventory. Stickney & McGee (1982) and
Nurfauzi & Firmansyah (2018) concluded that there is a negative correlation between
inventory intensity and tax aggressiveness. The larger the inventory level of companies, the
smaller the tax avoidance intention. Inventory intensity in this study is measured as inventory
divided by total assets (Richardson & Lanis, 2007).
H2: There is a significant relationship between inventory intensity and tax aggressiveness.
𝑇𝑜𝑡𝑎𝑙 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝐼𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦 = (2)
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

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Firm Size

The size of a company can affect taxes in several ways which are tax aggressiveness by
nature and tax reduction by using political advantage. (Kim & Im, 2017) added that based on
the theory of cost it can be concluded that the larger t e size and profit of companies, the
higher possibilities of companies doing tax aggressiveness by nature. While based on
political theory, the larger size of companies means the higher political advantage so that it
can carry out tax planning to reduce taxes that must be paid to the state using existing gaps.
Dunbar et al. (2010) and Allen et al. (2016) measured firm size as the natural logarithm of the
firm total asset.

Firm Size = Ln(Total Assets) (3)

Lanis & Richardson (2012), Sari & Tjen (2016), Devi et al. (2018) stated that firm size is
positively and significantly affect tax aggressiveness which means the larger firms are, the
more they will undertake an action to minimize their tax (Halioui et al. 2016).
H3: There is a significant relationship between firm size and tax aggressiveness.

Firm Risk

Paligorova & Santos (2017) defined firm risk as to the volatility of earnings which can
be measured by the standard deviation formula. The greater the deviation of earnings in the
company, the greater the risk of the company. The formula used to measure firm risk is;

𝑅𝑖𝑠𝑘 = √∑𝑇𝑇−1(𝐸 − 1/𝑇 ∑𝑇𝑇−1 𝐸)2 /(𝑇 − 1)

(4)

Research from Guenther et al. (2017) and Chang et al. (2015) concluded that the firm risks
affect tax aggressiveness behavior. Therefore, the proposed hypothesis of this research is,
H4: There is a significant relationship between firm risk and tax aggressiveness

Political Connection

The political connection is a dilemma that plagues its capital market. Political connection
classified by Bliss & Gul (2012) into three definitions which is the percentage of direct
government equity ownership; the percentage of equity owned by ‘‘institutional’’ investors,
firms that have informal ties with powerful politicians. Ying (2011), Wu et al. (2012), Kim &
Zhang (2016), Abdul Wahab et al. (2017), Ying et al. (2017) added that in the term of tax
aggressiveness, politically connected firms would be more aggressive in its tax policy rather
than non-political connected firms. In this study, the political connections used dummy

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http://dx.doi.org/10.31106/jema.v17i1.3609, ISSN (Online) 2597-4017

variables as a proxy. It will be given a value of 1 if there is ownership by the government in

the company vice versa.
H5: There is a significant relationship between political connection and tax aggressiveness.

Tax Aggressiveness

Abdul Wahab et al. (2017) defined tax aggressiveness as the downward management of
taxable income through tax-planning activities. The primary goal of this tax activities is to
reduce the tax bill of the companies. The terminology of tax avoidance and tax
aggressiveness have been used interchangeably. Lietz (2013) prefers to classified tax
aggressiveness as part of tax avoidance despite their legal, illegal, or gray-scaled behavior.
Lanis & Richardson (2012) argued that proxies that are most commonly used to measure the
aggressiveness of the tax are ETR. The formula used is;
𝑇𝑜𝑡𝑎𝑙 𝑇𝑎𝑥
𝐸𝑇𝑅 = (5)
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝐵𝑒𝑓𝑜𝑟𝑒 𝑇𝑎𝑥

Methods

Figure 1. Research Framework

Capital Intensity
H2
Inventory Intensity H1
H3
Firm Size Tax Aggressiveness

Corporate Risk H5
H4
Political Connections

The design used in this study was quantitative with panel data regression used as a data
analysis technique. The research was designed to focus on manufacturing companies listed in
Indonesia Stock Exchange (IDX) for 2015-2017 periods, publish their financial report
publicly, experienced a consecutive profit, and share their dividend. There are 37
manufacturing companies for the 2015-2017 periods observed in this study. This study has a
conceptual framework as seen in Figure 1. The model should pass all classical assumption
testing like normality, multicollinearity, autocorrelation, and heteroscedasticity. Data is
normally distributed if the significance value of Kolmogorov-Smirnov (KS) is larger than
0.050. Meanwhile, to pass the multicollinearity test, the value of Tolerance and VIF should

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 Does capital intensity, inventory intensity, firm size, firm risk, and political connections
affect tax aggressiveness? by Sugeng, Eko Prasetyo, Badrus Zaman

be higher than 0.400 and lower than 10. Detection of autocorrelation can be done with the
Durbin-Watson test which means that if the value of Durbin-Watson (DW) was lower than 1
or greater than 3 indicate autocorrelation. For the heteroscedasticity test, there is an indication
of homoscedasticity if the probability value of the Glejser test results is lower than 0.050.
Based on Table 1, it can be concluded that the model passes all classical assumption test.

Table 1. Normality, Multicollinearity, Autocorrelation, and Heteroscedasticity Test

Model Test Statistical Criteria Statistical Value

Autocorrelation Durbin Watson 1.000 < DW < 3.000 1.795
Multicollinearity Tolerance > 0.400 0.903; 0.892; 0.289; 0.281; 0.882
VIF < 10.000 1.107; 1.121; 3.458; 3.559; 1.134
Heteroscedasticity Prob. Value > 0.050 0.055; 0.730; 0.066; 0.436; 0.182
Normality Sig. Value of 1-KS > 0.050 0.150

Result and Discussion

Table 2. Hypothesis Testing

Model t Value Sig. Decision

Capital Intensity -> Tax Aggressiveness 7.921 0.000 H1 Accepted
Inventory Intensity -> Tax Aggressiveness 1.695 0.093 H2 Rejected
Firm Size -> Tax Aggressiveness 0.450 0.654 H3 Rejected
Firm Risk -> Tax Aggressiveness -1.719 0.089 H4 Rejected
Political Connection -> Tax Aggressiveness 1.316 0.019 H5 Accepted

This study supports previous studies by Dunbar et al. (2010) and Richardson et al. (2016)
that stated there was a significant relationship between capital intensity on tax
aggressiveness. The significant values of that relationship (0.000) were lower than 0.050
which means that H1 is accepted. (Sonia & Suparmun, 2019) added that the company which
has high capital intensity tend to do tax avoidance practice legally since the fixed assets can
reduce their tax bill by the depreciation. Thus, the depreciation can reduce the company’s
profit directly while doing tax calculation. This study also concluded that political connection
has a significant relationship on tax aggressiveness. The significant values of that relationship
(0.019) were lower than 0.050 which means that H5 is accepted. Adhikari et al. (2006) added
that company with politically connected tend to do tax planning aggressively than non-

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politically connected company since they have a better information regarding tax regulations
and enforcement, lower political cost, lower transparency (Kim & Zhang, 2016), incentives,
enforce tax legislations, and freedom to overlap policies to gain more tax benefit.
Unfortunately, this study failed to prove the proposed hypothesis which stated that there
is a significant partial relationship between inventory intensity, firm size, firm risk, and tax
aggressiveness. The significant values of that relationship (0.093; 0.654; 0.089) were higher
than 0.050 which means that H2, H3, H4 are rejected. Nurhayati et al. (2019) argued that
inventory as part of the investment is not the best-suited strategy to minimize tax burden
since companies which have a higher level of inventory perceived as worse market position
due to their low level of inventory. Richardson & Lanis (2007) added that companies that can
be classified into big size company categories have limited action to do tax planning due to
the high surveillance level of government, financial analyst, and media. Their big size
visibility causes them to become easy targets of the tax regulator. Therefore, it is too risky for
them to do tax planning especially when they experienced a consecutive profit. Firmansyah &
Muliana (2018) added that tax avoidance could enhance the firm risk for several reasons like
the uncertainty of future tax payments and serve as bad leading indicators of firm risk.

Conclusion and Suggestion

Our study has provided empirical evidence on tax aggressiveness behavior in Indonesia.
We have managed to expose the effect of capital intensity, inventory intensity, firm size, firm
risk, and political connections on tax aggressiveness. Using a sample of manufacturing listed
companies in Indonesia covering the period from 2015 to 2017, we find that there is a
significant effect between capital intensity, political connection, and tax aggressiveness. It
means that the higher the capital intensity and politically connected, the higher the tendencies
of a company to do tax planning aggressively. However, we have no evidence to prove our
proposed hypothesis regarding the effect of inventory intensity, firm size, firm risk on tax
aggressiveness. The previous study claimed that inventory as part of the investment is not the
best-suited strategy to minimize the tax burden. As the bigger the size of the company, the
higher the risk of a company to do tax planning due to the high surveillance level of
government. Further research should focus on the different industries and explore the external
and internal factors of tax aggressiveness.

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