The role of political connections as a moderating determinant of tax avoidance

Abstract

Background: This study aims to obtain empirical evidence related to thin capitalization and transfer pricing on tax avoidance and the role of political connections as a moderating variable. Methods: The sampling technique for this study used purposive sampling , resulting in a sample of 44 mining companies listed on the Indonesia Stock Exchange from 2013 to 2022. The method used in hypothesis testing is the Generalized Method of Moment (GMM). Findings: The results of this study indicate that thin capitalization and transfer pricing have a significant effect on tax avoidance. In addition, this study reveals that the role of political connections can moderate the influence of thin capitalization and transfer pricing on tax avoidance. The findings of this study are expected to be input for the government as a regulator, especially the Directorate General of Taxes (DGT) in establishing regulations related to taxation. Conclusion: This study concludes that tax avoidance in the mining industry is not merely a technical accounting strategy but is significantly intensified by political affiliations, necessitating more stringent, non-technical monitoring by regulators. Novelty/Originality of this article: This research is one of the studies that examines thin capitalization and transfer pricing on tax avoidance with a moderating variable of political connections. Political connections were chosen as a moderating variable because they are suspected of having a non-technical effect on tax avoidance practices carried out by companies.