Analysis of Corporate Income Tax Rate Changes and Earnings Management

Abstract

Özet: It is known that tax is one of the biggest contributor to state income all over the world. For Indonesia, income tax contribute an average of 36% to the state’s income. With the high contribution of tax, government could adjust the income tax rate in order to increase the tax income. However, the high rate of income tax would have an impact to investment decision as tax will reduce the net income. Usually the taxpayer will apply an earnings management in order to avoid high tax payment. Several previous research have been analyzed the determinants of earnings management and correlation between corporate income tax rate changes and earnings management. This research will be focused on Indonesian listed corporations and several events of corporate income tax rate changes in the last five years. Using discretionary accrual as an earnings management measurement, we found there is a significant impact of corporate income tax rate changes to corporate earnings management with the evidence of income minimization practice. While for earnings management determinant, we only found one variable out of four variables we tested in this research: earnings pressure which is significant in 10%.

Abstract

Özet: It is known that tax is one of the biggest contributor to state income all over the world. For Indonesia, income tax contribute an average of 36% to the state’s income. With the high contribution of tax, government could adjust the income tax rate in order to increase the tax income. However, the high rate of income tax would have an impact to investment decision as tax will reduce the net income. Usually the taxpayer will apply an earnings management in order to avoid high tax payment. Several previous research have been analyzed the determinants of earnings management and correlation between corporate income tax rate changes and earnings management. This research will be focused on Indonesian listed corporations and several events of corporate income tax rate changes in the last five years. Using discretionary accrual as an earnings management measurement, we found there is a significant impact of corporate income tax rate changes to corporate earnings management with the evidence of income minimization practice. While for earnings management determinant, we only found one variable out of four variables we tested in this research: earnings pressure which is significant in 10%.

Keywords

• tax,corporate income tax rate changes; earnings management; discretionary accrual; income minimization

References

1. Burgstahler, D., & Dichev, I. (1997). Earnings management to avoid earnings decreases and losses. Journal of
2. Accounting and Economics, 24(1), 99-126. Cohen, D. A., & Zarowin, P. (2010). Accrual-based and real earnings management activities around seasoned equity offerings. Journal of Accounting and Economics, 50(1), 2-19.
3. Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management. Accounting Review, 193- 2
4. Government of the Republic of Indonesia. (2007). Consolidation of law of the Republic of Indonesia Number 6 of 1983 concerning general provisions and tax procedures as lastly amended by the law number 28 of 2007. Jakarta:
5. Government of the Republic of Indonesia. Government of the Republic of Indonesia. (2008). Consolidation of law of the Republic of Indonesia Number 7 of 1983 concerning income tax as lastly amended by the law number 36 of 2008. Jakarta: Government of the Republic of Indonesia.
6. Guenther, D. A. (1994). Earnings management in response to corporate tax rate changes: Evidence from the 1986 Tax
7. Reform Act. Accounting Review, 230-243. Liu, Q., & Lu, Z. J. (2007). Corporate governance and earnings management in the Chinese listed companies: A tunneling perspective. Journal of Corporate Finance, 13(5), 881-906.
8. Slamet, A., & Wijayanti, P. (2012). Respon Perubahan Tarif Pajak Penghasilan, Insentif Dan Non-Insentif Pajak

9. Terhadap Manajemen Laba. In Conference In Business, Accounting And Management (CBAM) 2012 (Vol. 1, No. 1, pp. 1-14).
10. Yamashita, H., & Otogawa, K. (2008). Do Japanese Firms Manage Earnings in Response to Tax Rate Reductions in the Late 1990s. The Journal of Management Accounting, 16(1), 41-59.
11. Xie, B., Davidson, W. N., & DaDalt, P. J. (2003). Earnings management and corporate governance: the role of the board and the audit committee. Journal of Corporate Finance, 9(3), 295-316.