1. Rina Indah Sari Ginting and Dwi Martani
Analysis of Tax Aggressiveness and Financial Reporting Aggressiveness on Public Companies in Indonesia
Rina Indah Sari Ginting and Dwi Martani

2. Agenda Introduction Literature Review Research Method
Empiricial Result
Conclusion

3. Introduction
The quality of financial statements is important to stakeholder in making decisions related to investment, credit and improves market efficiency.
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. Companies are trying to manage their net income profit which is often called by financial reporting aggressiveness.
Financial reporting aggressiveness actions can have negative impacts for the company through the payment of taxes.
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).

4. Introduction
Frank et al (2009) conducted a research on the relationship of tax and financial reporting aggressiveness in America using residual permanent differences (DTAX) as the measurement. He 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.
Tanya and Fifth (2012) developed another way to measures tax aggressiveness, that called abnormal book tax differences (ABTD).
The purpose:
Expand the Frank et al (2009) by using Indonesian capital market data
Using the other proxy of tax aggressiveness that developed by Tanya and Fifth (2012)

5. Literature Review Quality of Financial Reporting
Financial statements contains a lot of information that can be used by stakeholders to assist the decision making process.
High financial statements quality can be used to make the right decision.
To meet stockholder expectation, 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.

6. Literature Review 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.
In this study, financial reporting aggressiveness have the same context with earnings management.
Aggressive financial reporting can be measured by discretionary accruals.
Several measure that usually used in detected aggressive financial are Model Jones (1991), Dechow et al (1995), Kasznik (1999) and Kothari (2005).

7. Literature Review Tax Aggressiveness
Tax avoidance is define as the reduction of explicit taxes ( Hanlon and Heitzman, 2010 ;Dyreng et al., 2008).
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.
Tax planning behavior of the company and can be discuss in various terms such as tax aggressiveness, tax sheltering, tax evasion or non-compliance.
Hanlon and Heitzman (2010) emphasizes that the definition of tax aggressiveness are not limited to specific measurement methods.
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.

8. Literature Review Tax Aggressiveness Measurement
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.

9. Literature Review Tax Aggressiveness Measurement
Tang and Fifth (2012) develop ABTD and NBTD measures.
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 BTDs on discretionary items and using the unexplained portion of BTDs as measure of ABTD.
Tang and Firth (2012) proved that ABTD negative effect on earnings because it contains information of relevance earnings management and tax management.

10. Literature Review Hyphotesis
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).
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).

11. Research Method Models
𝐷𝐴𝐶 𝐶 𝑖𝑡 = 𝛼 0 + 𝛼 1 𝐷𝑇𝐴 𝑋 𝑖𝑡 + 𝛼 2 𝑃𝑇𝑅𝑂 𝐴 𝑖𝑡 + 𝛼 3 𝐿𝐸 𝑉 𝑖𝑡 + 𝛼 4 𝐿𝐶 𝐹 𝐷 𝑖𝑡 + 𝛼 5 𝐹𝑂 𝑅 𝐷 𝑖𝑡 + 𝛼 6 𝑆𝐼𝑍 𝐸 𝑖𝑡 + 𝜀 𝑖𝑡
𝐷𝐴𝐶 𝐶 𝑖𝑡 = 𝛼 0 + 𝛼 1 𝐴𝐵𝑇 𝐷 𝑖𝑡 + 𝛼 2 𝑃𝑇𝑅𝑂 𝐴 𝑖𝑡 + 𝛼 3 𝐿𝐸 𝑉 𝑖𝑡 + 𝛼 4 𝐿𝐶 𝐹 𝐷 𝑖𝑡 + 𝛼 5 𝐹𝑂 𝑅 𝐷 𝑖𝑡 + 𝛼 6 𝑆𝐼𝑍 𝐸 𝑖𝑡 + 𝜀 𝑖𝑡
DACCit : dicretionary accrual
DTAXit : dicretionary 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 carry forwards
FOR_Dit : dummy that equals 1 when the value of foreign income > 0
SIZEit : natural log of total assets

12. Research Method Models
𝐷𝑇𝐴 𝑋 𝑖𝑡 = 𝛼 0 + 𝛼 1 𝐷𝐴𝐶 𝐶 𝑖𝑡 + 𝛼 2 𝑃𝑇𝑅𝑂 𝐴 𝑖𝑡 + 𝛼 3 𝐿𝐸 𝑉 𝑖𝑡 + 𝛼 4 𝐿𝐶 𝐹 𝐷 𝑖𝑡 + 𝛼 5 𝐹𝑂 𝑅 𝐷 𝑖𝑡 + 𝛼 6 𝑆𝐼𝑍 𝐸 𝑖𝑡 + 𝜀 𝑖𝑡
𝐴𝐵𝑇 𝐷 𝑖𝑡 = 𝛼 0 + 𝛼 1 𝐷𝐴𝐶 𝐶 𝑖𝑡 + 𝛼 2 𝑃𝑇𝑅𝑂 𝐴 𝑖𝑡 + 𝛼 3 𝐿𝐸 𝑉 𝑖𝑡 + 𝛼 4 𝐿𝐶 𝐹 𝐷 𝑖𝑡 + 𝛼 5 𝐹𝑂 𝑅 𝐷 𝑖𝑡 + 𝛼 6 𝑆𝐼𝑍 𝐸 𝑖𝑡 + 𝜀 𝑖𝑡
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 carryforwards
FOR_Dit : dummy that equals 1 when the value of foreign income > 0
SIZEit : natural log of total assets

13. Research Method Financial Reporting Aggressiveness Measurement
To measure financial reporting aggressiveness in this study, we use the Modified - Jones model ( Dechow et al ) as our proxy according to prior research of Frank et al (2009 ).
T𝐴𝐶 𝐶 𝑖𝑡 = 𝛼 0 + 𝛼 1 ∆𝑅𝐸 𝑉 𝑖𝑡 − ∆𝐴 𝑅 𝑖𝑡 + 𝛼 2 𝑃𝑃 𝐸 𝑖𝑡 + 𝜀 𝑖𝑡
TACCit : total accruals = ((EBEIit +TTEit) – (CFOit+ITPit))
EBEIit : earning before extra ordinary item
TTEit : total tax expense
CFOit : cash flow from operating activities
ITPit : 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 t
PPEit : gross property, plant and equipment
ԑit discretionary accruals

14. Research Method Tax Aggressiveness Measurement
The proxy used in this study are ABTD adopted by ABTD developed by Tang and Fifth (2012). The abnormal tax differences is the residual value of BTD’s equation regression.
BTD it = β0 + β1 ∆INVit + β2 ∆REV it + β3 NOL it + β4 TLU it + β5 BTD it-1 + ԑ it
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 t
TLUit : the value of tax losses utilized
NOLit : net operating loss
BTDit-1 : book tax differences from year t-1
Ԑit : error term

15. Research Method Tax Aggressiveness Measurement
The proxy used in this study are DTAX adopted by Frank et al (2009) and Kamila (2014). The discretionary permanent differences is the residual value of PERMDIFF’s equation regression.
PERMDIFFit = α0 + α1INTANGit + α2UNCONit + α3MIit + α4CSTEit + α5∆NOLit + α6LAGPERMit + εit
PERMDIFFit : permanent differences divided by total aset at t-1
INTANGit : goodwill and other intangibles divided by total aset at t-1
UNCONit : consolidated net income (loss) divided by total aset at t-1
MIit : Minority net income or loss divided by total aset at t-1
CSTEit : current state tax expense divided by total aset at t-1
∆NOLit : changes in net operating loss carryforward divided by total aset at t-1
LAGPERMit : permanent differences in year t-1 divided by total aset at t-1
εit : discretionary permanent differences

16. Research Method Listed company in IDX on 2010 – 2014
Not industry specific that have a special treatment in taxation ie: construction, oil and gas, shipping.
Not financial industry
No corporate action
Complete financial statement information
Using IDR and financial statement date Dec 31

17. Empirical Result

18. Empirical Result

19. Empirical Result Hypothesis DPERM ABTD Coeff p-value DPERM/ABTD +
Hypothesis
DPERM
ABTD
Coeff
p-value
DPERM/ABTD +
0.000***
PTROA -
LEV
0.333
0.030**
LCF-D
0.043**
0.001***
FOR-D
0.365
0.003***
SIZE
0.050**
0.009***
CONS
0.074
0.000 N
785
R-square
0.1435
0.1445
F-statistik
0.0000

20. Empirical Result Hypothesis DPERM ABTD Coeff p-value DACC + .0442028
Hypothesis
DPERM
 ABTD
Coeff
p-value
DACC +
0.000***
PTROA -
LEV
0.030**
0.004***
LCF-D
0.001***
0.320
FOR-D
0.003***
0.011**
SIZE
0.009***
0.224
CONS
0.000
0.368 N
785
R-square
0.2150
0.1450
F-statistik
0.0000

21. Empirical Result
Tax aggressiveness influence the financial reporting aggressiveness and vice versa.
Both measurement DPERM and ABTD consistently have positive influence to financial reporting aggressiveness.
ABTD as proxy to measuring tax aggressiveness show the consistent result with DPERM .
Control variables effect on the research results also show a similar value between DPERM and ABTD proxy.  
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.

22. Conclusion Conclusion
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 and 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).

23. Conclusion Implication
The results show that in accordance with previous studies that companies in Indonesia does not have a trad off 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.
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 .

24. Conclusion Limitation
Due to limited time , the study was conducted within only 5 years period. 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 aggressiveness 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 exploit the other variables such as family ownership structure , the effectiveness of corporate governance and changes in corporate tax rates.

25. THANK YOU