This study aims to investigate the moderating role of transaction risk on the relationship between board networks and tax avoidance in Indonesian manufacturing firms.
Using social network theory (SNT), this study uses closeness and eigenvector centrality to proxy board networks. The authors compute these centrality measures using all the possible ties each board member may have in publicly listed Indonesian firms. This study uses the panel data of 87 manufacturing firms in Indonesia from 2013 to 2021. The results are robust by using fixed effect regression and generalized least squares model, after controlling through endogeneity and sensitivity analysis.
The results suggest that firms with better-connected boards engage in less tax avoidance, and this trend is mitigated by higher levels of transaction risk. This means that having better-connected board members can help prevent firms from using loopholes to avoid paying their fair share of taxes, but this benefit is less effective when the firm’s business involves exploitable tax risk transactions. This research underscores the significance of examining corporate tax behavior within the context of social structure, in addition to traditional perspectives focused on regulatory frameworks.
This research contributes to taxation literature based on the perspective of SNT, to look at the social network influence on corporate tax behavior. This study specifically provides evidence that the social network influence on corporate tax behavior is contingent on the level of firms’ transaction risk. Practically, the authors suggest tax regulators to increase enforcement and scrutiny on transaction risk for the purpose of curtailing tax avoidance.
