The Financial Drivers of Base Erosion Profit Shifting In Indonesia: Transfer Pricing, Leverage, And Inventory Intensity In Multinational Companies

Abstract

Introduction: Some multinational companies in Indonesia have increasingly adopted aggressive strategies for tax planning. By January 2015, more than 4,000 such companies, owned by foreign entities, managed to avoid financial losses and bypass their tax obligations. Some view this behaviour as a deliberate tactic to evade tax payments, reducing government tax revenues. The study investigated how transfer pricing, return on assets (ROA), leverage, and inventory intensity influence these aggressive tax planning practices as financial drivers of base erosion profit shifting among multinational firms listed in Indonesia. By analyzing data from 101 firms between 2018 and 2022, totalling 505 observations, the research contributes theoretically and practically to the existing knowledge. The study conducted multiple regression analyses and diagnostic tests, including normality, heteroskedasticity, multicollinearity, and collinearity, to reveal that Indonesian multinational companies significantly employ various methods to minimize their tax liabilities. Specifically, the study identifies transfer pricing, ROA, leverage, and inventory intensity as crucial factors associated with aggressive tax planning practices. The novelty of the research is the sample of study 95 % in tax havens. The study highlights that increased aggressiveness in tax planning often occurs in transactions involving related parties across different tax jurisdictions. Future research could expand its focus by including unlisted non-multinational companies.