The purpose of this study is to investigate the utilization of derivative financial instruments in tax aggressiveness activities. The study is conducted by analyzing the fair value of derivative financial assets and liabilities in total and categorized it into hedging and speculative (non-hedging) designations to identify which type of derivatives are used for tax avoidance. The results of the analysis reveal that cash effective tax rate (Cash ETR) is negatively associated with the fair value of hedging derivative assets. This indicates that firms are reducing tax payment by delaying the realization of derivative gains designated for hedging. Furthermore, Cash ETR is found to be negatively (positively) associated with the fair value of non-hedging derivative assets (liabilities). This indicates that firms are delaying the realization of gains while accelerating the realization of losses on non-hedging derivatives to reduce tax payment. Moreover, GAAP ETR is positively associated with the fair value of the non-hedging derivative liabilities, indicating that there is a reduction of income tax expense through accelerating the realization of non-hedging derivative losses thus it can be implied that firms are utilizing derivative financial instruments in earning management activity to minimize their tax burden. This study contributes to the existing literature and public policy by providing evidence on the use of financial derivatives in tax aggressiveness along with policy recommendations related to tax implications of financial derivative transactions since, up to the time of this publication, Indonesia has not had specific tax provision which regulate taxation on financial derivative transactions.

This study fills the gap in the tax authority’s Covid-19 financial aid verifications by examining, and nominating, Long-run ETR (Dyreng et al., 2008) as the better corporate tax avoidance measure in excluding tax evader firms from the broad stimulus programs. Analysing confidential tax returns of 4,752 largest firms (32,120 firm-years) in Indonesia over 2009 to 2017 periods, this study found 18.12 percent of total sample firms is able to retain its Long-run ETR below 10 percent, which indicates continual tax avoidance activities by these firms during observation periods. Moreover, applying univariate and multivariate Ordinary Least Squares and Panel Data estimations, this study reveals, relative to other tax avoidance measures, Lagged Cash ETR (Lisowsky, 2010; Lisowsky et al., 2013) present the most consistent reliability in predicting long-run income tax burdens. Thus, this study asserts, in the conditions of computing Long-run ETR is costly and impractical (i.e. because of data unavailability), tax authority and policymakers can directly analyse firms’ Lagged Cash ETR to gauge their long-run income tax burdens and tax compliance behaviours prior the economic downturn.Â

This study examines how financial firms’ tax aggressiveness differs from their peers in other sectors. Using confidential tax return data of the 5,968 largest Indonesian firms from 2009 to 2017, our study finds financial firms to have lower tax burdens relative to their non-financial counterparts, suggesting more opportunities for tax avoidance. Further, we document simultaneous use of tax shelters and temporary and permanentdifferences between accounting standards and tax laws, indicating a tendency to use the most sophisticated and less costly techniques in minimising tax burdens. These findings suggest tax aggressiveness may be one important unintended consequence of the government’s conventional prudential policy.

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