Financial Derivatives in Corporate Tax Aggressiveness

Abstract

The purpose of this study is to investigate the utilization of derivative financial instruments in tax aggressiveness activities. The study is conducted by using the fair value of the financial assets and liabilities derived in total and divided on hedge design to identify the derivatives used for tax evasion. The results of the analysis show that cash effective tax rate (Cash ETR) is negatively associated with the fair value of hedging derivative assets. This indicates that the company reduced tax payments by delaying the realization of derivative profits designated hedging. Furthermore, Cash ETR is found to be negatively (positive) correlated with the fair value of non-hedging derivative assets (liabilities). This indicates that the company delayed the realization of the profit while accelerating the realization of the loss of non-hedging derivatives to reduce the tax paid. Then, GAAP ETR is positively correlated with the fair value of the non-hedging derivative liability, indicating that there is a reduction of tax expense through an accelerated realization of non-hedging derivative loss so that it can be said that the company does earnings management activity through minimization tax expense using derivative financial instruments. This study contributes to the Indonesian tax authorities by providing policy recommendations related to financial derivative transactions because up to the time of this research, Indonesia does not have tax rules that specifically regulate taxation on financial derivatives transactions.

Keywords: Tax Aggressiveness, Derivative Financial Instruments