Does ‘Information Reporting’ Really Matter for Tax Compliance? The Case of Indonesia

Abstract

Businesses that have their revenue and cost reported to the tax authorities by a third party may be more likely to be caught underreporting taxes than those not subject to third-party reporting. However, very little is known about the compliance response of corporate taxpayers relating to the impact of information reporting by third-party, particularly from an emerging economy perspective. In response, we use empirical data to scrutinise tax compliance in settings where third-party information reporting is either present or absent. Investigating 538,254 anonymous corporate tax records data from the fiscal year 2014 through 2019, we find evidence that tax compliance is lower for the group without information reporting but strikingly higher for the group with information reporting. Our study shows a positive relationship between operating profit margin and corporate tax turnover ratio (CTTOR) for firms with information reporting but a negative relationship for the group otherwise, indicating the former group reported higher positive fiscal adjustment and lower operating expenses than the latter. We also find a positive association between other income ratios from side business and CTTOR for the group with information reporting but a negative relationship between the two variables for the group otherwise, indicating tax compliance is higher when the corresponding income is more detectable. Supporting other studies, this paper has critical implications in advancing the understanding of the impact of information reporting on tax-paying behaviour of firms in Indonesia. From a tax policy perspective, our results suggest that strengthening third-party reporting offers one of the effective ways to improve tax compliance.

Keywords: tax compliance, information reporting, corporate taxpayers

JEL Classification: H2, H26