Thin Capitalization Rules, Capital Structure, Tax Avoidance, and the Covid-19 Pandemic: Evidence from Indonesian Listed Firms

Faisal Faisal, Arifin Rosid


In 2015, the Indonesian Government issued a regulation regarding thin capitalization rules, which was applied in 2016. This study generally aims to test and analyze the effectiveness of thin capitalization rules in reducing tax avoidance measures in Indonesia, especially for listed companies. The effect of thin capitalization rules is divided into two types: the influence on the company's capital structure (direct impact) and corporate tax avoidance (indirect impact). The test was carried out using a regression method with a difference-in-difference (DiD) approach in proving causal inference between the studied independent and dependent variables. Furthermore, this research will also discuss the moderating effect of the financial crisis due to the Covid-19 pandemic. The selection of samples uses purposive sampling techniques, where the samples are companies listed on the Indonesia Stock Exchange from 2011 to 2020. The regression results indicate that implementing thin capitalization rules negatively affects companies' capital structure but does not affect their tax avoidance level. The results also confirm that the economic crisis caused by the Covid-19 pandemic moderates the influence of thin capitalization rules on capital structures and tax avoidance levels of enterprises. The findings are expected to offer relevance, particularly to the Indonesian tax authority, concerning the effectiveness of the thin capitalization rules in minimizing the possibility of tax avoidance.


Keywords: Capital Structure, Covid-19 Pandemic, Public Companies, Tax Avoidance, Thin Capitalization Rules.

Full Text:



Almendros, J.A.C., & Mira, F.S. (2016). The effect of taxes on the debt policy of Spanish listed companies. Journal of the Spanish Economic Association, 7, 359-391.

Angrist, J. D.; Pischke, J. S. (2008). Mostly Harmless Econometrics: An Empiricist's Companion. Princeton University Press. pp. 227–243. ISBN 978-0-691-12034-8.

Badertscher, B. A., Katz, S. P., Rego, S. O., & Wilson, R. J. (2019). Conforming tax avoidance and capital market pressure. The Accounting Review, 94(6), 1-30.

Blouin, J., Huizinga, H., Laeven, M. L., & Nicodème, G. (2014). Thin capitalization rules and multinational firm capital structure. International Monetary Fund.

Brigham, E. F., & Ehrhardt M. C. (2011). Financial management: Theory and practice (13 Ed.). South-Western: South Western CENGAGE Learning.

Brondolo, J., (2009). Collecting Taxes During an Economic Crisis: Challenges and Policy Options. IMF staff position note (SPN/09/17), pp. 1–38, (Available at: external/pubs/ft/spn/2009/spn0917.pdf).

Buettner, T., Overesch, M., Schreiber, U., & Wamser, G. (2012). The impact of thin-capitalization rules on the capital structure of multinational firms. Journal of Public Economics, 96(11-12), 930-938.

Chen, S., Chen, X., Cheng, Q., & Shevlin, T. (2010). Are family firms more tax aggressive than non-family firms? Journal of financial economics, 95(1), 41-61.

Clair, T. S., & Cook, T. D. (2015). Difference-in-differences methods in public finance. National Tax Journal, 68(2), 319-338.

Copeland, T.E., J.F. Weston, & K. Shastri. (2004). Financial Theory and Corporate Policy. 4th ed. Addison Wesley.

De Hoyos, R. E., & Sarafidis, V. (2006). Testing for cross-sectional dependence in panel-data models. The stata journal, 6(4), 482-496.

De la Cuesta-González, M., & Pardo, E. (2019). Corporate tax disclosure on a CSR basis: A new reporting framework in the post-BEPS era. Accounting, Auditing & Accountability Journal, Vol. 32 No. 7, pp. 2167-2192.

Desai, M. A., & Dharmapala, D. (2006). Corporate tax avoidance and high-powered incentives. Journal of Financial Economics, 79(1), 145-179.

Dobbins, L., & Jacob, M. (2016). Do corporate tax cuts increase investments? Accounting and Business Research, 46(7), 731-759.

Dyreng, S. D., Hanlon, M., & Maydew, E. L. (2008). Long-run corporate tax avoidance. The Accounting Review, 83(1), 61-82.

Edwards, A., Schwab, C., & Shevlin, T. (2013, February). Financial constraints and the incentive for tax planning. In ANNUAL ROTMAN ACCOUNTING RESEARCH CONFERENCE (Vol. 7).

Efendi, S., Czernkowski, R., Morton, E., & Bond, D. (2021). Examining long-run corporate tax avoidance: How firms avoid taxes over time?

Egger, P., Keuschnigg, C., Merlo, V., & Wamser, G. (2014). Corporate taxes and internal borrowing within multinational firms. National Bureau of Economic Research.

Fredriksson, A. & Oliveira, G.M.d. (2019), "Impact evaluation using Difference-in-Differences", RAUSP Management Journal, Vol. 54 No. 4, pp. 519-532.

Gebhart, M. S. (2017). Measuring corporate tax avoidance–An analysis of different measures. Junior Management Science, 2(2), 43-60.

Godfrey, Jayne, Allan Hodgson, Ann Tarca, Jane Hamilton, and Scott Holmes. (2010). Accounting Theory 7th Edition. New York: John Wiley and Sons, hal. 360-402.

Graham, J. R. (2013). Do taxes affect corporate decisions? A review. Handbook of the Economics of Finance, 2, 123-210.

Gujarati, Damodar. (2004). Basic Econometrics Fourth Edition. New York: The McGraw-Hill Companies.

Gupta, S., & Newberry, K. (1997). Determinants of the variability in corporate effective tax rates: Evidence from longitudinal data. Journal of accounting and public policy, 16(1), 1-34.

Hanlon, M., & S. Heitzman. (2010). A review of tax research. Journal of Accounting and Economics, 50 (2/3): 127–178.

Hoechle, D. (2007). Robust standard errors for panel regressions with cross-sectional dependence. The stata journal, 7(3), 281-312.

Leary, M. T., & Roberts, M. R. (2010). The pecking order, debt capacity, and information asymmetry. Journal of Financial Economics, 95, 332–355.

Masri, I., & Martani, D. (2012). Pengaruh tax avoidance terhadap cost of debt. Simposium Nasional Akuntansi XV, 1.

McGuire, S. T., Omer, T. C., & Wang, D. (2012). Tax avoidance: Does tax-specific industry expertise make a difference? The accounting review, 87(3), 975-1003.

Mills, L. F. (1998). Book-tax differences and Internal Revenue Service adjustments. Journal of Accounting Research, 36(2), 343-356.

Penno, M., and D. Simon. (1986). Accounting choices: Public versus private firms. Journal of Business Finance and Accounting 13 (4):561–569.

Ramadhan, M. R., Frandyanto, S. A., & Riandoko, R. (2017). Pengaruh Thin Capitalization Rule pada Leverage Perusahaan Masuk Bursa di Indonesia.

Rego, S. O. (2003). Tax‐avoidance activities of US multinational corporations. Contemporary Accounting Research, 20(4), 805-833.

Richardson, G., Hanlon, D., & Nethercott, L. (1998). Thin capitalization: An Anglo-American comparison. The International Tax Journal, 24(2), 36–66.

Richardson, G., Taylor, G., & Lanis, R. (2015). The impact of financial distress on corporate tax avoidance spanning the global financial crisis: Evidence from Australia. Economic Modelling, 44, 44-53.

Rohaya, M. N., Fadzillah N.S.M., & Mastuki, N.A. (2010). Corporate tax planning: A study on corporate effective tax rates of Malaysian listed companies. International Journal of Trade, Economics, and Finance, 1, 2010-023X.

Salihu, I. A., Obid, S. N. S., and Annuar, H. A. Measures of corporate tax avoidance: Empirical evidence from an emerging economy. International. Journal of Business and Society, 14(3):412–427, 2013.

Saragih, A. H. (2018). Analisis Efektivitas Peraturan Kementerian Keuangan Nomor 169/PMK. 010/2015 (Studi Empiris atas Perusahaan Publik yang Terdaftar di Bursa Efek Indonesia Periode 2015-2016). ACCRUALS (Accounting Research Journal of Sutaatmadja), 2(2), 11-19.

Scott, William R. (2003). Financial Accounting Theory. Third Edition, Prentice-Hall, Toronto, Canada.

Slemrod, J. (2001). A general model of the behavioral response to taxation. International Tax and Public Finance, 8(2), 119-128.

Taylor, G., & Richardson, G. (2012). International corporate tax avoidance practices: evidence from Australian Firms. The International Journal of Accounting, 47, 469-496.

Taylor, G., & Richardson, G. (2013). The determinants of thinly capitalized tax avoidance structures: Evidence from Australian firms. Journal of International Accounting, Auditing and Taxation, 22(1), 12-25.

Widarjono, Agus. (2013). Ekonometrika: Pengantar dan Aplikasinya Disertai Panduan Eviews. Yogyakarta: UPP STIM YKPN.

Wilde, J. H., & Wilson, R. J. (2018). Perspectives on corporate tax planning: Observations from the past decade. The Journal of the American Taxation Association, 40(2), 63-81.



  • There are currently no refbacks.

Copyright (c) 2022 Faisal Faisal, Arifin Rosid

Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.

Flag Counter

Published by: 

AIBPM Publisher

Editorial Office:

JL. Kahuripan No. 9 Hotel Sahid Montana, Malang, Indonesia
 +62 341 366222

Supported by: Association of International Business & Professional Management 

If you are interested to get the journal subscription you can contact us at

ISSN 2622-0989 (Print)
ISSN 2621-993X (Online)

DOI: Prefix 10.32535 by CrossREF

Journal of International Conference Proceedings (JICP) INDEXED:


In Process

This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.