The Effect of Strategy Business on Tax Aggressiveness
Muhamad Ihsan and Elia Mustikasari
Department of Accounting, Universitas Airlangga, Surabaya, Indonesia
Keywords: Business Strategy, Defender, Tax Aggressiveness, Prospector.
Abstract: The purpose of this research is to obtain empirical evidence about the impact of strategy business on tax
aggressiveness. Companies that follow either prospector or defender strategies tend to seek tax
aggressiveness to increase their profit. Using a purposive sampling method, the empirical data was drawn
from 66 manufacturing companies listed in the Indonesia Stock Exchange (IDX), observed over a three-year
period during 2013–2015. Multiple regression models were examined to test the hypotheses. The results
showed that business strategies had a significant impact on tax aggressiveness. This is significant, because
companies used the same strategy from 2013 to 2015 to increase their profit and subsequently improve
performance. The value of this research is the empirical study and enrichment of literature regarding tax
aggressiveness.
1 INTRODUCTION
Although taxes are a source of state revenue, it can
be said that tax revenues are still not fully optimized.
This is evident from the increase in revenue in 2014
(up 92% compared to 2013) but in 2015 there was a
decline to 83.3% (data realization of the APBN
2013–2015). There is an under-optimization of tax
revenue because taxpayers attempt to reduce taxes
by tax evasion.
Tax aggressiveness is an attempt made by the
taxpayer to reduce tax collection paid to the state in
cash. Tax evasion consists of three forms, namely
tax avoidance, tax aggressiveness, and tax evasion.
Tax aggressiveness is an effort to avoid tax, which is
within legal limits but is unethical as tax shifting
conducts company operations in tax haven countries.
According to Armstrong et al. (2012), corporate
characteristics are factors that influence tax evasion.
Companies with a high innovation culture will affect
the level of profit earned due to the high expense of
research and development of their products.
Therefore, companies with such characteristics will
seek to reduce expenses through aggressive taxes in
order to increase profits and will subsequently
perform well.
Companies with good performance, an ambition
to become market leaders, and the desire to achieve
a competitive advantage, will strive to demonstrate
effective strategies and strengthen their businesses
using a number of methods, including functional
policies and an organizational structure (Porter,
1996). Miles and Snow (1978) classify organizations
into four types: those that use the defender strategy,
prospector strategy, analyzer strategy, and reactor
strategy.
The business strategies discussed will focus on
the prospector and defender types. The prospector is
a company strategy that promotes the manufacture
of innovative products to master the market and take
existing opportunities to increase profit. Because the
company has spent more money on research and
development, it looks for alternatives to reduce its
expenses, such as tax aggressiveness. Companies
using the defender strategy are opposed to the
prospector strategy because the defender is more
focused on preventing competitors from entering its
markets using competitive pricing. Therefore,
businesses using the defender strategy are tax-
aggressive to ensure that costs incurred during the
production of goods are not inflated and goods can
be sold at a competitive price.
Higgins et al. (2013) link a company’s business
strategy with tax evasion, which leads to the
conclusion that prospectors are more tax-avoidant in
their business processes than defenders and
analyzers. Hsu et al. (2014) discovered that
companies following cost leadership strategies, such
as the defender strategy, minimize risk and
uncertainty, strive to maintain organizational and
416
Ihsan, M. and Mustikasari, E.
The Effect of Strategy Business on Tax Aggressiveness.
In Proceedings of the Journal of Contemporary Accounting and Economics Symposium 2018 on Special Session for Indonesian Study (JCAE 2018) - Contemporary Accounting Studies in
Indonesia, pages 416-421
ISBN: 978-989-758-339-1
Copyright © 2018 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved

operational stability, and have a lower cash effective
tax rate (ETR) when there is at least one expert
director of finance from the audit committee. Firms
that focus on innovation and looking for new
markets (prospectors) have a higher ETR when at
least one expert director of finance from the audit
committee is present. The closer the ETR to zero,
the greater the tax avoidance rate in the company. So,
it can be concluded that a defender company, when
there is an expert director of finance from the
auditing committee, will be more inclined to tax
avoidance than companies that adopt the prospector
strategy. However, Novitaria and Santoso (2013)
found that the companies’ business strategies do not
significantly influence the level of tax evasion.
With the above background, it is necessary to re-
examine the influence of corporate business
strategies on tax aggressiveness. The population
used in the research are manufacturing companies
that make evident changes to materials from their
raw to finished states during the production process,
so there is an opportunity for the practice of tax
aggressiveness.
2 LITERATURE REVIEW AND
HYPOTHESIS DEVELOPMENT
2.1 Competitive Advantage Theory
Barney (1991) proposed a clear formal definition
with the notion of a sustained competitive advantage:
the excellence achieved continuously by
implementing a strategy of accomplished unique
values that competitors do not have. The company
will excel in the market and increase its performance
if it offers lower prices than competitors for
equivalent benefits or unique benefits beyond the
offered price (Porter, 1980).
Companies that choose a strategy to offer their
products at lower prices than competitors in order to
excel in their markets, make various efforts to
reduce financing during operations, including
reducing expenses by tax evasion resulting in low
taxes paid by the company. The cost during
production will be lower so the company can offer
products at lower prices, and the company
subsequently gains an advantage.
2.2 Agency Theory
Jensen and Meckling (1976) describe the agency
relationship as a contract whereby one or more
people (employers or principals) employ other
people (agents) to carry out some delegation of
authority to make decisions for the agent. Agent
conflicts arise due to differences in the interests of
agents and principals, in which the principal wants
the company to improve the welfare of the principal,
but the agent wants to improve the welfare of the
company. For a company that has a lower pricing
strategy than its competitors, it will seek to perform
efficiencies during operations. However, if the
principal wants its welfare to improve, it will show
an increase in corporate finance, prompting
companies to attempt to reduce this through tax
evasion.
2.3 Competitive Typology
Miles and Snow (1978) explain that there are four
typologies of corporate competitive strategy:
prospector, defender, analyzer, and reactor. In this
study, just the prospector and defender strategies
will be used due to their opposing nature. The
prospector strategy focuses on innovation and
creativity to create new products or markets so the
financing of research and development is relatively
high. However, through product innovation and new
market opportunities, sales will increase. In contrast,
the defender strategy emphasizes the stability and
sustainability of the company so that products and
services offered are of high quality but have a lower
price. This is because the emphasis is on efficiency
and low cost. Efficiency will be achieved by strictly
controlling costly areas, such as research and
development.
2.4 Hypothesis Development
2.4.1 The Influence of Corporate Business
Strategy to Tax Aggressiveness
Higgins et al. (2013) explains that the potential for
tax avoidance is greater for corporate prospectors
than defenders because prospectors will be more
aggressive in taking on existing opportunities to
ignore tax positions. This is because one of the
prospector strategy’s characteristics is to take
existing opportunities and risks with no regard for
uncertainty. However, firms that adopt the defender
strategy tend to squeeze in cost-efficiency as a
cornerstone of competitive advantage and tax
expense is the main cost of most companies.
Therefore, defender firms should be more likely to
avoid taxes than firms that adopt a prospector
strategy.
The Effect of Strategy Business on Tax Aggressiveness
417

Hsu et al. (2014) explain that companies that
embrace costly leadership strategies, minimize risk
and uncertainty, and strive to maintain
organizational and operational stability (defenders)
have a lower ETR when there is at least one expert
director of finance from the audit committee. On the
other hand, firms that are focused on innovation and
looking for new markets (prospectors) have a higher
ETR when at there is at least one expert director of
finance from the audit committee. However,
Novitaria and Santoso (2013) found that the
corporate business strategy did not significantly
influence the tax avoidance rate. Based on the above
description, the hypothesis is formulated as follows:
H1: Corporate Business Strategy Affects Tax
Aggressiveness.
Figure 1: Conceptual Framework
3 RESEARCH METHODS
3.1 Operational Variable Definition
3.1.1 Independent Variable
In this research the independent variable is the
Corporate Business Strategy (X). The measurement
of business strategy variables are used in accordance
with those used by Higgins et al. (2013).
1. The Ratio of Research and Development to Sales
(RD)
The ratio of RD to sales serves as a measure of the
company's tendency to search for new products
(Higgins et al., 2013). Company prospectors tend to
have large numbers on innovation activity and
expect to have higher research and development
costs than defenders (Hambrick, 1983).
R&D/SALES =
Research and Development
Total Sales
2. The Ratio of Total Employees to Total Sales
The company's ability to efficiently produce and
distribute goods and services is critical to the
company's business strategy (Thomas et al., 1991).
Because the defenders focus on organizational
efficiency, defenders expect to have an employee
cost figure of fewer sales (Higgins et al., 2013).
EMP/SALES =
Number of Employees
Total Sales
3. The Ratio of Company Growth
Measurement of growth ratio is used because it is
believed that prospector strategies have a chance to
grow faster than defenders (Higgins et al., 2013).
GROWTH =
Total Sales n − Total Sales n − 1
Total Sales n − 1
4. The Ratio of Marketing to Sales
Defender firms tend to focus on a market to survive in
the marketplace and companies that embrace defender
strategies will seek to provide their product
information to customers through advertising, so that
defender firms tend to have high advertising costs due
to the provision of product information to customers.
Market =
Advertisement Expense
Total Sales
5. Intensity of Fixed Assets
Companies that adopt a prospector strategy tend to
produce new products according to consumer tastes
so the prospector company will have a higher
PPE/TA value than the defender.
PPEINT =
Property, Plant, and Equipment
Total Assets
3.1.2 Tax Aggressiveness (Y)
The measurement of tax aggressiveness using Book
ETR, which describes the tax avoidance activity that
affects net income directly and not the tax burden
paid in the next period (Hanlon & Heitzman cited in
Hsu et al., 2014).
Book ETR =
Total Tax Expense
Pre − tax Book Income
If the company has an ETR score close to zero,
this indicates that tax avoidance in the company will
increase. Conversely, if the ETR is far from zero
then the existence of tax evasion in the company will
decline.
Corporate Business
Strategy
Tax
Aggressiveness
SIZE
ROA
Control
Variable
JCAE Symposium 2018 – Journal of Contemporary Accounting and Economics Symposium 2018 on Special Session for Indonesian Study
418

3.1.3 Control Variables
1. Corporate Size (SIZE)
Zimmerman (1983) says that the relationship
between firm size and effective corporate tax rate is
positive, which means that the bigger the company,
the more taxes will be paid.
SIZE = ln(Total Assets)
2. Asset Return Rate (ROA)
Anderson and Reeb (2003), cited in Sari and Martani
(2010), suggest that firms with higher profitability
and firms with fewer fiscal loss compensation rates
are seen to have higher ETRs. So, it can be
concluded that the higher the profitability of the
company the higher the tax burden paid by the
company.
ROA =
Pre − Tax Revenue
Total Assets
3.2 Population and Sample
The population used in this study is a manufacturing
company that uses the strategy of prospectors and
defenders listed on the IDX period 2013–2015. The
purposive sampling method was used with the
criteria required for the research. There were 22
sampled companies each year, so over a three-year
period, the total sample comprised 66 companies.
3.3 Hypothesis Analysis and Testing
Technique
The analysis technique used in this research is
multiple linear regression, while the analytical
model used is cluster analysis, which aims to
classify objects or variables into specific groups
where the group has the same characteristics. In this
study, the business strategies are categorized into
prospectors and defenders. Five independent
variable measurement proxies will be classified to
form groups using cluster analysis. Furthermore,
hypothesis testing is done, consisting of a test of
coefficient of determination and statistic test t with
level of trust (α) used is 5% (0, 05).
4 RESULTS AND DISCUSSION
4.1 Group Testing
Company samples are grouped into two groups:
prospector and defender. Based on research and
development ratios, fixed asset intensity, EMP/sales,
corporate growth and MARKET, the company
grouping is carried out using multivariate analysis
and cluster analysis. So, group analysis based on
cluster analysis for all sample companies amounted
to 66.
4.2 Hypothesis Testing
Based on table 1, the regression equation was
obtained as follows:
Y = 0,551 + 0,018X1 – 0,012X2 +
0,088X3 + 0, 0325130
It can be concluded that the company's business
strategy has a positive and significant effect on the
ETR book. SIZE has a negative and significant
effect on the ETR book. ROA has positive but not
significant effect on ETR book. It can be seen from
the p-values of <0, 05 which explains a significant
effect and if> 0, 05 is influential but not significant.
Table 1: Statistic t Test
Coefficients
a
Model
Unstandardi
zed
Coefficients
Standardi
zed
Coefficie
nts
t
Si
g.
Collinearity
Statistics
B
Std.
Error
Beta
Tolera
nce
VIF
1
(Constan
t)
.55
1
.084
6.5
84
.00
0
STRAT
EGI
.01
8
.009
.243
2.0
58
.04
5
.990
1.0
10
SIZE
-
.01
2
.003
-.514
-
4.0
64
.00
0
.863
1.1
59
ROA
.08
8
.048
.230
1.8
25
.07
4
.871
1.1
49
a. Dependent Variable: BOOK
Source: data processed, 2016
The Effect of Strategy Business on Tax Aggressiveness
419

Table 2: Coefficient Determination Test Results
Model Summary
b
Model
R
R Square
Adjusted R Square
1
.518
a
.269
.227
Source: data processed, 2016
Based on table 2, obtained Adjusted R Square
value of 0.227 (22.7%). This shows that business
strategy variables, firm size, and asset returns can
predict the dependent variable, i.e. a tax
aggressiveness of 22.7%, while the remaining 77.3%
is predicted by other variables not used in the
research.
4.2 Discussion
4.2.1 The Influence of a Corporate Business
Strategy on Tax Aggressiveness
One hypothesis in the research is the corporate
business strategy influence on tax aggressiveness.
The results show that individual business strategy
variables have a significant effect. So, it can be
concluded that the company's business strategy has
an influence on tax aggressiveness and Hypothesis
one, which states that the corporate business strategy
affects the aggressiveness of the tax accepted. A
regression coefficient of business strategy variable
equal to 0,018 explains that if there is a change of
strategy from defender to prospector, then the book
value of ETR will experience an increase equal to
0,018 times and impact on the reduction of tax
aggressiveness action. So, it can be concluded that
the prospector has a negative effect on tax
aggressiveness, and conversely, the defender has a
positive influence on tax aggressiveness.
Firms that adopt defender strategies tend to have
limited products and narrow markets, so they
typically put more emphasis on efficiency and low
costs. Achieving efficiency will be evident in the
strict controlling of costs, such as research and
development, so companies that adopt a defender
strategy will try to offer products of high quality but
lower prices than competitors to survive in the
market. This does not rule out the possibility that the
defender company may practice tax aggressiveness
to lower the cost so that goods offered to the market
will be relatively cheaper. The lower the ETR book
owned by the defender strategy, the higher the
aggressiveness practices of the company, resulting in
the lower price of offered goods so that companies
following the defender strategy can survive in the
market. In contrast, firms that adopt the prospector
strategy tend to operate in less stable business
environments, seek new market opportunities and
innovate products, and tend to have flexible control
systems, providing a wider scope for informal
communication. So, to be able to survive, the
prospector company will continue to innovate rather
than lower the price of goods offered to the market,
resulting in a high ETR book and low tax
aggressiveness.
The results indicate that there is influence of the
corporate business strategy on tax aggressiveness.
The results of this study are in line with Higgins et al.
(2013) and Hsu et al. (2014) who explain that there
is a correlation between the corporate business
strategy on tax aggressiveness, and contrary to
research by Novitaria and Santoso (2013) who
explain that there is no relationship between
business strategies and tax aggressiveness. Novitaria
and Santoso (2013) used 2010–2011 data, moving in
the manufacturing industry in Indonesia due to the
population, using inconsistent strategies each year.
5 CONCLUSION
The results of this study prove that there is a
relationship between business strategy and tax
aggressiveness because companies tended to use a
consistent strategy during the period 2013–2015 and
business strategies to achieve higher profits using
tax aggressiveness.
Based on the results of research and previous
discussion, it is suggested that further research
should be carried out to look for other control
variables that can affect tax aggressiveness. Future
research should comprise longer-term observations
to oversee long-term results and adjust to current
trends. Subsequent research may add other non-
financial corporations to increase the number of
samples for investigation.
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