Do Transfer Pricing, CSR, Ownership Structure, and Earnings Management Affect Profitability Through Tax Avoidance? Evidence from Indonesian Manufacturing Firms

Abstract

Background/Motivation: Tax avoidance represents a persistent governance and fiscal challenge in emerging-market economies; however, its role as a mediating channel between firm-level strategic determinants and profitability remains underexplored in the Indonesian multinational context. Objective: This study examines whether transfer pricing, corporate social responsibility (CSR), managerial ownership, institutional ownership, and earnings management influence firm profitability through the intermediating mechanism of tax avoidance in Indonesian manufacturing multinational corporations (MNCs). Method: Using panel data from 31 IDX-listed MNCs over 2018–2023 (186 firm-year observations), we apply random effects panel regression and Sobel mediation tests, with robustness checks using Book-Tax Difference (BTD) as an alternative proxy, a lagged-variable specification, and an extended control variable set including financial leverage, capital intensity, sales growth, and year fixed effects. Endogeneity is assessed via the Durbin–Wu–Hausman test. Results: None of the five determinants significantly influences GAAP ETR, and tax avoidance does not significantly mediate any determinant–profitability relationship. Only institutional ownership exerts a significant direct effect on profitability (β = 0.002381, p < 0.05). Contribution: This is the first study to comprehensively test a five-determinant simultaneous mediation model in the Indonesian MNC context. The findings reveal that the mediation architecture commonly documented in developed-market contexts does not hold in Indonesian MNCs—attributable to institutional enforcement gaps, concentrated ownership structures, and the symbolic nature of CSR in emerging markets—with direct implications for Indonesian tax policy and corporate governance reform.