Title: How does market-based governance influence sustainable tax behaviour? Evidence from tax haven utilisation and tax avoidance

Authors: Elisa Tjondro; Heru Tjaraka

Addresses: Accounting Department, Faculty of Economics and Business, Universitas Airlangga, Jalan Airlangga No. 4-6, Surabaya, 60115, Indonesia; Accounting Department, Faculty of Business and Economics, Universitas Kristen Petra, Jalan Siwalankerto 121-131, Wonocolo, Surabaya, 60236, Indonesia ' Accounting Department, Faculty of Economics and Business, Universitas Airlangga, Jalan Airlangga No. 4-6, Surabaya, 60115, Indonesia

Abstract: This study investigates whether the external corporate governance mechanism plays an effective monitoring system for multinational companies' tax avoidance and profit-shifting activities. This study uses 553 firm-year observations from 135 listed firms in the manufacturing and agriculture sectors of the Indonesian capital market from 2015-2019. The results suggest that firms with potential tax avoidance activities experience a more severe decline in firm value, specifically firms with strong market-based governance. The findings on firms with tax haven subsidiaries suggest that market-based governance effectively prevents firms from gaining benefits through tax havens and encourages sustainable tax behaviour. This study provides novel empirical evidence that market-based governance is the encouraging factor in achieving sustainable tax behaviour. The findings have significant implications for regulators and practitioners, showing that the regulations related to the advanced transparency and mandatory disclosure of foreign subsidiaries along with the external monitoring mechanism, have effectively encouraged sustainable behaviour.

Keywords: corporate governance; market-based governance; tax avoidance; tax haven; sustainable tax behaviour.

DOI: 10.1504/IJSE.2024.135200

International Journal of Sustainable Economy, 2024 Vol.16 No.1, pp.45 - 66

Received: 08 Apr 2022
Accepted: 31 Jul 2022
Published online: 02 Dec 2023 *

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