INTERNATIONAL JOURNAL OF SCIENTIFIC & TECHNOLOGY RESEARCH VOLUME 8, ISSUE 02, FEBRUARY 2019 ISSN 2277-8616

How The Effect Of Deferred Tax Expenses And

Tax Planning On Earning Management ?
Dyah Purnamasari

Abstract: Recognition of the value of deferred tax expense and tax planning subjective gives management the opportunity to practice earnings
management. This study aims to determine how much influence tax planning and tax burden in conducting earnings management in manufacturing
companies listed on the Indonesia Stock Exchange for the period 2014-2017. The method used in this research is descriptive method. Data collection
techniques are carried out through secondary data. The population in this study were manufacturing companies of the Food and Beverages Sector listed
on the Indonesia Stock Exchange for the 2014-2017 period totaling 43 companies. The sample research method used was purposive sampling. The type
of data used is secondary data obtained from the financial statements of company publications in www.idx.co.id. Data is processed through multiple
linear regression statistical test methods using SPSS software. Based on the results of statistical tests, concluded that (1) Tax planning has a positive
and not significant effect on earnings management, (2) The burden of deferred tax has a positive and not significant effect on the probability of
companies making earnings management. The study also found that earnings management did occur with the aim of avoiding reporting losses on
companies listed on the Stock Exchange in 2014 - 2017.

Index Terms: Defferred Tax Expenses, Tax Planning, Profit Management, Indonesia Stock Exchange.
————————————————————

1 INTRODUCTION That is why the information submitted is sometimes accepted

The company is faced with intense competition to be able to not in accordance with the actual conditions of the company.
exist in the global market, especially for the manufacturing This condition is known as information asymmetry, which is a
industry in Indonesia. In order to compete strongly, companies condition where there is an imbalance in information
are required to have competitive advantages from other acquisition between management as a provider of information
companies. The company is not only required to produce with shareholders and stakeholders (Hairu, 2009: 1). With the
quality products for consumers, but is also able to manage its management's desire to suppress and make the tax burden as
finances well, meaning that financial management policies small as possible, management tends to minimize tax
must be able to guarantee the sustainability of the company's payments. Efforts to minimize the tax burden by euphemism
business and this is indicated by the amount of profit achieved are often referred to as tax planning (tax planning) or tax
by a company. This situation usually encourages managers to sheltering (Suandy, 2003). Generally tax planning refers to the
commit deviant behavior in presenting and reporting earnings process of reengineering businesses and taxpayer
information known as earnings management. Earnings transactions so that tax debt is in a minimal amount but still
management is an attempt to change, hide, and engineer within the framework of applicable tax regulations, so tax
numbers in financial statements and play around accounting planning is a legal action during the corridor of tax laws
methods and procedures used by the company (Sulityanto, applicable in Indonesia. Tax is one source of state revenue,
2008). Whereas according to (National Association of Certified including Indonesia which relies on tax revenues as the main
Fraud Examiners, 1993 in Hairu, 2009) defines earnings source of state (Irianto, 2010). One of the biggest tax sectors
management as intentional errors or omissions in making that the country gets is income tax. For financial statement tax
financial statements regarding material facts and accounting accounting, every company in Indonesia in making financial
data, so that it is misleading when all information is used to statements is required to follow the rules of the Financial
make judgments that will eventually cause people to read it will Accounting Standards (IFRS) in order to produce credible and
change or change their opinions or decisions. Earnings informative financial reports to investors and creditors. In
management can be done through income smoothing, taking a addition, the company is also required to prepare an income
bath, and income maximization (Scoot, 2000). The concept of statement based on tax rules. A number of differences
earnings management can be explained using the agency between IFRS and tax rules produce two types of income,
theory approach, namely the theory which states that practice namely pre-tax profit (calculation of accounting profit according
earnings management is influenced by a conflict of interest to IFRS) and taxable income (calculation of fiscal profit,
between the parties concerned (principal) and management as according to fiscal rules). The difference between accounting
the party that runs the interest (agent). This conflict arises earnings and taxable income can cause difficulties in
when each party tries to reach the level of prosperity it wants. determining the amount of profit, so that it can affect the
The company's efforts to engineer information through the financial statements and cause an imbalance in the final
practice of earnings management have become the main balance. Therefore, it is necessary to adjust the balance
factors that cause financial statements to no longer reflect the between accounting profit and fiscal profit fiscal reconciliation.
fundamental value of a company. Therefore, the engineering of Temporary differences between accounting earnings and
financial statements has become a central issue as a source profits give rise to deferred tax expense. Until now earnings
of misuse of information that can harm interested parties. management is the most controversial area in financial
accounting based on the background raised above, the
___________________________ research title raised in this study is "The Effect of Deferred Tax
 Dyah Purnamasari Expenses and Tax Planning on Profit Management (Case
 Lecturer of Widyatama University Bandung, Indonesia & Doctoral Study of Manufacturing Companies Listed on the Indonesia
Students of Management Department, Faculty of Economics and Stock Exchange for the Period 2014-2017)".
Business, Pansudan University Bandung, Indonesia

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2 LITERATURE REVIEW objectives of the legislators. So tax planning here is the same
as tax avoidance because it is both economically intrinsic both
2.1 Corporate Income Tax trying to maximize income after tax, because tax is a profit
One type of tax that applies in Indonesia is Income Tax, which deduction burden available, both to be shared with
is imposed on individual taxpayers and corporate tax returns. shareholders and to be reinvested. Tax planning is divided into
What is meant by corporate taxpayers according to Income two:
Tax Law No. 36 of 2008 is a group of people and / or capital 1) National tax planning,national tax planning only pays
which constitutes a unit that does business or does not attention to Domestic Law, the election is carried out or
conduct business which includes limited liability companies, not a transaction in the national tax planning depends on
partnership companies, other companies, State-owned the transaction, meaning to avoid/reduce taxes,
enterprises or regionally owned business entities of any name taxpayers can choose what types of transactions must be
or form, firm , partnerships, cooperatives, retirement funds, carried out in accordance with existing tax law, for
associations, associations, foundations, mass organizations, example, will you get the final special tax rate or not?
socio-political organizations, or other organizations, institutions 2) International tax planning, in addition to paying attention
and other body forms including collective investment contracts to the Domestic Law, the International tax planning must
and permanent establishments. also pay attention to tax treaty from the countries
involved.
2.2 Deferred Tax Expenses .
Tax expense (tax income) is the aggregate amount of current 2.4 Earning Management
tax and deferred tax calculated in determining profit or loss in 1 Schipper (2000) in Sumomba (2010) defines earnings
a period. Tax expense (tax income) consists of current tax management as a deliberate management intervention in
burden (current tax income) and deferred tax expense the profit determination process to obtain some personal
(deferred tax income). Definition of Deferred Tax Liabilities is benefits. The purpose of the intervention here is the effort
the amount of income tax payable for the coming period as a made by managers to influence information in financial
result of differences in taxable temporary differences (taxable statements with the aim of tricking stakeholders who want
temporary differences). Temporary differences arise as a to know the performance and conditions of the company.
logical consequence of differences in standards or provisions Often this process includes fashioning accounting reports,
relating to recognition (criteria and periods), and measurement especially the lowest number, namely profit (Wild et al.,
or assessment of elements of financial statements that apply 2004). The emergence of earnings management practices
in tax accounting disciplines (tax provisions) to one party with carried out by management is based on two theories,
standards or provisions that apply in financial accounting namely agency theory and positive accounting theory.
discipline on the other side. Presentation of Deferred Tax Jensen and Meckling (1976) in Setiowati (2007) define
Liabiliies in the balance sheet must be presented separately agency relations as a contract in which one or more
from current tax obligations, presented in non-current principals (owners) use another party or agent (manager)
liabilities. Fiscal corrections must be made because of to run the company. In agency theory, what is meant by
differences in treatment of income and costs that differ principal is a shareholder or owner who provides facilities
between accounting standards and applicable tax regulations. and funds for the company's operating needs. An agent is
For internal interests and other interests, taxpayers can use management who has an obligation to manage the
generally accepted accounting standards, while tax calculation company as mandated by the principal to him. Agency
and payment must be based on tax regulations, in this case theory assumes that each individual is solely motivated by
the Income Tax Law and other related regulations. This his own welfare and interests. The motivated principal
difference can be grouped into two, namely permanent makes a contract to improve his welfare through dividend
difference /permanent difference temporary difference. distribution or an increase in the company's share price.
 Fixed difference/permanent difference is a difference Agents are motivated to improve their welfare through
caused by differences in recognition of income and increasing compensation.
expenses between accounting standards and tax 2 The theory pioneered by Watts and Zimmerman (1986)
regulations. This difference causes the difference in the explains that certain economic factors can be related to
amount of net income before tax with taxable income or the behavior of managers or financial statement makers.
taxable income. Anis and Imam (2003) in Januarti (2003) stated that
 Time difference/temporary difference is a difference positive accounting theory is part of agency theory. This is
caused by differences in time and methods of recognizing because positive theory accounting recognizes the
certain income and expenses based on accounting existence of three agency relationships, namely (1)
standards with tax regulations. This difference results in between management and owners (the bonus plan
differences in the time of recognition of income and hypothesis), (2) between management and creditors (the
expenses between one tax year and another. debt to equity hypothesis), and (3) between management
and government (the political hypothesis). The three main
2.3 Tax Planning hypotheses in positive accounting theory are (Watts and
Tax planning is the first step in tax management. At this stage, Zimmerman, 1986): 1. The Bonus Plan Hypothesis In
the collection and research of tax regulations is carried out, companies that have a bonus plan, managers will tend to
with the intention of selecting the types of tax saving measures use accounting methods that can play the size of
that will be carried out. In general, the emphasis of tax accounting numbers in financial statements. . This is done
planning (tax planning) is to minimize tax obligations as low as so that managers can get maximum bonuses every year,
possible by utilizing existing regulations but different from the because the success of manager's performance is

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measured by the level of profits obtained by the company. is influential in an effort to detect the effect of accrual
2. The Debt to Equity Hypothesis (Debt Covenant engineering to minimize taxes in earnings management
Hypothesis) This hypothesis relates to the conditions that (Yulianti, 2005). Deferred tax is one way that managers do to
must be met by companies in debt covenants. Most of the engineer financial statements by doing earnings management
debt agreements have conditions that must be met by the (Sri Sulistyanto 2008: 56). Yulianti (2005) proves that deferred
borrower during the agreement period. When a company tax expense can be used as an alternative to prove the
starts to be in danger of violating a debt agreement, the probability of earnings management to avoid losses. In
company manager will try to avoid the occurrence of the continuing the results obtained, Philips, et al. (2003)
debt agreement by choosing an accounting method that investigated companies related to earnings management with
can increase income or profit. Violations of debt changes in components of deferred tax assets and liabilities
agreements can result in sanctions which will ultimately (net deferred tax liabilities) which are a reflection of the value
limit the actions of managers in managing the company. of deferred tax expense in the income statement. . The
Therefore, management will increase profits (do income research conducted by Ulfa and Budiman (2013) dependents
increasing) to avoid or at least delay breach of agreement. tax burden has a positive effect on earnings management.
3. The Political Cost Scott Hypothesis (2000) states that
companies that are faced with political costs, tend to make Effect of Deferred Tax Expenses and Tax Planning on
a profit reduction engineering with the aim of minimizing Profit Management
the political costs they must bear. Political costs cover all The information contained in financial statements is often
costs that must be borne by the company related to engineered by management to optimize company profits and
government regulations, government subsidies, tax rates, also for their own interests or known as earnings management
labor demands and so forth. (Herdawati, 2015). There are several methods used to test
earnings management and earnings management is often
3 THEORETICAL FRAMEWORK associated with tax planning and deferred tax expense. The
Earnings management is earnings manipulation by company conducts tax planning as effectively as possible, not
management to achieve certain goals. Manipulation is done so only to obtain fiscal benefits, but actually the company also
that profits appear as expected. In addition, manipulation is benefits in obtaining additional capital from investors through
also done so that investors remain interested in the company the sale of company shares. Therefore, the tax which is a
(Wedari, 2004). According to Sri Sulistyanto (2008: 6) argues profit deduction available to be shared with investors or
that earnings management is an attempt by company invested by the company, will be sought by management to be
managers to intervene or influence information in financial minimized in order to optimize the amount of the company's
statements with the aim of tricking stakeholders who want to net profit. In this case, there is an indication of management
know the performance and conditions of the company. doing earnings management in the tax planning process, as
well as the deferred tax burden is one approach that can be
Effect of Deferred Tax Expenses on Profit Management used to detect the existence of earnings management
Deferred tax expense arises due to temporary differences practices carried out by company management (Herdiawati,
between accounting earnings and fiscal profits. The difference 2015). Suandy (2011) explains that if the purpose of tax
between accounting and fiscal financial statements is caused planning is to engineer so that the tax burden can be reduced
in the preparation of financial statements, accounting as low as possible by utilizing existing but different regulations
standards provide more flexibility for management in for the purpose of making laws, then tax planning seeks to
determining accounting principles and assumptions than are maximize income after tax (after tax return ) because tax is a
allowed according to tax regulations. Temporary differences profit deduction available, both to be shared with shareholders
arise from accrual components and operating cash flows. and to be reinvested.
Because of the temporary differences, the deferred tax burden

Figure 1: Theoretical Framework

4 Research Methodology Profit Management (Case Study of Manufacturing Companies

The research method used in this study is quantitative Listed on the Indonesia Stock Exchange for the Period 2014-
research methods and other research methods namely 2017). The company which is the unit of this research is a
associative descriptive research. The object in this study is manufacturing company that is listed on the Indonesia Stock
the Effect of Deferred Tax Expenses and Tax Planning on Exchange (IDX) for the 2014-2017 period. Manufacturing
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companies are chosen because the company has more earnings management. Conversely, the lower the tax planning,
complex financial report information and has homogeneous the smaller the opportunity for companies to do earnings
characteristics. The researcher analyzes the company's management. Likewise with deferred tax expense, if the
financial statements that have been published on the site deferred tax burden increases then the probability of the
www.idx.co.id. To obtain the expected research results, company carrying out earnings management will increase.
information data is needed that will support this research. The Conversely, if the deferred tax burden decreases, the
data collection technique in this study is to use the probability of the company carrying out earnings management
documentary method, namely by collecting data in the form of will decrease. However, the significance level shows that the
financial report documents contained in the Indonesian capital value of the p value for tax planning and deferred tax expense
market directory (ICMD) and IDX. This study uses library is greater than the significant level (0.05 or 5%), which means
research, which is by collecting data from library sources that that neither tax planning nor deferred tax expense has a
support this research and Internet Research, namely data significant effect on earnings management. These results
collection is done by reading the literature, books on the indicate that tax planning and deferred tax expense can be
theory of problems that researched and used internet media used as indicators in detecting earnings management,
as a supporting media in tracing additional information about although the effect is weak on earnings management. The
the theory and the data needed in this study. The sampling magnitude of the mean value of earnings management
technique in this study was purposive sampling. The reason variables which shows the negative numbers above, according
for using purposive sampling technique is because not all to the theory put forward by Philips et al. (2003), shows the
samples have criteria that are in accordance with what the effort of earnings management to avoid losses. In other words,
author has done. The data sources used in this study are accepting the hypothesis (H1) which states tax planning has
secondary. Secondary data sources taken are the Annual an effect on earnings management, and simultaneously
Financial Statements of food and beverages sector companies accepts the hypothesis (H2) which says Deferred Tax
in 2014-2017. Data collection techniques carried out by the Expenses affect earnings management. The results of this
author to obtain secondary data in this study are library study are in line with Yulianti (2005), Pungky Lukman (2013),
research. In this study, the data used is secondary data, where Yana Ulfah (Proceedings of the National Symposium on
annual financial reports are obtained through the official Taxation 4), and not in line with Satwika and Damayanti
website of the Indonesia Stock Exchange (IDX), namely (2005), Ferry Aditama (2013), and this study is not in line with
www.idx.co.id. Hadi Kusuma Ningrat (2014).

5 RESULT AND DISCUSSION 6 CONCLUSION AND SUGGESTIONS

Based on the results of the research conducted, it can be seen
that the tax planning variable has a positive effect on earnings Conclusion
management variables, the higher the tax planning, the more Based on the results of tests that have been conducted, it can
likely the company is to conduct earnings management in be concluded that:
manufacturing companies listed on the Indonesia stock 1) Tax planning has a positive and not significant influence
exchange. Likewise with the deferred tax burden has a on earnings management, the higher the tax planning,
positive effect on earnings management, meaning that the the greater the chance the company engages in earnings
higher the deferred tax expense, the higher the profitability of management (and vice versa) even though the influence
the company in managing earnings. In addition, the results of is weak, meaning there are many other factors that
testing the coefficient of determination using the R-square also determine the occurrence of earnings management.
shows that the portion of the effect of tax planning and Therefore accepting the hypothesis that tax planning
deferred tax expense on manufacturing companies listed on affects earnings management.
the Indonesia Stock Exchange is positively linear. The R- 2) The deferred tax burden has a positive and not significant
Square value in this study is only equal to 0.15 or equal to effect on the probability of companies conducting
15%, which means that variations in changes in the dependent earnings management, meaning that every increase in
variable (Y) can be explained by the independent variable deferred tax expense, then the probability of companies
(TRR) and (DTE) of 15.00% and the remaining 85 00% can be doing earnings management will increase (and vice
explained by other variables outside the model. The higher the versa) so accepting the hypothesis that deferred tax
R-Square value of the results of a regression, the relationship expense affects earnings management . The study also
between the independent variable and the dependent variable found that earnings management did occur with the aim
in a study will also be strong. As for the results of simple linear of avoiding reporting losses on companies listed on the
regression analysis the value of the p value tax planning (X1) Stock Exchange in 2014 - 2017.
and deferred tax expense (X2) is smaller than the alpha level
of significance 5% (0.05) so it can be concluded that the tax Suggestions
planning variable is a significant explanation of variavel profit Based on the discussion and conclusions, the authors suggest
management. Likewise, deferred tax expense is a significant the following: This study can be expanded by adding
explanation for earnings management variables and each independent variables that are thought to have a strong
independent variable influences the dependent variable with a influence in detecting earnings management. It is expected
weak correlation. Furthermore, the results of partial correlation that the next researcher extends the year interval of the study,
testing that has been done, it can be seen that the tax for example a period of five years. The next researcher is
planning and deferred tax expense have a positive effect on expected to expand or add samples such as non-
earnings management. meaning that the higher the tax manufacturing companies listed on the Indonesia Stock
planning, the greater the chance for the company to do Exchange, so it is not only researching in manufacturing
companies.
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ACKNOWLEDGMENT Tax Accounting. Yogyakarta: ANDI.

The authors wish to thank Widyatama University Bandung,
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