The Interplay Between Political Connections, ESG, and Tax Avoidance: Insights from Indonesia

Kuslina, Boedi Hartadi and Joni, Joni (2025) The Interplay Between Political Connections, ESG, and Tax Avoidance: Insights from Indonesia. In: The 33rd Annual Conference on Pacific Basin Finance, Economics, Accounting and Management, June 13-14, 2025, Taiwan.

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Abstract

This study investigates the impact of political connections on tax avoidance and the moderating role of Environmental, Social, and Governance (ESG) engagement in publicly listed firms in Indonesia. Tax avoidance remain a critical issue for firms in emerging economies such like Indonesia. Research on tax avoidance for political affiliated firms in Indonesia have varied results from positive to negative effect on tax avoidance, and no effect. The role of ESG in mitigating the relationship, however, remains underexplored. Using a dataset of 140 observation from Refinitiv (LSEG) between 2019 to 2023, this study employs Generalized Method of Moments (GMM) to test the hypotheses. The models include firm-specific controls such as firm size, leverage, and profitability, and account for industry and year fixed effects. The findings reveal that politically connected firms engage in greater tax avoidance, as indicated by the negative relationship between political connections and effective tax rates (ETR). However, ESG engagement significantly moderates this effect, reducing the extent of tax avoidance among politically connected firms. Additionally, firm size and profitability negatively affect ETR, suggesting that larger and more profitable firms are more likely to engage in tax planning. These results enrich governance theories and emphasize stronger ESG regulation and policy to enhance tax enforcement as a practical implication. Future research should explore sector-specific ESG impacts and evolving tax regulations.

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