Determinant Factors of Tax Avoidance Practices in Property Development Industry

[Virtual Presenter] Good morning everyone, welcome to our presentation. This presentation will provide an overview of our research into the determinants of tax avoidance practices in the property development industry in Malaysia. We will discuss the background of the study, the broad problem area, and the estimated revenue loss due to tax avoidance. If you have any questions, please raise your hand so we can address them. Let's get started..

[Audio] The study aims to understand the effects of tax avoidance practices on the Malaysian property development industry, which is a significant contributor to the government's revenue. The background of the study includes the potential of Direct Tax revenue growth in 2022, the responsibility of the Inland Revenue Board of Malaysia (IRBM) and the National Property Information Centre (NAPIC) report. Tax avoidance practices refer to specific actions taken to reduce a taxpayer's overall tax liability, such as using a variety of strategies to protect income from taxes..

Broad Problem Area. Tax avoidance is a taxpayer’s effort to minimize corporate tax burden which is not a violation of the tax laws as the effort is conducted in a manner that is made possible by the Tax Law (Kurniasih & Sari, 2013). Tax avoidance is legal and is done by taking advantage of tax loopholes, in contrast, tax evasion violates taxation rules and is punishable and unacceptable (Fisher, 2014). Furthermore, tax avoidance, though legal, could become illegal when it is done aggressively, which in the words of Hanlon and Heitzman (2010:137) is "pushing the envelope of tax law”. According to Razali et al. (2019), tax planning or tax avoidance is exercised by firms in using knowledge of tax laws and within tax requirements. Companies always attempt to evade taxes, even though every country has anti-tax avoidance regulations. Tax avoidance is the most challenging issue to prevent in every tax jurisdiction. It is now apparent that the continuous war between corporate taxpayers and the taxing authorities is taking new dimensions, as corporate tax avoidance has been identified as one of the biggest challenges of our generation (Hundal,2011). Based on the estimation of Crivelli et al. (2015) world revenue losses due to tax avoidance by corporation approximately $600 billion each year. The tax avoidance cases in Malaysia increased year by year. The tax avoidance led to country revenue under collected. Our tax authorities (IRBM) have discovered specific strategies used by developers for avoiding taxes in the property industry, which could lead to decreased revenue. This trend highlights the continued use of tax avoidance in the property and real estate sector, which lead to tax authorities increase their monitoring and scrutiny.

Broad Problem Area. Tax avoidance is a taxpayer’s effort to minimize corporate tax burden which is not a violation of the tax laws as the effort is conducted in a manner that is made possible by the Tax Law (Kurniasih & Sari, 2013). Tax avoidance is legal and is done by taking advantage of tax loopholes, in contrast, tax evasion violates taxation rules and is punishable and unacceptable (Fisher, 2014). Furthermore, tax avoidance, though legal, could become illegal when it is done aggressively, which in the words of Hanlon and Heitzman (2010:137) is "pushing the envelope of tax law”. According to Razali et al. (2019), tax planning or tax avoidance is exercised by firms in using knowledge of tax laws and within tax requirements. Companies always attempt to evade taxes, even though every country has anti-tax avoidance regulations. Tax avoidance is the most challenging issue to prevent in every tax jurisdiction. It is now apparent that the continuous war between corporate taxpayers and the taxing authorities is taking new dimensions, as corporate tax avoidance has been identified as one of the biggest challenges of our generation (Hundal,2011). Based on the estimation of Crivelli et al. (2015) world revenue losses due to tax avoidance by corporation approximately $600 billion each year. The tax avoidance cases in Malaysia increased year by year. The tax avoidance led to country revenue under collected. Our tax authorities (IRBM) have discovered specific strategies used by developers for avoiding taxes in the property industry, which could lead to decreased revenue. This trend highlights the continued use of tax avoidance in the property and real estate sector, which lead to tax authorities increase their monitoring and scrutiny.

[Audio] According to a study done by Bank Negara Malaysia, there were 2169 tax avoidance cases reported in 2017 in the property development industry. The study found that firm size, profitability, foreign operation, capital intensity and leverage are significant factors influencing tax avoidance of multinational corporations. Leverage and company size have a significant effect on tax avoidance in the property development industry. It is therefore essential for the industry to be aware of the determinant factors of tax avoidance practice in order to prevent any form of tax avoidance..

[Audio] We will be focusing on slide number 6 of our presentation, which deals with the problem statement of our topic. We will be analyzing the potential losses of tax revenue for the government as a result of companies minimizing their tax burden. Additionally, we will explore how firm size, profitability and leverage have an effect on the tax avoidance practices of the property development industry..

[Audio] Our presentation is focused on analyzing the effect of firm size, profitability, and leverage on tax avoidance practices in the property development industry. We aim to gain a more comprehensive knowledge of how the industry operates and how our understanding of it can be improved through gaining insight into the influence of the aforesaid three factors. To this end, this slide is devoted to providing an overview of our research questions and research objectives..

[Audio] This slide presents an overview of the significance of the study. It aims to analyze the impact of various factors on tax avoidance. The study will provide us with insights about the factors influencing tax avoidance and propose criteria for audit case selection. The results of this study would be advantageous to policy makers and tax authorities in Malaysia, supplying them with the necessary information to make wise decisions regarding taxation..

[Audio] The Agency Theory is a major factor in discussions about tax avoidance. It suggests that individuals within a business will use legal means to adjust their net income in order to lower their tax burden. This slide looks at the literature in support of this theory, which states that larger companies are more likely to take advantage of tax loopholes, small businesses lack the means to engage in tax avoidance, and those with a higher level of risk taking are more inclined to utilize tax avoidance strategies..

[Audio] Many companies in the property development industry have been observed to take advantage of tax avoidance practices to minimize their income tax payments, as evidenced by the findings of Arifin (2013) and Putra, Syah & Sriwedari (2018). These practices include manipulating transfer prices, restructuring financing or debt arrangements, utilizing tax-advantaged leasing, and employing hybrid entities. Rego (2003) highlights that companies have the capability to exploit tax loopholes to achieve their goal..

[Audio] It is important to understand the impact of firm size on tax avoidance practices. Research has shown that the bigger the firm, the more opportunities exist for tax avoidance. Smaller firms have fewer resources and operating complexity, which restricts them from taking advantage of tax avoidance strategies. Conversely, research also suggests that firm size has no significant influence on tax avoidance in firms..

[Audio] The slide focuses on the findings of the impact of profitability on tax avoidance practices. It was observed that more profitable companies pay higher taxes than less profitable companies. Moreover, as profitability increases, the management is seen to focus more on avoiding taxes. Additionally, it was observed that the ability to make profits affects the proportion of taxes paid by the company. Thus, it can be concluded that profitability plays a significant role in determining the tax avoidance practices in the property development industry..

[Audio] Slide 13 examines previous studies and the independent variables related to tax avoidance practices in the property development industry. Regarding leverage, Fadila (2017) concluded that it is the amount of debt employed to finance an organization's assets and Dharma and Ardiana (2016) determined that companies with high debt levels tend to outperform those without or with lower debt. Richardson and Lanis (2007) established that leveraged companies may have a comparatively sizable incentive to avoid taxes, or a small drive to do so. This slide provides a concise overview of certain research conducted on this subject..

[Audio] We are going to examine the determinants of tax avoidance practices in the property development industry. A table containing data related to this topic has been provided to help us understand the practices employed by companies in avoiding taxes. To begin, let's look at Capital Intensity. This concept pertains to the ratio of a company's size to its asset size, as well as the amount of money put into fixed assets such as property, plant and equipment. Capital Intensity is known to be used by companies to reduce the taxes they have to pay, and previous studies have offered support for this. We will also be reviewing the literature related to this topic and the relationship between capital intensity and tax avoidance when it comes to reducing tax obligations..

[Audio] There are evidently gaps in the research about tax avoidance in the property development industry. Previous studies have analysed correlations between firm size, profitability, leverage and capital intensity, however, more investigation is needed. This could include considering regional discrepancies or the effect of varying economic policies. By recognising the reasons and techniques of tax avoidance in property development, governments can formulate regulations that can fight against such practices..

[Audio] Our presentation's 16th slide focuses on hypothesis development, which includes a hypothesis statement supported by related literature. Per the literature, a bigger firm size may result in multiple complex transactions and an increase in the number of tax avoidance activity possibilities. Moreover, company management can deploy their tax expertise to reduce corporate tax, and studies show that company size has a positive effect on tax avoidance. This implies firm size has great sway over the tax avoidance techniques deployed in the property development business..

[Audio] Tax avoidance practices can have a significant effect on the profitability of property development businesses, according to research by several authors. This slide presents a hypothesis which states that there is a positive relationship between profitability and tax avoidance. To support this hypothesis, this slide has displayed findings from relevant literature that ROA serves as a measure of a company's financial performance and that firms with higher profitability have the opportunity to place themselves in tax planning that decreases the tax expense. As such, understanding these relationships and factors is key to understanding the determinant factors of tax avoidance practices in the property development industry..

[Audio] Tax avoidance is a practice used by companies to pay as little tax as possible. This slide examines the relationship between leverage and tax avoidance in the property development industry. Leverage is the ratio of debt to equity of a company. Research has found that there is a positive relationship between leverage and tax avoidance. Companies with low effective tax rate values have a high level of tax avoidance due to optimal use of debt to minimize the tax burden payable..

[Audio] Our hypothesis of a positive relationship between capital intensity and tax avoidance is supported and justified. This is evidenced in relevant literature such as Muzakki & Darsono (2015) and Mulyani (2020). Additionally, Susilowati et al (2018) and Sabli & Noor (2012) both mention that companies with high fixed assets tend to do tax planning..

[Audio] A theoretical framework is presented on Slide 20 which identifies determinant factors of tax avoidance practices in the property development industry. These determinant factors are firm size, profitability, leverage, capital intensity, and independent and dependent variables. This framework is based on agency theory, which seeks to align incentives between parties to minimize individual interests and maximize collective interests..

[Audio] Slide 21 of our presentation focuses on the empirical schema of this topic. A table of the six main variables that significantly influence the tax avoidance practices in the property development industry can be seen. These variables include firm size, profitability, leverage, capital intensity, independent variable and dependent variable. This is significant in comprehending the hypotheses that have been discussed throughout the presentation, like hypothesis 1, hypothesis 2 and hypothesis 3..

[Audio] Our purpose of study is to determine the key factors influencing tax avoidance practices in the property development industry. We are conducting a causal study, with the unit of analysis being the property development industry. Our researcher interference will be minimal, so we will be studying events as they normally occur. We have planned our sampling design and study setting to be non-contrived and have given ourselves a certain time horizon. We have determined our measurement and measures, with operational definitions, and plan to use various data collection methods and research strategies, including collecting data from internal sources. This will be the focus of the discussion in this slide..

[Audio] The tax avoidance practices of the property development industry are an issue that impacts everyone involved. This slide evaluates the methods used to select the sample population for this study. It began with all the taxpayers in the Klang Valley branches, amounting to 20,841 cases across 8 branches. After filtering out any cases that did not meet the requirements, there were 6,631 cases left to analyze. Stratified random sampling was then used to acquire a sample group from every subgroup of each branch in the Klang Valley. The sample size was determined by taking the total number of 6,631 cases and proportionally dividing it between industry and branch, resulting in 500 cases selected for the sample population..

[Audio] Slide 24 looks at our sampling selection and sample size. As you can see from the data above, we have used disproportionate stratified sampling. We used Klang Valley as the population basis and divided into seven stratums according to districts. We calculated the percentage of each district's share of the total tax audit case in order to determine the sample size. Out of the 6,631 total cases, we selected 500 cases for the sampling survey, representing 8%-20% of each stratum..

[Audio] At this slide we can observe the data sources and the data collection methods used for this research. Secondary data was selected, from the internal documents of the Inland Revenue Board of Malaysia, and a quantitative research method was conducted using the SPSS software. This will allow us to perform a deeper and more accurate analysis on the determinant factors of tax avoidance practices in the property development industry..

[Audio] The slide examines the metrics of tax avoidance strategies used in the property development sector. The three variables evaluated are firm size, profitability, leverage, and capital intensity. Firm size is gauged by total assets and debt. Profitability is judged by return on equity. Leverage is the debt to equity ratio, and capital intensity is the ratio of total net fixed assets to total liabilities. These metrics can provide insights on the tax avoidance tactics employed by the property development industry..

[Audio] An empirical model is presented on this slide to test the hypotheses of this study, utilizing secondary data from the Department of Operation Tax in IRBM. This model suggests that firm size, profitability, leverage, capital intensity and institutional ownership have an influence on tax avoidance. The regression coefficients for each of these variables are indicated. This model is an essential instrument for us to investigate the determinant factors of tax avoidance practices in the property development industry..

[Audio] Data analysis techniques can be employed to understand determinant factors of tax avoidance practices in the property development industry. Descriptive statistics, correlation of variables, multiple regression analysis and modern PowerPoint Presentations are all viable avenues for uncovering patterns and relationships among different variables that can lead to a robust understanding of determinant factors of tax avoidance practices..

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[Audio] This slide is for our presentation titled "Determinant Factors of Tax Avoidance Practices in Property Development Industry". We will be discussing three references. Sugiyanto suggests cooperative tax avoidance can be implimented with agency theory. Andini and Mokhlas explain how tax avoidance can be moderated by company size and profitability. Putra, Zainal, Thohir and Harahap provide further evidence on the determinants of tax avoidance. By evaluating these sources, we can gain a better understanding of the tax avoidance practices in property development industry..

[Audio] The property development industry is a growing and complex one, and tax avoidance practices have many contributing factors. Tax avoidance strategies aim to reduce the taxes paid and increase profits. Identifying and understanding which elements influence tax avoidance is key in order to minimize it and ensure that everyone pays their fair share. In conclusion, this discussion has hopefully given an insight into the determinants of tax avoidance in the property development industry..