Decoding Corporate Tax Avoidance: What University Students Can Learn from Malaysian Public Firms?

Decoding Corporate Tax Avoidance: What University Students Can Learn from Malaysian Public Firms?

Ruhaya Binti Rusni¹, ^*Mohd Taufik Bin Mohd Suffian², Masetah Ahmad Tarmizi³, Liyana Ab Rahman⁴, Siti Marlia Shamsudin⁵, Gilang Ramadhan⁶

Kalis & Co, D4-3-9, Solaris Dutamas, No. 1, Jalan Dutamas 1, 50480 Kuala Lumpur, MALAYSIA

^2,3,4,5Faculty Of Accountancy, Universiti Teknologi MARA, Perak Branch Tapah Campus, 35400 Tapah Road, Perak, MALAYSIA

⁶Faculty Of Technology, Policy And Management, Delft University Of Technology, Mekelweg5, 2628 CD Delft, NETHERLANDS

*Corresponding Author

DOI: https://dx.doi.org/10.47772/IJRISS.2025.903SEDU0211

Received: 21 April 2025; Accepted: 25 April 2025; Published: 14 May 2025

ABSTRACT

Taxation is critical to sustaining government revenue and funding public services, thus future business and accounting professionals must examine corporate tax behavior. This study investigates the causes of tax evasion among Malaysian publicly traded companies from 2018 to 2022, providing both academically and pedagogically useful findings. The study, which focuses on company size, profitability, leverage, capital intensity, and inventory intensity, uses the Effective Tax Rate (ETR) as a proxy for tax avoidance. The study finds strong negative correlations between tax avoidance and both firm size and capital intensity, although profitability is favorably connected with tax avoidance strategies. These findings not only help to deepen our understanding of corporate financial conduct but also give important learning opportunities for university students studying tax strategy, business ethics, and fiscal policy. The study has implications for incorporating real-world tax methods into accounting and business curricula, as well as promoting critical thinking and ethical awareness among higher education students.

Keywords: Tax avoidance, effective tax rate, university students, public firms

INTRODUCTION

Taxation is a vital method for producing government revenue and encouraging wealth redistribution, supporting the delivery of critical public services such as infrastructure, healthcare, and education. Corporate taxes account for a sizable amount of national income in Malaysia, as they do in many countries. Nonetheless, many firms engage in tax planning tactics to reduce their tax responsibilities, resulting in the prevalent practice of tax evasion. Tax avoidance is the use of legally authorized means by people and businesses to decrease tax liabilities, frequently through smart financial arrangements, the exploitation of legal ambiguities, or the use of existing tax benefits (Beebeejaun, 2018). While such techniques are legal, aggressive tax evasion can have a major impact on public finances, reducing the resources available for vital government operations and long-term development goals (Sonia et al., 2019).

Tax avoidance differs from tax evasion, which involves illegal activities to underreport income or falsify deductions to evade taxes altogether. While avoidance operates within the legal framework, it raises ethical concerns and impacts the equity of the tax system, especially when large corporations pay disproportionately less tax compared to their income levels (Huang et al., 2021). This disparity not only erodes public trust in the tax system but also increases the tax burden on smaller businesses and individuals who may lack access to similar resources for tax planning (Jalan & Vaidyanathan, 2017).

Research into the determinants of tax avoidance has produced varied findings, reflecting the complexity and context-specific nature of corporate tax strategies. Several factors influence a company’s propensity to engage in tax avoidance, including firm size, profitability, leverage, capital intensity, and inventory intensity (Ulfa et al., 2021). The effects of these factors differ across industries, regulatory environments, and geographic regions. Larger firms, for example, may have more resources to dedicate to tax planning, yet they are often subject to stricter regulatory scrutiny, which could limit their ability to avoid taxes (Firmanzah & Marsoem, 2023). Similarly, profitable firms might be more motivated to engage in tax avoidance to preserve earnings, while companies with high leverage could use interest deductions to reduce taxable income (Ratnawati & Utomo, 2022).

In Malaysia, corporate tax avoidance has gained considerable attention from both regulators and researchers, particularly in the context of publicly listed companies. Malaysian companies listed on the Main Market of Bursa Malaysia are required to adhere to stringent financial reporting standards, providing a robust dataset for examining tax avoidance practices. This study aims to explore the determinants of tax avoidance among these companies, focusing on the relationship between firm size, profitability, leverage, capital intensity, and inventory intensity, using the effective tax rate (ETR) as a proxy for tax avoidance (Mohd & Saad, 2019).

The results of this study will contribute to the growing body of literature on tax avoidance, providing insights into the corporate tax strategies employed by public companies in Malaysia. Moreover, understanding the key factors driving tax avoidance is crucial for policymakers and regulators seeking to design more effective tax policies and enforcement mechanisms (Kalbuana et al., 2020). By identifying which factors contribute most significantly to tax avoidance, this research can inform strategies to curb aggressive tax planning, ensuring a fairer and more equitable tax system (Pravita et al., 2022). The objective of this study is to determine the relationship between the factors including firm sizes, profitability, inventory intensity, capital intensity, and leverage of the companies that will affect the tax avoidance issues in the publicly listed companies in Bursa Malaysia

The study provides in-depth insights into tax avoidance and its influencing factors, emphasizing the roles of tax authorities, policymakers, and businesses. It highlights the need for tailored approaches in tax enforcement, regulatory improvements, and corporate compliance to enhance the effectiveness of strategies against tax avoidance. The findings advocate for interdisciplinary collaboration among stakeholders to address the complexities of tax avoidance and improve overall tax governance.

Tax authorities can use these insights to develop focused strategies, target high-risk areas, and improve revenue collection. This knowledge helps formulate new policies that prevent tax evasion and encourage voluntary compliance, ultimately leading to a more stable revenue stream and greater public trust in the tax system.

Policymakers can also leverage the study’s findings to craft regulations that effectively limit tax avoidance. By closing loopholes, enhancing oversight, and fostering transparency, they can create a fairer tax environment. Additionally, offering incentives for compliant taxpayers can encourage adherence to tax laws, contributing to economic growth and sustainability.

Businesses can benefit by understanding the various factors affecting tax avoidance, allowing them to ensure compliance and reduce tax-related risks. With this knowledge, companies can make informed decisions in their tax planning, minimizing the risk of non-compliance and promoting ethical tax practices. By enhancing their tax governance, businesses can protect their reputation and financial stability while supporting a fair tax system that benefits society.

LITERATURE REVIEW

Tax Avoidance

Tax avoidance means legally arranging finances to lower tax payments (Nurdiana, 2021). Businesses use methods like valid deductions and delaying taxes to reduce their tax bills while following the law (Sari et al., 2022). This issue is complicated and affects governments, businesses, and society. The literature review discusses definitions, theories, ways to measure tax avoidance, influencing factors, consequences, and relevant regulations. Unlike tax evasion, which is illegal, tax avoidance takes advantage of legal loopholes in tax laws. It’s important to differentiate between proper tax planning and illegal evasion. Tax avoidance can be measured using the effective tax rate (ETR), which comes from current tax expenses and profits before tax. Past studies have used ETR to assess tax avoidance. For example, Sonia et al. (2019) looked at different factors affecting tax avoidance in manufacturing companies on the Indonesia Stock Exchange from 2014 to 2016. They found that institutional ownership and return on assets had a strong effect on tax avoidance, while factors like company size and leverage did not. Another study by Firmanzah and Marsoem (2023) explored how profitability, leverage, firm size, and related party transactions impacted tax avoidance in the food and beverage sector. They discovered that earnings management influenced the relationship between profitability, firm size, and related party transactions on tax avoidance. Sari et al. (2022) studied tax avoidance in the mining sector from 2017 to 2020, finding that larger firms tended to avoid more taxes, while higher profitability reduced tax avoidance. Kalbuana et al. (2020) examined similar factors in companies listed on the Jakarta Islamic Index from 2015 to 2019 and concluded that companies with more capital tended to engage in tax avoidance, while those with higher leverage did less. Finally, Razali et al. (2018) looked at how tax planning affected the value of firms in Malaysia, finding that ETR was a better measure of firm value than differences between book and tax values. In short, a company’s tax planning reflects its management’s goals, influenced by various factors. This study aims to explore the relationships between firm size, profitability, leverage, capital intensity, and inventory intensity in aggressive tax planning.

Firm Size

Firm size, which means the total assets a company owns, is an important factor in tax avoidance. Nasir (2023) found that while companies can avoid taxes more through financial manipulation, their size doesn’t really affect this behavior. Similarly, Firmanzah and Marsoem (2023) discovered that bigger firms tend to avoid taxes less, showing a negative link between firm size and tax avoidance. Kartikaningdyah (2019) also found that larger manufacturing companies in Indonesia had lower tax avoidance. Razali et al. (2018) mentioned that smart tax planning, especially with foreign tax credits, can boost a firm’s value, but larger firms often end up avoiding taxes more. However, Ulfa et al. (2021) found that firm size didn’t have a big impact on tax avoidance in their study of manufacturing companies in Indonesia. They suggested that other factors, like how long a CEO has been in charge and how much capital a company uses, might matter more. Mohd and Saad (2019) found a positive link between firm size and tax rates among multinational companies in Malaysia, showing that the effect of firm size on tax strategies can change. In short, the connection between firm size and tax avoidance is complicated and depends on the situation. This review highlights the need for more research to understand these relationships better and to help create fair tax policies.

Profitability

Profitability measures how well a company makes money compared to what it spends and invests (Marsahala et al., 2020). It’s important for investors, managers, and policymakers to understand what affects profitability. Common ways to measure it include return on assets (ROA), gross profit margin, operating profit margin, and return on equity (ROE). ROA shows how effectively a company uses its assets to earn income (Aldboush, 2023) and indicates its financial health (Nawaz & Haniffa, 2017). More profitable companies usually benefit from tax deductions, credits, and exemptions compared to those that are less profitable (Mohd and Saad, 2019). Studies have shown that there is often a negative relationship between profitability and effective tax rates. For example, Mohd and Saad (2019) found that higher profitability in multinational corporations in Malaysia is linked to lower effective tax rates. In contrast, Firmanzah and Marsoem (2023) found a positive connection in the food and beverage sector, where higher profitability seems to lead to more tax avoidance. Asih and Darmawati (2022) looked at how independent commissioners can influence the relationship between profitability and tax avoidance in manufacturing firms, finding that more profitable companies tend to avoid more taxes. However, Tarmidi et al. (2020) found mixed results, showing that some studies suggest a positive link between profitability and tax avoidance, while others do not. In summary, profitability is a key part of how well businesses perform and compete. This review brings together existing research on profitability, covering its definitions, ways to measure it, and influencing factors. More research is needed to better understand the complexities of profitability and its effects on different stakeholders.

Leverage

Leverage shows how much a company relies on debt in its financial structure, which can influence its tax avoidance strategies. Companies with more debt might be more likely to avoid taxes because they benefit from deductions on interest payments (Stamatopoulos et al., 2019). Leverage is typically measured by looking at total debt compared to total assets. Kalbuana et al. (2020) found that in their study on tax avoidance, factors like capital intensity and firm size, along with leverage, indicated that higher leverage actually reduces tax avoidance. This means that companies with more debt may be closely watched or may have less ability to avoid taxes. In another study, Ratnawati and Utomo (2022) looked at how things like executive pay, company integrity, sales growth, and capital intensity affect tax avoidance. They found that leverage plays a role by helping companies manage tax avoidance through high interest costs. Their research involved 48 manufacturing firms in Indonesia from 2017 to 2020. Dang and Tran (2021) studied 369 listed companies in Vietnam from 2008 to 2020, focusing on how financial difficulties affect tax avoidance. They discovered that companies strategically use leverage to lower their tax burdens by taking advantage of tax-deductible interest. Additionally, Kim and Im (2017) examined how simplified accounting rules for small and medium-sized enterprises (SMEs) affect tax avoidance. Their study of 18,954 firms from 2011 to 2013 found that SMEs with higher leverage tended to avoid taxes less because they could use interest deductions to decrease their tax bills. In summary, the link between leverage and tax avoidance is complicated and matters for many people, including policymakers and business owners. Understanding this relationship can help with tax planning and financial choices, showing the need for more research in this area.

Capital Intensity

Capital intensity refers to how much a company relies on physical assets like machines and equipment for production. Tax avoidance means legally lowering tax bills through smart financial planning. The idea is that companies with high capital intensity might have more opportunities and reasons to engage in tax avoidance, especially through deductions for asset depreciation and shifting income. Kalbuana et al. (2020) studied firms listed on the Jakarta Islamic Index from 2015 to 2019 and found that those with more capital assets tend to use tax avoidance strategies. Similarly, Irianto et al. (2017) found a positive connection between capital intensity and effective tax rates when looking at how factors like company size and profitability affect tax avoidance in manufacturing firms on the Indonesian Stock Exchange. Mohd and Saad (2019) looked at tax avoidance strategies in multinational corporations (MNCs) using data from 830 MNCs in Malaysia. They discovered that higher capital intensity is linked to higher effective tax rates, suggesting that big capital investments might limit tax avoidance opportunities due to increased scrutiny from tax authorities. On the other hand, Irmaslian et al. (2021) found that both profitability and capital intensity can negatively impact tax evasion strategies. In their study of 43 manufacturing companies in Indonesia from 2015 to 2018, they showed that higher capital intensity could lead to less tax evasion, adding complexity to the relationship. In summary, while many studies suggest that capital intensity is connected to increased tax avoidance, some also indicate it may lead to higher tax rates or less evasion because of scrutiny. These findings show the complicated ways capital intensity affects corporate tax strategies.

Inventory Intensity

Good inventory management is essential for a company’s success, as it involves handling the buying, storing, and distributing of goods. It affects both financial performance and tax planning, which is important for stakeholders like investors and managers. Nugrahadi & Rinaldi (2021) found that the amount of inventory a company holds can influence its tax avoidance strategies in food and beverage companies listed on the Indonesia Stock Exchange (IDX) from 2014 to 2018, studying 10 out of 18 companies in that sector. Maulana (2020) also showed that having more inventory can lead to greater tax avoidance. This study focused on 34 property and real estate companies on the IDX, looking at factors like capital intensity, profitability, leverage, and company size. Supporting these results, Pravita et al. (2022) explored how inventory levels impact tax avoidance in manufacturing firms on the IDX from 2016 to 2020, confirming that higher inventory plays a significant role in tax avoidance. In short, managing inventory well is crucial for a business’s success and has a big effect on tax planning and financial results. Inventory intensity, which shows how much a company invests in inventory compared to its total assets, is important for tax strategies. By effectively managing their inventory, companies can improve their tax situations and overall efficiency, highlighting the connection between inventory management and tax planning.

The Underpinning Theory

Agency theory looks at the relationship between principals (owners or shareholders) and agents (managers or executives) in companies. It suggests that businesses want to perform better and lower their tax costs to increase profits for shareholders (Ulfa et al., 2021). Managers, acting as agents, play a key role in tax planning and may use aggressive methods to reduce tax liabilities, which helps both the company and its investors. The Effective Tax Rate (ETR) is an important measure that shows how much tax a company pays and its efforts to avoid taxes (Stamatopoulos et al., 2019). Several factors influence tax avoidance strategies, including firm size, profitability, leverage, capital intensity, and inventory intensity. Larger companies usually have more resources for complex tax planning (Sonia and Suparmun, 2019). Profitable companies might spend more on tax strategies to boost performance, while companies with high debt can benefit from tax advantages related to that debt. Businesses that invest heavily in assets can use depreciation and other incentives for tax benefits, and how they manage inventory can also affect their tax liabilities. Previous research by Santini and Indrayani (2020), Wiratmoko (2018), and Sonia and Suparmun (2019) has used agency theory to study how these factors affect tax avoidance. This approach helps to understand how the relationship between principals and agents influences tax behaviors, showing the complex interactions between resources, company structures, and tax strategies.

Conceptual Framework

Figure 1: Framework of the study

This study looks at five main factors: firm size, profitability, leverage, capital intensity, and inventory intensity, to see how they affect tax avoidance, which is measured by the Effective Tax Rate (ETR). Firm size shows how big a company is, while profitability indicates how well it can make money. Leverage measures how much debt a company uses, affecting its financial risk and obligations. Capital intensity looks at how much a company invests in things like machinery, and inventory intensity examines how well a company manages its inventory. The main focus, tax avoidance, involves legal methods to reduce tax liabilities. The ETR is a helpful way to measure how much tax a company avoids. By studying the connections between these factors and tax avoidance, the research aims to identify what influences companies’ tax planning choices and how those choices affect their financial decisions. This framework allows for a detailed look at how operational, financial, and tax factors interact, leading to a better understanding of tax avoidance strategies and their effects on a company’s performance.

HYPOTHESIS DEVELOPMENT

Firm Size

Previous studies on the relationship between firm size and tax avoidance show mixed results. Firmanzah and Marsoem (2023) found a negative relationship, indicating that larger firms tend to engage less in tax avoidance. Similarly, Kartikaningdyah (2019) observed a negative effect of firm size on tax avoidance in manufacturing firms. However, Ulfa et al. (2021) found no significant relationship between firm size and tax avoidance in Indonesian companies, while Mohd and Saad (2019) reported a positive correlation between firm size and effective tax rates (ETR) in Malaysian multinational corporations, suggesting that larger firms had higher ETRs and were less likely to avoid taxes. These varying results highlight the complexity of the relationship between firm size and tax avoidance, indicating that it may differ based on context and industry.

H1: There is significant negative relationship between firm sizes and tax

Profitability

Research on the relationship between profitability and tax avoidance shows mixed results. Most studies use Return on Assets (ROA) to measure profitability, indicating how efficiently companies manage their assets and tax strategies. Generally, more profitable firms tend to utilize tax deductions, credits, and exemptions more effectively, reducing their tax burden (Mohd & Saad, 2019). Mohd and Saad (2019) found a negative relationship between profitability and the effective tax rate (ETR) in Malaysian multinational corporations, suggesting that higher profitability leads to lower taxes. However, Firmanzah and Marsoem (2023) observed a positive relationship in Indonesian food and beverage companies, where increased profitability led to higher tax avoidance. Similarly, Asih and Darmawati (2022) found that profitability was linked to greater tax avoidance in manufacturing firms. Contrarily, Tarmidi et al. (2020) reported mixed findings, with some evidence of a positive relationship and other results showing a negative impact. Therefore, profitability remains a key determinant of tax avoidance, with varying effects across industries and contexts. Therefore, based on above arguments, the below hypothesis is formulated:

H2:  There is significant positive relationship between profitability and tax avoidance.

Leverage

The relationship between leverage and tax avoidance has been extensively studied, yielding complex findings. Kalbuana et al. (2020) found a negative impact of leverage on tax avoidance among companies in the Jakarta Islamic Index, suggesting that increased debt levels lead to a decreased inclination toward tax avoidance, likely due to heightened scrutiny. Similarly, Ratnawati and Utomo (2022) explored how leverage mediates the effects of executive compensation and capital intensity on tax avoidance, indicating that leverage could facilitate tax avoidance by reducing financial burdens. In a different context, Dang and Tran (2021) emphasized the strategic use of leverage to alleviate tax burdens through interest deductions during financial distress in Vietnam. Moreover, Kim and Im (2017) highlighted that higher leverage in small and medium-sized enterprises (SMEs) could decrease tax avoidance tendencies, showcasing the varied impacts of leverage across different business scales and regulatory frameworks. These studies collectively suggest that the interplay between leverage and tax avoidance is nuanced, carrying important implications for stakeholders in finance. Therefore, based on above arguments, the below hypothesis is formulated:

H3: There is significant negative relationship between leverage and tax avoidance.

Capital intensity

Previous research by Kalbuana et al. (2020) found a positive relationship between capital intensity and tax avoidance among companies listed in the Jakarta Islamic Index (JII) from 2015 to 2019, suggesting that firms with higher capital intensity are more likely to engage in tax avoidance strategies. As studies done by Irianto et al. (2017) discovered a positive association between capital intensity and effective tax rates in manufacturing companies listed on the Indonesian Stock Exchange from 2013 to 2015. Similarity with studies by Mohd & Saad (2019) found that higher capital intensity is linked to higher effective tax rates among multinational companies (MNCs) in Malaysia. A recent study by Irmaslian et al. (2021) revealed that both profitability and capital intensity negatively influence tax avoidance strategies within manufacturing companies listed on the Indonesia Stock Exchange from 2015 to 2018. Therefore, based on above arguments, the below hypothesis is formulated:

H4:  There is significant negative relationship between capital intensity and tax avoidance.

Inventory intensity

Previous research indicates a significant relationship between inventory intensity and tax avoidance, particularly in specific sectors. Nugrahadi and Rinaldi (2021) found that inventory intensity partially influences tax avoidance in the food and beverage sector on the Indonesia Stock Exchange from 2014 to 2018, analyzing 18 companies and using purposive sampling to focus on 10. Similarly, Maulana (2020) reported a positive association between inventory intensity and tax avoidance among property and real estate firms listed on the IDX during the same period. Additionally, Pravita et al. (2022) emphasized the importance of inventory intensity in shaping tax avoidance strategies among manufacturing companies listed on the IDX from 2016 to 2020, reinforcing the notion that higher inventory levels can significantly impact tax planning within these sectors. Therefore, based on above arguments, the below hypothesis is formulated:

H5:  There is significant positive relationship between inventory intensity and tax avoidance.

METHODOLOGY

This study utilizes a quantitative research design to investigate the determinants of tax avoidance among Malaysian public listed companies. The focus is on five key factors: firm size, profitability, leverage, capital intensity, and inventory intensity, which are hypothesized to influence tax avoidance behavior. The sample comprises 84 companies listed on the Main Market of Bursa Malaysia from 2018 to 2022, selected through a simple random sampling method to ensure an unbiased representation of the corporate population.

Dependent Variable: Tax Avoidance, ETR

The effective tax rate serves as the dependent variable and proxy for tax avoidance, calculated as the ratio of current tax expenses to profit before tax. This measure is widely used in tax avoidance research, as it reflects the actual tax burden faced by firms (Mohd & Saad, 2019). A lower ETR indicates a higher level of tax avoidance.

Effective tax rate = Current tax expenses

                            Profit before tax

Independent Variable: Firm Sizes, SIZES

Firm size is measured by the total assets of the companies, as larger firms often have more resources and complex structures for tax planning. Previous studies have shown that firm size can significantly influence tax avoidance practices, with larger firms typically facing more scrutiny from tax authorities (Firmanzah & Marsoem, 2023; Kartikaningdyah, 2019).

Firm sizes = Total assets

Independent Variable: Profitability, PTI

Profitability is assessed using Return on Assets (ROA), which indicates how efficiently a company utilizes its assets to generate earnings. Higher profitability may lead to greater incentives for tax avoidance, as profitable companies often seek to maximize shareholder value by minimizing tax liabilities (Asih & Darmawati, 2022).

Return on assets = Net income

                           Total assets

Independent Variable: Leverage, LEV

Leverage is defined as the debt-to-asset ratio, reflecting a company’s financial structure. Higher leverage may reduce tax burdens through interest expense deductions, but it could also increase scrutiny from tax authorities, affecting tax avoidance strategies (Kalbuana et al., 2020; Ratnawati & Utomo, 2022).

Debt ratio = Total liabilities

                       Total assets

Independent Variable: Capital Intensity, CAPINT

Capital intensity is measured by the ratio of total net fixed assets to total assets, indicating the degree to which a firm relies on fixed assets for production. Companies with higher capital intensity may utilize depreciation allowances to lower taxable income, potentially influencing tax avoidance (Irianto et al., 2017; Mohd & Saad, 2019).

Capital intensity ratio = Total Net fixed assets

                                              Total assets

Independent Variable: Inventory intensity, INVINT

Inventory intensity is measured as the ratio of total inventory to total assets, highlighting the proportion of resources tied up in inventory. Higher inventory intensity can influence tax planning strategies, as firms may manipulate inventory valuations to optimize tax liabilities (Nugrahadi & Rinaldi, 2021; Pravita et al., 2022).

Inventory intensity ratio = Total Inventory

                                                total assets

Data for this study is collected from annual reports and financial statements of the selected companies, ensuring the reliability and consistency of the information. Descriptive statistics are first calculated to summarize the data, followed by correlation analysis to assess the relationships between variables. Finally, multiple linear regression analysis is employed to identify the significant determinants of tax avoidance, allowing for a comprehensive understanding of how financial and operational factors interact in the context of Malaysian corporate tax behavior.

DATA ANALYSIS AND RESULTS

Based on the results presented in Table 2, the mean values after the descriptive tests indicate that the average number of effective tax rate, sizes, profitability, leverage, capital intensity and inventory intensity are approximately 0.3, 9.18, 0.07, 0.39,0.47 and 0.14, respectively. In addition, the standard deviation values for the variables of sizes, profitability, leverage, capital intensity and inventory intensity are approximately 0.58, 0.05, 0.16, 0.19 and 0.09 respectively. The standard deviation for Effective tax rate is 0.03.

The Descriptive Analysis

Table 2: The Descriptive Analysis

Note: This table presents the descriptive statistics of all variables for a final sample of 420 firm-year observations.

Normality Test

The general guideline for skewness and kurtosis to adhere to a normal distribution suggests that values should lie within the range of -1 to +1. However, in certain cases, a slightly broader range of -2 to 2 may still be considered acceptable, indicating that the normality assumption has not been significantly violate (Wardani et al., 2022).  Essentially, for a distribution to be considered normal, skewness is expected to fall within the range of -1 to 1, encompassing both positive and negative skewness. In the context of this study, Table 4.1 demonstrates that the data exhibit characteristics of a normal distribution, as evidenced by skewness values ranging from 0.041 to 0.560 which is still in the range of -1 to +1.

Meanwhile, kurtosis serves as an indicator of the thickness in the tails of a probability density function. In a standard normal distribution, the expected kurtosis value is 0. Positive kurtosis indicates a distribution with a ‘peaked’ shape, while negative kurtosis suggests a ‘flatter’ distribution. The generally accepted range for kurtosis to conform to normality is commonly considered to be between -2 and 2 (Blanca et al., 2013). Table 4.1 illustrates that the data distribution is normal, as the kurtosis values range between -0.735 to -0.312.

Pearson Correlation Analysis

Table 3: The Pearson Correlation Matrix

The correlation analysis conducted in this study examines the relationships between the dependent variable, effective tax rate (DV_ETR), and various independent variables, including firm size (IV1_SIZES), profitability (IV2_PTI), leverage (IV3_LEV), capital intensity (IV4_CAPINT), and inventory intensity (IV5_INVINT). The Pearson correlation coefficients reveal significant insights into these relationships. A positive correlation of 0.209 (p < 0.01) suggests that as firm size increases, the effective tax rate also tends to rise. Conversely, a significant negative correlation of -0.242 (p < 0.01) indicates that higher profitability, measured by return on assets, is associated with a lower effective tax rate. Additionally, capital intensity shows a negative correlation of -0.193 (p < 0.01), implying that increased investment in fixed assets correlates with a reduced effective tax rate. Meanwhile, leverage displays a slight positive correlation of 0.115 (p < 0.05), suggesting that additional debt may increase the effective tax rate. Inventory intensity, however, shows a weak and statistically insignificant negative correlation of -0.037, indicating that changes in inventory levels have little impact on the effective tax rate. Overall, the analysis highlights the nuanced relationships between DV_ETR and the independent variables, particularly emphasizing the significant roles of firm size, profitability, and capital intensity in influencing tax rates, which can inform financial strategies and policy development.

Linear Regression

Table 4: The Linear Regression

Note:

This table shows the model summary of each earnings firm performance for a sample of 420 firm year observations.

***Significant at the 1% level (2-tailed)

**Significant at the 5% level (2-tailed)

*Significant at the 10% level (2-tailed)

The analysis examines the coefficients of several independent variables (IVs) in relation to the dependent variable (DV) of the effective tax rate (DV_ETR) within a multiple regression model. The intercept is 24.560, with a standard error of 2.083, yielding a t-statistic of 11.793 and a p-value of 0.001, indicating statistical significance. The unstandardized coefficient for firm size (IV1_SIZES) is 0.580, suggesting that a one-unit increase in company size results in an increase of 0.580 units in the effective tax rate, with a t-value of 2.313 and a p-value of 0.021, supporting the hypothesis that larger firms tend to have higher effective tax rates. This aligns with the findings of Mohd and Saad (2019) and is consistent with studies by Firmanzah and Marsoem (2023) and Kartikaningdyah (2019). For profitability (IV2_PTI), a negative relationship is observed with an unstandardized coefficient of -0.116 (t = -4.230, p < 0.001), indicating that as profitability increases, the effective tax rate decreases, which corroborates previous research by Mohd and Saad (2019) and aligns with Firmanzah and Marsoem (2023) and Asih and Darmawati (2022). The leverage variable (IV3_LEV) shows unstandardized coefficients of -0.005 and a p-value of 0.597, indicating no significant relationship with tax avoidance, consistent with findings by Dakhli (2021) and Pratama & Leon (2022), thereby not supporting the hypothesis. Conversely, capital intensity (IV4_CAPINT) demonstrates a positive relationship with an unstandardized coefficient of 0.015 (t = 1.881, p = 0.061), suggesting a marginally significant link to the effective tax rate, in line with Kalbuana et al. (2020) and Mohd & Saad (2019), thus supporting the hypothesis regarding capital intensity. Inventory intensity (IV5_INVINT) reveals unstandardized coefficients of 0.003 and a p-value of 0.860, indicating a weak and statistically insignificant relationship with tax avoidance, consistent with the findings of Urrahmah & Mukti (2021) and Manihuruk et al. (2021), leading to the conclusion that this hypothesis is not supported. Overall, the analysis indicates that larger companies and those with greater capital intensity engage less in tax avoidance, while higher profitability is associated with increased tax avoidance. The model explains approximately 9.6% of the variation in DV_ETR, with an R-squared value of 0.096, suggesting that while the model has some explanatory power, a substantial 90.4% of the variation remains unexplained. The adjusted R-squared value of 0.085 indicates that only around 8.5% of the variability is effectively explained, highlighting the need for future research to incorporate additional variables to enhance the model’s explanatory power and better understand the factors influencing DV_ETR. To conclude, the results of the hypotheses tested in this study are summarized in the table below:

CONCLUSION

This study looks into the factors that contribute to tax avoidance among companies listed on Bursa Malaysia’s Main Market, with an emphasis on variables including firm size, profitability, leverage, capital intensity, and inventory intensity. The findings show a substantial positive relationship between firm size and the effective tax rate, implying that larger enterprises are less likely to engage in tax avoidance, which is similar with Mohd and Saad’s (2019) findings. However, this finding contradicts studies by Firmanzah and Marsoem (2023) and Kartikaningdyah (2019), which found a negative association, showing that larger firms may have more sophisticated systems and resources to capitalize on tax planning options.

Profitability is also observed to be positively associated with tax avoidance, corroborating the claims of Tarmidi et al. (2020) and Muhammad et al. (2022), who argue that more lucrative enterprises are motivated to conserve earnings through tax reduction measures. Firmanzah and Marsoem (2023) and Asih and Darmawati (2022) take a different approach, arguing that very profitable corporations may prefer maintaining a solid corporate reputation and ethical standing over engaging in aggressive tax strategies.

The analysis found a negative but statistically insignificant association between leverage and tax avoidance, which is consistent with the findings of Dakhli (2021), Pratama and Leon (2022), and Safitri and Oktris (2023). However, Kalbuana et al. (2020) and Ratnawati and Utomo (2022) argue that increasing leverage may lessen the motivation for tax avoidance by allowing for interest expense deductions. In terms of capital intensity, the analysis reveals a significant negative relationship with tax avoidance, supporting previous research by Kalbuana et al. (2020) and Mohd and Saad (2019), who argue that firms with significant fixed asset investments benefit from legitimate deductions such as depreciation, reducing the need for more aggressive tax strategies.

Lastly, inventory intensity reveals a positive but statistically insignificant connection with tax avoidance, mirroring the results of Urrahmah and Mukti (2021), Manihuruk et al. (2021), and Irmaslian et al. (2021). This is in contrast to the findings of Maulana (2020) and Pravita et al. (2022), who found a stronger favorable correlation. Taken together, the data demonstrate the multidimensional character of tax evasion behavior, which is influenced by firm-specific and environmental factors. The study underlines the significance of nuanced legislation that takes into account these intricacies, as well as the need for additional research to clarify contradictions in the literature and get a better knowledge of tax avoidance methods among Malaysian public listed corporations.

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