EXPLORING THE DYNAMICS OF CONFORMING TAX AVOIDANCE ON

EARNINGS QUALITY: THE MODERATING ROLE OF ESG INITIATIVES IN ASIA

PACIFIC MNES

Ananda Anggara

Topic/Research Question
Taxes significantly contribute to sustainable development by funding government services,
regulating the economy, and promoting social equity. However, tax non-compliance remains a
global challenge, with 2021 witnessing losses exceeding US$472 billion, impacting countries
like Australia, Indonesia, New Zealand, and others in the Asia Pacific region (Gaisbauer et al.,
2015; Bostajyan et al., 2022; Randlane, 2016; Marino, 2021; Tax Justice Network, 2022).
Multinational enterprises (MNEs) are often at the forefront of legal yet ethically questionable
profit-shifting strategies, moving profits from high-tax to low-tax jurisdictions. High-profile
cases such as Apple's $128 billion profit-shifting scheme and Google's use of a Dutch subsidiary
to transfer royalties to Bermuda underscore the need for fairness and equitable cost distribution
within conglomerates (Drucker et al., 2017; Meijer, 2019). This context highlights the potential
of sustainability programs within corporate strategies as a moderating force. As firms
increasingly integrate Sustainable Development Goals (SDGs) into their operations, the
relationship between international tax practices and the role of sustainability programs in
influencing corporate financial behavior emerges as a critical area for research. While extensive
literature explores tax avoidance strategies like transfer pricing and thin capitalization and their
impact on earnings quality (Beer et al., 2018; Duhoon et al., 2023; Kalra et al., 2023; Choi, 2021;
Xian et al., 2015), there's a notable gap in understanding the effects of conforming tax avoidance
strategies and their dynamic influence on stakeholders' perceptions (Ki et al., 2022; Hizazi et al.,
2022; Lou et al., 2023). This gap points to a significant oversight in our theoretical grasp of tax
avoidance's broader spectrum. Furthermore, inconsistent findings on the impact of ESG
performance on financial outcomes call for a detailed examination of how ESG components
affect corporate behavior and financial reporting (Amel-Zadeh et al., 2018). This study aims to
fill these gaps by exploring the determinants of conforming tax avoidance and its dynamic
relationships, and how corporate sustainability programs can moderate the effects of tax
avoidance on earnings quality among MNEs in the Asia Pacific.

Research Benefits/Significance
By examining how multinational enterprises (MNEs) balance their roles as "corporate
citizens" with tax avoidance strategies, this research assists tax authorities in developing policies
that encourage responsible corporate behavior, potentially enhancing tax compliance and
augmenting state revenues. For retail investors, the investigation provides a deeper
understanding of MNEs' financial practices, revealing how transfer pricing and sustainability
initiatives signal ethical tax strategies and possibly higher earnings quality. This knowledge
empowers investors to make informed decisions, favoring companies that integrate financial
performance with sustainable practices. The study's insights are poised to refine investment
strategies, directing investors toward firms that not only promise financial returns but also
embody sustainable and ethical business operations.
Academically, this research could enrich signaling theory with empirical evidence on the
role of sustainability programs in indicating a firm’s approach to tax avoidance and earnings
quality, fostering a more sophisticated comprehension of how companies communicate their
financial health and dedication to sustainable practices to stakeholders. By focusing on
conforming tax avoidance, the study sheds light on the ethical, legal, and business dimensions of
tax strategies, stimulating further scholarly debate.
Utilizing TNMM to measure transfer pricing based on OECD guidelines and identifying
conforming tax avoidance persistence, this exploration significantly advances academic
discourse on tax avoidance, encouraging future inquiries into the ethical nuances of corporate tax
behavior and contributing to theoretical advancements in corporate finance by offering a nuanced
view of the interplay between sustainability efforts, tax avoidance practices, and corporate ethics
in the global business environment.

Design of The Study

This study explores the influence of sustainability initiatives on stakeholders' perceptions
regarding the direct and indirect impacts of international tax practices on earnings quality.
Utilizing signaling theory as a lens, the research aims to understand the complex relationship
between tax practices, sustainability efforts, and stakeholders' perceptions within organizational
contexts. The analysis will focus on firms listed in the Thomson Reuters ESG universe from
2008 onwards, aligning with the inclusion of the MSCI World by Thomson Reuters ESG. This
index provides comprehensive data covering the Asia Pacific region, including large and mid-
cap companies from both emerging and developed markets. The objective is to offer both
descriptive and inferential statistical analyses to shed light on these relationships.
Thus, this research framework is as follow

This research's variable description can be simplified a follows:

Variable
No
Name Dependen Independen Mediatin Moderatin Source
.
t t g g
COMPUSTAT
1 Earnings Quality √ Global
Vantage
Transfer Pricing BVD
2 √
Activities TP Catalyst
3 Thin Capitalization √ COMPUSTAT
Activities Global
 No Variable
Name Source
. Vantage
Conforming Tax
Avoidance COMPUSTAT
4 (Persistence, if any √ √ Global
autoregressive lag Vantage
exist)
Corporate
Sustainability Thomson
5 √
Programme – ESG Reuters
Scores

The Generalized Method of Moments (GMM) is identified as the most suitable approach
for investigating the determinants of conforming tax avoidance. GMM effectively manages the
dynamic characteristics of variables by including lagged dependent variables, tackles
endogeneity with instrumental variables, and utilizes the panel data structure to explore
variations across sections and over time. This method is crucial for determining whether past tax
avoidance behavior can predict future patterns, ensuring the analysis remains robust to issues of
endogeneity and serial correlation (Arellano & Bond, 1991; Blundell & Bond, 1998).
To examine the moderating effects of corporate sustainability components on the link
between conforming tax avoidance persistence and earnings quality in multinational enterprises
across the Asia Pacific, a combination of Panel Data Analysis and Interaction Term Analysis is
advocated. This strategy uses panel data's strengths to observe diverse impacts across companies
and periods, while interaction terms scrutinize the influence of environmental, social, and
governance (ESG) factors on the tax avoidance-earnings quality relationship. This
methodological approach is effective in uncovering the subtle roles that corporate sustainability
initiatives have in influencing financial outcomes, providing insights into the intricate
relationship between tax practices and sustainable corporate governance. This methodology is in
line with Richardson's (2006) research, which highlights the significance of employing panel
data to explore dynamic interactions and moderation effects in corporate finance and
sustainability studies.

Research Timetable
Assuming the research is undertaken during a PhD tenure, the projected timeline is
as follows:
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