Pay Less Today, Suffer Tomorrow? Tax Avoidance and Financial Distress
DOI:
https://doi.org/10.38035/jafm.v7i2.3354Keywords:
Agency Costs, Consumer Cyclical Sector, Corporate Tax Avoidance, Financial DistressAbstract
Corporate tax avoidance has long been a continuous issue in Indonesia, where government revenue is heavily reliant on tax revenue. For firms, financial distress is one of the critical issues faced because it may eventually lead to bankruptcy risk if left unresolved. Because tax avoidance strategies carry inherent risks, these practices may potentially serve as a key determinant of financial distress. Therefore, extending prior research, this research aims to examine the effect of corporate tax avoidance on financial distress. This study utilizes secondary data from 2019 to 2023 extracted from the audited financial statements of listed firms within the consumer cyclical sector, analyzed using a panel data regression approach. The results show that corporate tax avoidance increases financial distress because tax avoidance itself embeds risks through tax audits and penalties and agency costs. Further analysis of the coronavirus pandemic demonstrates that corporate tax avoidance does not affect financial distress because firms focus on survival. Theoretically, this study extends the existing literature by shifting the focus from the immediate cash-flow benefits of tax avoidance to its potential financial consequences. Practically, this research serves as a strategic framework for corporate managers, emphasizing that tax avoidance practices must not compromise organizational sustainability.
References
Abdelmoula, L., Chouaibi, S., & Chouaibi, J. (2022). The Effect of Business Ethics and Governance Score on Tax Avoidance: A European Perspective. International Journal of Ethics and Systems, 38(4), 576–597. https://doi.org/10.1108/IJOES-12-2021-0219
Adijaya, V., & Radianto, W. E. D. (2025). Debt, Profit, and Tax: Investigating Corporate Tax Behavior. Journal of Accounting, Entrepreneurship, and Financial Technology (JAEF), 07(01), 55–74. https://doi.org/10.37715/jaef.v7i1.6069
Al-Faryan, M. A. S. (2024). Agency Theory, Corporate Governance and Corruption: An Integrative Literature Review Approach. Cogent Social Sciences, 10(1), 1–30. https://doi.org/10.1080/23311886.2024.2337893
Alkurdi, A., Almarayeh, T., Bataineh, H., Al Amosh, H., & Khatib, S. F. A. (2024). Corporate Profitability and Effective Tax Rate: The Moderating Role of Board Gender Diversity. Journal of Islamic Accounting and Business Research, 15(1), 153–171. https://doi.org/10.1108/JIABR-05-2022-0122
Altman, E. I., Hotchkiss, E., & Wang, W. (2019). Corporate Financial Distress, Restructuring, and Bankruptcy: Analyze Leveraged Finance, Distressed Debt, and Bankruptcy (4th ed.). John Wiley & Sons, Inc. www.WileyFinance.com.
Aviantara, R. (2023). Scoring the Financial Distress and the Financial Statement Fraud of Garuda Indonesia with «DDCC» as the Financial Solutions. Journal of Modelling in Management, 18(1), 1–16. https://doi.org/10.1108/JM2-01-2020-0017
Bayar, O., Huseynov, F., & Sardarli, S. (2018). Corporate Governance, Tax Avoidance, and Financial Constraints. Financial Management, 47, 651–677. https://doi.org/10.1111/(ISSN)1755-053X
Dang, V. C., & Tran, X. H. (2021). The Impact of Financial Distress on Tax Avoidance: An Empirical Analysis of the Vietnamese Listed Companies. Cogent Business and Management, 8(1), 1–10. https://doi.org/10.1080/23311975.2021.1953678
Dhawan, A., Ma, L., & Kim, M. H. (2020). Effect of Corporate Tax Avoidance Activities on Firm Bankruptcy Risk. Journal of Contemporary Accounting and Economics, 16(2), 1–23. https://doi.org/10.1016/j.jcae.2020.100187
Dyreng, S. D., Hanlon, M., & Maydew, E. L. (2008). Long-Run Corporate Tax Avoidance. The Accounting Review, 83(1), 61–82. https://doi.org/10.2308/accr.2008.83.1.61
Dyreng, S. D., Hanlon, M., & Maydew, E. L. (2010). The Effects of Executives on Corporate Tax Avoidance. Accounting Review, 85(4), 1163–1189. https://doi.org/10.2308/accr.2010.85.4.1163
Edwards, A., Schwab, C., & Shevlin, T. (2016). Financial Constraints and Cash Tax Savings. The Accounting Review, 91(3), 859–881. https://doi.org/10.2308/accr-51282
Farooq, M., Hunjra, A. I., Ullah, S., & Al-Faryan, M. A. S. (2023). The Determinants of Financial Distress Cost: A Case of Emerging Market. Cogent Economics and Finance, 11(1), 1–22. https://doi.org/10.1080/23322039.2023.2186038
Guedrib, M., & Bougacha, F. (2024). The Moderating Effect of Tax Risk on the Relationship Between Tax Avoidance and Firm Risk: Empirical Evidence in the French Context. International Journal of Law and Management, 66(4), 468–495. https://doi.org/10.1108/IJLMA-06-2023-0140
Guedrib, M., & Marouani, G. (2023). The Interactive Impact of Tax Avoidance and Tax Risk on the Firm Value: New Evidence in the Tunisian Context. Asian Review of Accounting, 31(2), 203–226. https://doi.org/10.1108/ARA-03-2022-0052
Hendayana, Y., Ramdhany, M. A., Pranowo, A. S., Rachmat, R. A. H., & Herdiana, E. (2024). Exploring Impact of Profitability, Leverage and Capital intensity on Avoidance of Tax, Moderated by Size of Firm in LQ45 Companies. Cogent Business and Management, 11(1), 1–13. https://doi.org/10.1080/23311975.2024.2371062
Iazzi, A., Vacca, A., Maizza, A., & Schiavone, F. (2023). The Role of Corporate Board and Auditors in Tax Planning: Evidence from Italy. Management Research Review, 46(3), 321–339. https://doi.org/10.1108/MRR-07-2021-0518
Imen, F., & Anis, J. (2021). The Moderating Role of Audit Quality on the Relationship Between Auditor Reporting and Earnings Management: Empirical Evidence from Tunisia. EuroMed Journal of Business, 16(4), 416–430. https://doi.org/10.1108/EMJB-03-2020-0024
Isin, A. A. (2018). Tax Avoidance and Cost of Debt: The Case for Loan-specific Risk Mitigation and Public Debt Financing. Journal of Corporate Finance, 49, 344–378. https://doi.org/10.1016/j.jcorpfin.2018.01.003
Jensen, M. C., & Meckling, W. H. (1976). Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure. Journal of Financial Economics, 3, 305–360. https://doi.org/10.1016/0304-405X(76)90026-X
Kementerian Keuangan. (2025). Laporan Keuangan Pemerintah Pusat 2024 (Audited). https://djpb.kemenkeu.go.id/portal/images/LKPP/LKPP-2024.pdf
Khan, M. T., & Nawaz, F. (2023). Analysis of the Effect of Financial Distress on Tax avoidance During the COVID-19 Financial Crisis: Evidence from Pakistan. Review of Applied Management and Social Sciences, 6(1), 45–62. https://doi.org/10.47067/ramss.v6i1.257
Kim, J. B., Li, Y., & Zhang, L. (2011). Corporate Tax Avoidance and Stock Price Crash Risk: Firm-level Analysis. Journal of Financial Economics, 100(3), 639–662. https://doi.org/10.1016/j.jfineco.2010.07.007
Koay, G. Y., & Sapiei, N. S. (2025). The Role of Corporate Governance on Corporate Tax Avoidance: A Developing Country Perspective. Journal of Accounting in Emerging Economies, 15(1), 84–105. https://doi.org/10.1108/JAEE-01-2023-0022
Menchaoui, I., & Hssouna, C. (2024). Impact of Internal Governance Mechanisms on Tax Aggressiveness: Evidence from French Firms Listed on the CAC 40. EuroMed Journal of Business, 19(3), 503–517. https://doi.org/10.1108/EMJB-03-2022-0047
Mindzak, J., & Zeng, T. (2020). Pyramid Ownership Structure and Tax Avoidance Among Canadian Firms. Accounting Research Journal, 33(1), 16–33. https://doi.org/10.1108/ARJ-02-2017-0036
Putra, P. D., Syah, D. H., & Sriwedari, T. (2018). Tax Avoidance: Evidence of As a Proof of Agency Theory and Tax Planning. International Journal of Research & Review, 5(9), 52–60.
Rahiminejad, S. (2025). Large Book-Tax Differences, Bankruptcy and Firm Efficiency. Journal of Corporate Accounting and Finance, 36(2), 138–156. https://doi.org/10.1002/jcaf.22760
Sánchez-Ballesta, J. P., & Yagüe, J. (2021). Financial Reporting Incentives, Earnings Management, and Tax Avoidance in SMEs. Journal of Business Finance and Accounting, 48(7–8), 1404–1433. https://doi.org/10.1111/jbfa.12519
Stanley, N., & Widianingsih, L. P. (2025a). Corporate Tax Avoidance: How Financial Health Reshapes the Game. Jurnal Bisnis Dan Akuntansi, 27(1), 185–208. https://doi.org/10.34208/zjtnke73
Stanley, N., & Widianingsih, L. P. (2025b). Profitability Meets Responsibility: The Role of Board Gender Diversity in Shaping Corporate Tax Avoidance Behaviour. Ekombis Review: Jurnal Ilmiah Ekonomi Dan Bisnis, 13(3), 2847–2860. https://doi.org/10.37676/ekombis.v13i3.7909
Tanjung, M. R., & Amin, M. N. (2022). Pengaruh Leverage, Corporate Governance dan Profitabilitas Terhadap Penghindaran Pajak pada Perusahaan Sektor Keuangan Sub Sektor Perbankan Periode 2017-2021. Jurnal Ekonomi Trisakti, 2(2), 567–582.
Teja, M. R. (2025). Predicting Bankruptcy and Financial Distress Using Altman Z Score, Grover G Score, Springate S Score and Zmijewski X Score-A Study on Select Companies. Advances in Consumer Research, 2(5), 494–500.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2026 Nicklaus Stanley, Luky Patricia Widianingsih
This work is licensed under a Creative Commons Attribution 4.0 International License.
Authors who publish their manuscripts in this journal agree to the following conditions:
- The copyright on each article belongs to the author(s).
- The author acknowledges that the Journal of Accounting and Finance Management (JAFM) has the right to be the first to publish with a Creative Commons Attribution 4.0 International license (Attribution 4.0 International (CC BY 4.0).
- Authors can submit articles separately, arrange for the non-exclusive distribution of manuscripts that have been published in this journal into other versions (e.g., sent to the author's institutional repository, publication into books, etc.), by acknowledging that the manuscript has been published for the first time in the Journal of Accounting and Finance Management (JAFM).
