EFFECT OF CORPORATE TAX RATE REDUCTION ON EARNINGS MANAGEMENT PRACTICES: A CASE STUDY IN INDONESIA

Abstract

Government of Indonesia has reduced corporate tax rate from 30 percent to 28 percent single tax rate in 2009. This study observes the companies earnings management practices in response to the corporate tax rate reduction. Furthermore, it examines whether earnings management practiced by loss firms is similar to profit firms. The results suggest that companies perform earnings management in response to corporate tax rate reduction. The earnings management in profit firms is affected by tax incentives (tax planning and net deferred tax liabilities) and non-tax incentives (earnings pressure). Earnings management performed by loss firm is also affected by tax incentives (net deferred tax liabilities) and non-tax incentives (earnings pressure). Meanwhile, sample companies earnings management practices is not affected by the percentage of total paid-up shares of companies traded in Indonesia Stock Exchange (IDX).