Arnaldo Purba, Sampoerna University, South Jakarta, Indonesia; Directorate General of Taxes, Indonesia. Email: arnaldo.purba@sampoernauniversity.ac.id
Alfred Tran, The Australian National University, Canberra, Australia. Email: Alfred.Tran@anu.edu.au
Prior studies suggest that multinationals can use several channels to shift profits in order to lower their global tax liabilities. The two most common channels used are cross-border transfer pricing and high debt financing arrangements. However, most prior studies use data from developed countries and few use data from developing countries.
In our recent article, How Do Multinationals Shift Profits Out of Indonesia?, published in issue 10(1) of The Journal of Tax Administration, we investigate whether foreign-owned Indonesian companies (FOICs), which are Indonesian affiliates of foreign MNEs, use intra-firm transfer pricing and/or debt financing by related parties to shift profits out of Indonesia, a major developing country.
Data Analysed and Tests Performed
Our analyses include comparisons between FOICs and comparable domestic-owned Indonesian companies (DOICs) in terms of two indicators that are expected to capture the two profit-shifting channels. Specifically, this study compares earnings before interest and taxes scaled by total sales and long-term liabilities with related parties scaled by total assets to capture the transfer pricing and debt financing channels of profit shifting, respectively.
Our study uses confidential corporate tax return data provided by Indonesia’s tax authority, the Directorate General of Tax. The time period for the study is 2009 to 2015. FOICs (as the treatment group) and DOICs (as the control group) are matched in pairs using propensity score matching (PSM). PSM has been used extensively, mainly due to its superiority when creating a simple and direct comparison of baseline covariates between treated and controlled observations. We also use coarsened exact matching (CEM) as an alternative matching method to check whether the PSM produces consistent results. CEM generates strata and uses weights to offset different strata sizes between treated and control units.
Statistical analyses using paired t-tests and ordinary least squares regressions on the matched samples are then run to examine whether FOICs shift profits out of Indonesia by means of both transfer pricing and debt financing.
Our Results
The paired t-tests compare 2,636 FOICs with 2,636 matched DOICs and show that, on average, FOICs report lower earnings before interest and taxes scaled by total sales by 2.2 percentage points. The results of the paired t-tests also confirm that FOICs report nearly one percentage point higher long-term liabilities to related parties after comparing 3,729 FOICs with 3,729 matched DOICs. Both results are significant at the 1% level.
PSM and CEM procedures produce consistent results and support the theory that FOICs appear to use both transfer pricing and debt financing strategies to shift profits out of Indonesia. The empirical findings corroborate prior studies’ findings that developing countries may suffer from profit-shifting strategies adopted by MNEs.
References
- Purba, A., & Tran, A. (2025). How Do Multinationals Shift Profits Out Of Indonesia? The Journal of Tax Administration, 10(1), 40–65. https://jota.website/jota/article/view/171