The Moderating Role of Controlled Foreign Corporations in the Relationship between Profitability, Leverage, Capital Intensity and Tax Avoidance

Abstract

This study examines the effects of profitability, leverage, and capital intensity on tax avoidance and investigates the moderating role of Controlled Foreign Corporations (CFC) in these relationships. The study uses a quantitative approach and panel data from manufacturing companies listed on the Indonesia Stock Exchange during 2021–2025. Based on the sample selection criteria, 194 companies were included, resulting in 970 balanced firm-year observations. Tax avoidance is measured using the Cash Effective Tax Rate (CETR), profitability using Return on Assets (ROA), leverage using the Debt-to-Equity Ratio (DER), capital intensity using the fixed-asset ratio, and CFC using foreign share ownership. The empirical model employs panel-data regression and Moderated Regression Analysis (MRA). The results indicate that profitability has a positive and significant coefficient on CETR, while leverage is not statistically significant. Capital intensity has a positive and significant coefficient on CETR. The interaction between ROA and CFC is negative and statistically significant, whereas the interaction between DER and CFC is not statistically significant. The interaction between capital intensity and CFC is positive and statistically significant. Because a higher CETR represents a lower degree of observed tax avoidance, the findings indicate that profitability and capital intensity are associated with lower observed tax avoidance, while CFC changes the relationship between profitability and tax avoidance and strengthens the positive relationship between capital intensity and CETR. The findings highlight the importance of considering foreign ownership structures when examining corporate tax avoidance among Indonesian manufacturing firms.