The Firm Life Cycle Dynamics of Tax Avoidance

This paper aimed at finding out whether tax
avoidance differed across firm life cycle (FLC). We used cash
flows pattern as a proxy to identify FLC into 4 phases, namely
introduction, growth, mature, and decline. Tax avoidance was
measured using effective tax rate (ETR) to show the impact of
this practice on net income. Each FLC phase had different
characteristics and hence explained its dynamics to implement
tax avoidance in every stage. As a part of firms� important
strategy, tax avoidance decision would consider resource
allocation across FLC phases. We constructed a dataset of
Indonesia publicly listed manufacturing firms which were
classified as basic industries and chemicals sectors. We used a
final sample of 56 companies with an 8-year research period and
found that tax avoidance practice varied along FLC phases.
Based on the 448 firm-year observations, this study found that
firms significantly positively engaged with tax avoidance in
introduction and decline stages while significantly negatively
engaged in growth and mature stages. These results indicate the
extent of FLC phases in explaining firms� tendency to be involved
in tax avoidance and thus useful for predicting current and
future potential tax.