Examining the Impact of Tax Avoidance on Firm Profitability: Evidence of the Nonlinear Moderating Role of CFO Compensation in Non-Financial Companies Listed on the Indonesia Stock Exchange

Abstract

Tax avoidance is widely used as a corporate strategy to reduce tax burdens; however, its impact on firm profitability remains inconclusive, particularly due to differences in measurement approaches. In addition, the moderating role of Chief Financial Officer (CFO) compensation especially in a non-linear form has been underexplored in emerging markets such as Indonesia. This study examines the relationship between tax avoidance and firm profitability and analyzes whether CFO compensation moderates this relationship in a non-linear pattern. Tax avoidance is measured using two complementary proxies: TAETR (one minus the accrual-based Effective Tax Rate, representing book-based tax avoidance) and TACETR (one minus the Cash Effective Tax Rate, representing cash-based tax avoidance). The study uses panel data from 98 non-financial firms listed on the Indonesia Stock Exchange during 2020–2024, consisting of 481 firm-year observations. The analysis is conducted using a Fixed Effects Model with firm-clustered robust standard errors and year fixed effects, supported by robustness checks using alternative profitability measures and lagged specifications. The results indicate that accrual-based tax avoidance is negatively associated with profitability, while cash-based tax avoidance shows a positive association. CFO compensation moderates only the relationship between cash-based tax avoidance and profitability, and this moderation follows an inverted U-shaped pattern. However, the non-linear moderating effect is not fully consistent across model specifications, suggesting that the relationship is proxy-dependent rather than universally applicable. Overall, this study highlights the importance of distinguishing between accrual and cash dimensions of tax avoidance and provides evidence of a contingent and non-linear role of CFO compensation in shaping profitability outcomes in an emerging-market context.