Tax avoidance in Southeast Asia: unraveling the effects of environmental uncertainty and governance

This study investigates the effect of environmental uncertainty at both the country and firm levels on firms’ tax avoidance, as well as whether a country’s governance moderates this relationship. Data were collected from non-financial publicly listed firms in four emerging Southeast Asian countries, namely Indonesia, Malaysia, Thailand and the Philippines, spanning from 2016 to 2021, with a total of 7,066 observations. Using data panel regression, the results indicate that country-level environmental uncertainty which is proxied by economic policy uncertainty negatively affects firm tax avoidance. Additionally, this negative effect is more pronounced in countries with higher-quality governance. However, this study finds that firm-level environmental uncertainty is not associated with firm tax avoidance and country governance also does not moderate this relationship. These results remain robust across sensitivity tests and after addressing the endogeneity issue. Overall, the findings provide evidence that the effect of environmental uncertainty on tax avoidance varies depending on its source. This study underscores the significance of environmental uncertainty as an exogenous determinant of firm tax avoidance and suggests that policymakers, management and investors weigh the impact of environmental uncertainty in their decision-making processes.