Thin capitalization and tax avoidance: The moderating role of independent commissioners

This study examines the effect of thin capitalization on tax avoidance and the moderating role of independent commissioners in consumer non-cyclical companies in Indonesia. The study employs 150 firm-year observations from companies listed on the Indonesia Stock Exchange during 2021-2023. The hypotheses are tested using fixed-effects panel regression estimated via Generalized Least Squares (GLS) to address heteroskedasticity. The results indicate that thin capitalization has a positive effect on tax avoidance, while independent commissioners weaken this relationship. These findings suggest that debt financing provides firms with opportunities to reduce their tax burdens through interest deductions. In contrast, greater representation of independent commissioners may constrain the tax-related implications of financing decisions. This study contributes to the literature by highlighting the role of corporate governance in moderating the relationship between thin capitalization and tax avoidance. The findings also provide implications for the Directorate General of Taxes in strengthening risk-based supervision of debt-related tax deductions and corporate financing arrangements.