The Impact of Digital Transformation and Market Power on Corporate Tax Avoidance: The Moderating Role of Internal Control in Indonesian Listed Firms

Abstract

Introduction: This study has novelty by developing the measurement of digital transformation variables from Chen et al. (2024) which only focused on digital technology aspects. That approach has not yet reflected the complexity of digital transformation comprehensively, as it does not consider changes in business processes, organizational culture, skills, and customer experience. In the industry 4.0 era, companies need more holistic and adaptive digital strategies, so this research adds three new dimensions: business model, digital business, and sustainability, which represent a strategic and comprehensive approach to digitalization.

 Objectives: The aim of the present work is to investigate the association among digital transformation and market power in the impact of these factors on tax aggressiveness. Finally, the research will also investigate how internal control and its components can serve as a moderating factor in the association of digital transformation, market dominance and Tax Avoidance in a firm.

Methods: The research is quantitative. The study concentrates on firms which are publishing the audited annual report and sustainability report of the company listed on Indonesia Stock Exchange in 2023 taken from www. idx. co.id. Purposive sampling was conducted and 363 companies selected. Cross-sectional data is utilized in this study.

Results: The research concludes that shifting to digitalization is connected to less tax avoidance yet when one has market dominance then he Inded more avoid taxes.Thus in addition to not being able effectively oppose the worsening effect on its control of tax, transitioning to a digital approach only makes it worse. However, internal controls do mitigate the positive outcome of market power toward tax avoidance.

Conclusions: Evidence shed light that adoption of digital transformation strategies are helpful to reduce business Tax Avoidance, however, market power and influence encourages tax avoidance. Internal control does not reinforce the favorable link between digital transformation and tax avoidance, and attenuates the direct positive correlation within market power and tax avoidance. These results confirm the importance of technology and governance in the control of firms’ taxes. Stronger digital systems and an internal control system are urgently needed, particularly in developing countries such as Indonesia to close down tax avoidance practices. The sensitivity test results are in line with our expectations and show that incorporating dimensions such as business model, digital business and sustainability in the service of DT provides more in-depth and accurate evaluations than the former approach, which was limited to digital technology. This result demonstrates that digital transformation for commercial purposes is more successful in restraining tax avoidance instead of technology adoption alone.