For a country to operate its government, it requires a source of income. The government receives money from a variety of sources, including grants, taxes, and non-tax revenues. One of the nations where taxes are the main source of income is Indonesia. The table below, which displays the Indonesian state’s revenue sources.

The data shown above illustrates how substantially the state of Indonesia depends on tax income. The state budget will be significantly impacted if tax revenue declines. In order to raise more money through taxes, the government keeps examining regulations. The more onerous the nation's tax laws have become the more likely it is that taxpayers will find ways to minimize their tax obligations. This is due to the fact that taxpayers still view taxes as a burden. Bothcorporate andindividual taxpayers are considered taxpayers. In Indonesia, corporations are among the biggest taxpayers. Although businesses operating in Indonesia have to comply with local laws, they also have interests beyond paying taxes, such as enhancing shareholder welfare. There will undoubtedly be disagreements between the government and the company as a consequence. Companies that receive funding from investors typically act to represent the interests of investors, increasing their welfare. One way is through engaging in tax avoidance.

Tax avoidance refers to any activity that does not violate tax laws or court cases that are used to lower the proportion of taxes paid by taking advantage of legal loopholes (Syawalina & Irmawati, 2022). Investors will undoubtedly receive a higher profit as a result of this tax avoidance. Tax laws still have gaps in them even though they have been correctly implemented. Companies frequently perform in taking advantage of these opportunities to boost earnings. The country will undoubtedly suffer from this since less money will come in from taxes. The process of determining prices for related party transactions is known as transfer pricing (PER-32). Multinational corporations frequently use transfer pricing, which involves transferring income to the nation with the lowest tax rate and expenses to the nation with the highest tax rate (Syawalina & Irmawati, 2022). The business can avoid paying a lot of taxes in this way. Based on prior research’s findings, this study attempts to investigate the impact of transfer pricing on tax evasion again.

The findings of the research (Syawalina & Irmawati, 2022)–(Panjalusman et al., 2018) demonstrate that transfer pricing affects tax avoidance. The impact on corporate tax payments increases with the magnitude of the transfer pricing action. In addition to examining how transfer pricing affects tax evasion. This study additionally examines at variables that may affect a company’s choice of employing transfer pricing. This study analyzes the use of three variables—incentive tunneling, bonus mechanisms, and debt covenant— that have the empirical potential to affect transfer pricing decisions. Controlling shareholders can participate in tunneling incentives, which involve using company assets or profits for personal gain. Companies that set outrageous amounts and have special ties to majority shareholders are the ones who carry out this tunneling incentive (Sintia, 2023). According to (Komarudin & Dewi, 2022)–(Sujana et al., 2022)pricing transfer, tunneling incentive, intangible assets and profitability The purpose of this study is to analyze the effect of good corporate governance (GCG, tunneling incentives can help companies generate greater transfer pricing decisions.

Transfer pricing decisions may be influenced by bonus mechanisms. Management receives bonuses in the situation that company profits rise significantly (S. D. Mulyani, 2020). The bonus obtained increases with the amount of profit made. Transfer pricing is one strategy for boosting profits. (S. D. Mulyani, 2020)–(Syuheri et al., 2023) indicates that the company’s transfer pricing activities may increaseasaresult of thebonusmechanism. Another factor that may have an impact on the choice for utilizing transfer pricing is debt convenant. A debt covenant is a type of agreement that prevents creditors from managerial decisions that might risk the condition of the deal (C. Djohar, 2022). Transfer pricing is used by companies that frequently violate debt agreements to improve profits and avoid violating creditor agreements (Pondrinal et al., 2023). The findings of (C. Djohar, 2022), (Pondrinal et al., 2023) demonstrate that debt convenant can enhance transfer pricing activities.

Due to the background above, researchers are eager to reexamine transfer pricing decisions are impacted by tunneling incentives, bonus mechanisms, and debt covenants, as well as how these factors relate to tax avoidance. By using variables that have been used in the past research, the 2-stage regression method as the novelty to this research. The question being examined in this study is to determine if debt covenants, bonus mechanism, and tunneling incentives affect the decision to use transfer pricing, as well as how transfer pricing affects tax avoidance. Tax regulators can use the information from this study to inform the creation of tax policies.

Multinational manufacturing companies listed on the Indonesia Stock Exchange within 2019 to 2021 included the research sample used in this study. Purposive sampling was used to choose the sample based on a number of considerations, such as foreign ownership of at least 20%, financial reports ending on December 31, ETR between 0-1 and multinational manufacturing companies listed on the Indonesian stock exchange during the research period. A total of 12 companies fit the requirements to serve as research samples. 2-Stage regression is used to test the hypothesis. The research model can be described as follows:

TP = b0 + b1 TI + b2 BM + b3 Debt + e TA = b0 + b1 TP

TP = Transfer Pricing

TI = Tunneling Incentive BM = Bonus Mechanism Debt = Debt Convenant TA = Tax Avoidance

Table below show definition operation of each variable

The following are descriptive statistical results and hypothesis testing results

The descriptive table above shows that the average foreign ownership of multinational companies in Indonesia is 51%, which shows that the controllers of multinational companies in Indonesia are foreign companies. and the average tax rate imposed on companies in Indonesia is 24%.

Tunneling incentives have an effect on transfer pricing decisions, according to hypothesis testing results, with a significance value of 0.0421 and a coefficient value of 0.4592. This demonstrates how transfer pricing activities can rise when tunneling incentives are measured based on foreign ownership.This is because corporate controllers want to shift profits to countries with lower tax rates in order to increase profits. Naturally, this will have a negative impact on the nation in which the business is located. These findings are according to (Syuheri et al., 2023), (I. Nurhayati, 2022), (E. Mustikasari, 2018). It argues that transfer pricing decisions will increase as a result of tunneling incentives. Transfer pricing decisions are not influenced by the bonus mechanism as well as debt covenant variables.

Transfer pricing has no effect on tax avoidance, according to the results of the second test. This demonstrates that transfer pricing is not yet a popular strategy for tax evasion in Indonesia. In Indonesia, very strict tax laws prevent this transfer pricing from leading to a large amount of tax avoidance. In addition, the volume of transactions with related parties is still small when compared to transactions with third parties, which account for 17% of the total. These findings have been proven by (Hartono et al., 2022),(Panjalusman et al., 2018), (H. F. A. T. Lasar, 2023)

The objective of this research is to obtain evidence of how debt covenants, bonus mechanism, and tunneling incentives affect transfer pricing decisions and how it affect tax avoidance. Tunneling incentives are found to have an impact on transfer pricing actions, according to research conducted with a sample of 12 multinational companies that are listed on the Indonesian stock exchange. This is because the transfer pricing can be done because the controlling company is a foreign entity that owns businesses in multiple nations. Meanwhile, transfer pricing decisions are unaffected by debt covenants and bonus systems. Furthermore highlighting that transfer pricing has no impact on tax avoidance. This study only considers a few variables that may affect transfer pricing, and it only looks at transfer pricing as a potential source of tax avoidance. Since only multinational corporations were included in the sample, it cannot be applied to all businesses. For further research, we can add other factors that can influence transfer pricing and can use other schemes in determining factors that cause tax avoidance. The research sample can be supplemented with other sectors so that it can be generalized to all company sectors