ESG disclosure, governance, political connection, and tax Aggressiveness: what information is critical, and is more information always forceful?

Asmoro, Priandhita Sukowidyanti et al. Article ESG disclosure, governance, political connection, and tax Aggressiveness: what information is critical, and is more information always forceful? Cogent Business & Management Provided in Cooperation with: Taylor & Francis Group Suggested Citation: Asmoro, Priandhita Sukowidyanti et al. (2024) : ESG disclosure, governance, political connection, and tax Aggressiveness: what information is critical, and is more information always forceful?, Cogent Business & Management, ISSN 2331-1975, Taylor & Francis, Abingdon, Vol. 11, Iss. 1, pp. 1-21, https://doi.org/10.1080/23311975.2024.2435600 This Version is available at: https://hdl.handle.net/10419/326730 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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Priandhita Sukowidyanti Asmoro, Suresh Ramakrishnan, Sifa Arsyanda, Nurlita Sukma Alfandia, Devi Nur Cahaya Ningsih, Dewi Noor Fatikhah Rokhimakhumullah & Kadarisman Hidayat To cite this article: Priandhita Sukowidyanti Asmoro, Suresh Ramakrishnan, Sifa Arsyanda, Nurlita Sukma Alfandia, Devi Nur Cahaya Ningsih, Dewi Noor Fatikhah Rokhimakhumullah & Kadarisman Hidayat (2024) ESG disclosure, governance, political connection, and tax Aggressiveness: what information is critical, and is more information always forceful?, Cogent Business & Management, 11:1, 2435600, DOI: 10.1080/23311975.2024.2435600 To link to this article: https://doi.org/10.1080/23311975.2024.2435600 © 2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group Published online: 04 Dec 2024. Submit your article to this journal Article views: 2228 View related articles View Crossmark data Citing articles: 1 View citing articles Full Terms & Conditions of access and use can be found at https://www.tandfonline.com/action/journalInformation?journalCode=oabm20 Accounting, corporAte governAnce & Business ethics | reseArch Article Cogent Business & ManageMent 2024, VoL. 11, no. 1, 2435600 ESG disclosure, governance, political connection, and tax Aggressiveness: what information is critical, and is more information always forceful? priandhita sukowidyanti Asmoroa , suresh ramakrishnanb, sifa Arsyandaa, nurlita sukma Alfandiaa , Devi nur cahaya ningsiha, Dewi noor Fatikhah rokhimakhumullaha and Kadarisman hidayata ataxation study Program, Faculty of administrative science, universitas Brawijaya, Malang, indonesia; bDepartment of accounting and Finance, Faculty of Management, universiti teknologi, Johor, Malaysia ABSTRACT this research examines the complex relationships among esg (environmental, social, and governance) disclosure, corporate governance, political affiliations, and tax aggressiveness (tAg) in basic materials and energy sector companies listed on the indonesia and Malaysian stock exchanges. By focusing on expanding specific information essential to esg disclosure, as outlined in the gri standards, the study aims to evaluate its effectiveness in mitigating tAg. employing a quantitative approach, the research addresses gaps in previous studies by using hierarchical regression to systematically evaluate the incremental impact of each predictor on tAg, offering deeper insights beyond the general effects captured by linear regression. the study’s findings indicate that no combination of variables is universally effective in mitigating tAg across indonesian and Malaysian corporations. Furthermore, the research highlights the nuanced nature of information disclosure, demonstrating that not all disclosed information is equally significant in curbing tAg. While not confirming legitimacy theory, the study identifies the gri 2018 and gri 2019 standards as containing crucial information for indonesian companies to mitigate tax tAg. A key contribution lies in pinpointing tax‑related disclosures within the gri 2019 framework as critical influencers, advancing the understanding of how esg practices impact tax aggressiveness. 1. Introduction taxes are a driving force behind many business decisions (Fuadah & Kalsum, 2021). the global corporate landscape is beginning to include more and more managerial practices that are exclusively focused on minimizing corporate taxes through tAg activities. nevertheless, aggressive corporate taxation can result in both substantial costs and benefits. taxpaying contributes positively to societal welfare. conversely, tAg is socially irresponsible because reducing tax revenue results in a potentially irreversible loss to the community. tAg can exacerbate social inequality (Baudot et al., 2020) and become a socially irresponsi‑ ble practice (Zeng, 2016). tAg negatively impacts the company’s reputation and image, costs of audits to detect fraud, loss of legitimacy, and other factors (Baudot et al., 2020; lanis & richardson, 2018; raithatha & shaw, 2022). A company’s reputation and legitimacy can be enhanced by implementing various planned initiatives to improve its operations, such as sustainability reports and being portrayed as ‘good business’. sustainability reports legitimize the negative aspects of the organization while highlighting its positive accomplish‑ ments (harmadji et al., 2018). under the legitimacy theory, the sustenance of a company relies on the endorsement it receives from the surrounding society and environment. A viable method for garnering © 2024 the author(s). Published by informa uK Limited, trading as taylor & Francis group CONTACT Priandhita sukowidyanti asmoro [email protected] taxation study Program, Faculty of administrative science, universitas Brawijaya, Malang, indonesia. https://doi.org/10.1080/23311975.2024.2435600 this is an open access article distributed under the terms of the Creative Commons attribution License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. the terms on which this article has been published allow the posting of the accepted Manuscript in a repository by the author(s) or with their consent. ARTICLE HISTORY received 21 December 2023 revised 10 september 2024 Accepted 23 november 2024 KEYWORDS esg disclosure; political connection; governance; tax aggressiveness; global reporting initiative; hierarchical regression SUBJECTS environment & Business; Business, Management and Accounting; corporate social responsibility & Business ethics; corporate governance; corporate social responsibility 2 p. s. AsMoro etAl. this legitimacy is through adopting and transparent disclosure of environmental, social, and governance (esg). numerous researchers have examined the impact of information disclosure, both mandatory and vol‑ untary, on a variety of tax behaviours, including tax avoidance (Kovermann & velte, 2021), tax evasion (Montenegro, 2021), tAg (Kurniawati, 2019; sari & tjen, 2016), but all of these are intertwined with csr practices. the research findings by park etal. (2023), employing text mining techniques, indicate that the domains of csr and esg possess differing scopes and scales, highlighting the necessity for a new frame‑ work not only to present the meanings and definitions of csr and esg but also to elucidate the con‑ ceptual relationship between csr and esg. esg refers to corporate activities related to environmental, social, and governance aspects as a form of responsibility and obligation to provide sustainable and long‑term wealth and stakeholder social welfare (Mohammad & Wasiuzzaman, 2021). in contrast, csr focuses on the philanthropic obligations of the company, ethics, law, and economics as summarised in the csr pyramid model (carroll, 1999). there has been a surge in the expectations of responsible investors and stakeholders regarding the provision of sustainability‑related disclosures in recent times. the literature suggests an ongoing trend in esg initiatives (Beck etal., 2018; Fijałkowska etal., 2018; hang etal., 2019). Both investors and businesses want to be socially conscious, which aligns with the corporate social responsibilities (csr) trend that has emerged in recent decades. As a result, sustainable investment has grown in popularity. Future‑oriented investors significantly believe that non‑financial information, such as esg issues, is needed to construct a sustainable global economy (Jitmaneeroj, 2016). indonesia is no exception to this trend. the phenomenon of disclosing esg information is fundamen‑ tal to a company’s comprehensive sustainability strategy and reporting framework in the contemporary landscape. the law no. 19/2003 for state‑owned companies and the law no. 40/2007 (the law no 40 on indonesian corporation and its explanation, n.d.; the law no. 19 on state‑owned and its explanations, 2003) for foreign companies that operate in indonesia are two regulations that the indonesian govern‑ ment has issued in response to the demand for the international or global trend. Furthermore, the reg‑ ulatory framework introduced through Financial service Authority (oJK) regulation no. 51/2017 by the oJK underscores the imperative for indonesian companies to disseminate sustainability reports, affording a preparatory grace period of two years. the pivotal shift in compliance dynamics has compelled the indonesian general banking sector and foreign banks engaged in operations within indonesia to initiate the publication of sustainability reports by the culmination of December 2019. notably, the ambit of sustainability reporting requirements is poised to extend to additional sectors, with their implementation slated to commence in the year 2020. similar to indonesia, Malaysia initially embraced voluntary reporting as a means to heighten corporate awareness regarding the imperative integration of social responsibility to enhance value. the govern‑ ment actively participated in initiatives aimed at shaping a comprehensive business environment, with a particular focus on social responsibility. this involvement led to the revision of guidelines, fostering a more stringent recognition of the importance of sustainability in business operations (Bursa Malaysia, 2022). Bursa Malaysia has mandated social liability information by merging the annual reports listed companies publish (carrot & sticks, 2021). previous research often utilizes the global reporting initiative (gri) for analyzing esg disclosure prac‑ tices due to its internationally recognized framework that provides a standardized methodology for reporting sustainability information (holle etal., 2021; ismail et al., 2021; rudyanto, 2024). gri standards offer comprehensive indicators covering esg aspects, enabling a systematic and comparable assessment of disclosure practices across diverse organizations and regions. in the context of differing esg disclosure guidelines in Malaysia and indonesia, the use of gri provides a common ground for comparison. Despite the variations in national regulations, the gri framework offers a standardized set of metrics, allowing researchers to assess esg disclosure practices consistently. in addition, researchers can bridge the gap between the unique governance guidelines of each country, ensuring a more reliable and meaningful comparative analysis. the gri introduced its inaugural set of guidelines in 2000, marking the inception of the first compre‑ hensive global framework for corporate sustainability (cs) reporting with a specific emphasis on environ‑ mental concerns (gri, 2022). subsequent guidelines, including gri g1 (2000), gri g2 (2002), gri g3 cogent Business & MAnAgeMent 3 (2006), gri g3.1 (2011), and gri g4 (2013), were developed to address ethical, social, and economic aspects. in 2016, gri made a transition from offering guidelines to establishing the initial set of first global standards for sustainability reporting, known as the gri standards, where all the key ideas from the previous guidelines were included (carungu et al., 2021). they also had a more flexible structure, more precise requirements, and simpler language. these standards are continually updated and extended, including new topic standards on Water and effluents, occupational health and safety (2018), tax (2019) and Waste (2020). even though the use of gri is still voluntary in indonesia, a survey conducted in 2022 found that 80% of companies were using the standards for their sustainability reports. similar to Malaysia, gri remains the most dominant standard used in Malaysia; almost 95% of companies use this standard. however, whether the company requires extended information as an information provider or stake‑ holders is still debatable. on the one hand, Winter and Zülch (2019) argued that over‑disclosure and repetition create ambiguity among financial reporting addressees. Also, goette and han (2020) experi‑ ments showed that information overload leads to confirmation bias. on the other hand, the us government Accountability office 2019 stated that companies typically report on a wide range of esg issues, however, a lack of consistency and detail can make the information less useful and damage a company’s reputation. considering the debate surrounding the adequacy and scope of information, this research also examines whether all relevant information is required and can prevent tAg or whether esg disclosure requires only a subset of relevant information disclosure. this study also aims to investigate the degree to which esg information is disclosed and what specific extended information is required to alleviate corporation tAg by assessing the presence of political connections and corporate governance (cg) practices. indonesia and Malaysia exhibit substantial similarities that make them valuable for comparative anal‑ ysis in this study. As observed by lu and Batten (2023), the corporate governance cultures of the two countries are notably alike. nevertheless, despite these substantial similarities, they have each developed unique corporate law frameworks. this divergence arises not from their legal origins but rather from political choices, such as whether to adopt or dismiss key corporate governance elements highlighted by the organisation for economic co‑operation and Development (oecD) (sheehy et al., 2021). A significant question arises as to whether the trend of esg information disclosure by publicly traded companies enhances tax compliance in indonesia and Malaysia, given the relatively recent implementa‑ tion of policies in both nations mandating esg disclosure. Moreover, indonesia (10.1) and Malaysia (11.4) have tax ratios below the Asia‑pacific average, which has already reached 19% (oecD, 2022). these fig‑ ures still do not indicate a significant increase in 2023, where Malaysia has a tax ratio of 11.8 and indonesia 10.9 (oecD, 2023). rosid etal. (2018) revealed that a low tax ratio indicates a high level of tax non‑compliance. therefore, good governance is essential for overseeing the operations of companies to make sure they run lawfully and ethically, including when it comes to tAg (rohyati & suripto, 2021). Within the frame‑ work of corporate tax behaviour, governance mechanisms are instrumental in guiding and supervising managerial behaviour. the board of directors, entrusted with performance enhancement, resource allo‑ cation, and the maximization of shareholder wealth, plays a pivotal role in determining the approach to tax management. consequently, companies with distinct governance structures may implement different strategies for tax management. Duong and pallasch (2021) state that female ceos are less likely to engage in tAg. this viewpoint is corroborated by Jarboui et al. (2020), who discovered a negative cor‑ relation between the number of female board members and tax avoidance. hoseini et al. (2019) found that having female board members diminishes tax avoidance activities. in the realm of cg, examining ceo duality is also deemed imperative within the context of this research. the empirical examination by Aburajab et al. (2019) revealed a positive correlation between board duality and tAg. the extent of tAg is contingent on the size of the board. in the institutional contexts of emerging economies like indonesia and Malaysia, political connections pose a significant challenge to the integrity of their capital markets (Abdul Wahab et al., 2017). Due to the relationship‑based economy in Asia (rajan & Zingales, 2009), political connections have become prev‑ alent in indonesia and Malaysia. Faccio et al. (2006) identified indonesia (27) and Malaysia (81) as having the highest number of politically connected firms in southeast Asia. According to Kim and Zhang (2016), firms with political connections tend to be more tAg, which can be attributed to increased risk‑taking. 4 p. s. AsMoro etAl. political connections can provide firms numerous benefits, including tax breaks (lin et al., 2018). As a result, firms may be more willing to take on risky projects if they believe they can rely on government assistance. political connections can protect firms from penalties and encourage risky behaviour. this research utilises data from basic materials and energy firms listed on the indonesia stock exchange and Malaysian stock exchange. these sectors are among the industries that regularly participate in tAg. tAg is common in the energy business because of the plentiful natural resources and the substantial prof‑ its that may be generated from operations (sulistiyanti & saputra, 2020). According to the previous study, profitable businesses frequently engage in tAg to reduce their tax burden (hasyim & Jiwayana, 2021) because a company’s high profitability ratio appeals to investors and shareholders (Marsahala et al., 2020). thus, based on this background, the research questions of this study are as follows: 1. if political connections and governance are not considered, which extension of esg disclosure based on gri standards effectively mitigates tAg in publicly listed basic materials and energy firms in indonesia and Malaysia? 2. When either political connections or governance, or both, are present in publicly listed basic mate‑ rials and energy firms in indonesia and Malaysia, which aspect of esg disclosure expansion accord‑ ing to gri standards effectively mitigates tAg? hierarchical regression analysis is used to answer the research questions. the primary concern of using this method is to control for potential confounding variables by entering them in earlier steps of the regres‑ sion equation before adding the variables of primary interest. this helps to isolate the unique contribution of each predictor variables which in this study are esg disclosure, political connection, and governance. some of these studies use linear regression to examine the effect of esg disclosure towards tAg (Fonseca, 2020; Jarboui et al., 2020; Yoon et al., 2021). this is not the most effective approach for this study because the objective of regression is only to understand the overall relationship between inde‑ pendent and dependent variables or even path analysis where to analyze the direct or indirect effects between variables. Meanwhile, the central concept of this study is to determine whether esg disclosure necessitates the full disclosure of information required, as determined on a series of gris, or just a por‑ tion of the disclosure of pertinent information along with other predictor variables. hierarchical regres‑ sion analysis is the best approach to examine whether the addition of certain independent variables improves the prediction of the dependent variable beyond what has been calculated by other indepen‑ dent variables which is therefore, this method allows researchers to test the theoretical models by sys‑ tematically entering variables in a predetermined sequence (Doz et al., 2023). By examining changes in the amount of variance explained by adding each set of variables, it can be determined whether each set contributes unique predictive power beyond what is accounted for by previous sets. this research contributes to the existing body of literature in several ways. initially, it offers a novel perspective by employing hierarchical regression Analysis to investigate how each stage of information expansion in the standard gri can effectively mitigate tAg. notably, scholars in this field have not pre‑ viously employed this analytical approach. Additionally, this study stands out as the first of its kind to shed light on the specific information essential in esg disclosure to reduce corporate tAg, examining the roles of political connections and the effectiveness of cg practices. lastly, the research provides valuable insights for tax policy makers, offering an assessment of the extent to which esg information mandated by gri standards can play a role in alleviating tAg. 2. Literature review and hypothesis development 2.1. ESG disclosure and tax aggressiveness sustainability report disclosures show that firms are being run morally. legitimacy theory clarifies corpo‑ rate responsibility to stakeholders to preserve firms’ viability (natalia et al., 2021). however, companies’ participation in csr initiatives, which are further detailed in the sustainability report, is more than just following the law; they also fulfill an appropriate ethical duty (rudyanto & pirzada, 2021). companies cogent Business & MAnAgeMent 5 publish sustainability reports to influence (or even manipulate) stakeholder perceptions of their brand, performance, and impact (Bini & Bellucci, 2020; Manetti & Bellucci, 2017). since tAg is interpreted by legitimacy theory as a breach of the social compact (low tax‑paying firms are not paying their ‘fair share’), it is expected that tax‑aggressive firms will make more disclosures in an attempt to maintain or restore their legitimacy (hardeck et al., 2019; hardeck & Kirn, 2016). Based on this, a company is inclined to refrain from adopting tAg measures when it opts to partake in esg dis‑ closure initiatives. consequently, companies that divulge esg information are anticipated to exercise heightened prudence when contemplating tAg strategies. such actions would contradict other esg com‑ mitments and could potentially compromise the positive impacts the company seeks to achieve. socially conscious businesses are less inclined to manipulate profits to avoid paying taxes since the public perceives tAg as costly to society and irresponsible. tAg may generate unfavorable feelings due to things like the leaving of firm management staff, political pressure, possible fines, and boycotts by customers (chen et al., 2019). As a result, companies with better esg scores are less likely to engage in tAg, which endangers the public. Moreover, it is often not regarded as ethically unacceptable for a cor‑ poration to engage in tAg or not pay a ‘fair share’ of corporate income tax towards government funding of public goods in society (payne & raiborn, 2018). this shortfall in corporate income tax revenue can lead to negative consequences, including damage to the company’s reputation among stakeholders and in extreme cases, may even result in the cessation of its operations (guenther et al., 2013). the conse‑ quences of tAg include a large and possibly permanent loss to society (Kristiadi et al., 2020). nevertheless, theories grounded in economics acknowledge that disclosures entail costs associated with proprietary information, and that disclosure will only take place insofar as the advantages of trans‑ parency outweigh these expenses. As will be covered in more detail below, aggressive firms’ tax disclo‑ sures may result in costs from government agencies through enforcement and stakeholder pressure (such as employee or customer boycotts). in addition, company competitors may gain knowledge about supply chains and other lucrative tactics from certain tax disclosures (such as country‑by‑country report‑ ing). liquidity theory and existing literature indicate that tax‑aggressive firms will disclose more despite the general consensus from economics‑based theories that they will bear higher costs and disclose less. According to laguir etal. (2015), csr activities with a higher social dimension result in lower tAg, while those with a higher economic dimension result in higher tAg. Karthikeyan and Jain (2017), lanis and richardson (2015), and hoi et al. (2013) also found a negative correlation between csr and tAg. Additionally, this research underscores the significant role of gri standards in guiding optimal practices in sustainability reporting, including the proactive management of change. the gri standards index was chosen for the assessment because it is an internationally applicable standard in indonesia and Malaysia. in indonesia, the application of gri is still entirely voluntary. companies can submit general financial reports or add more reports covering environmental and finan‑ cial issues. however, predicated on the thomson reuters database system, 80% of indonesian companies surveyed in 2022 reported using the gri standards for their sustainability reporting. the most recent gri standard in use today is the gri standards 2021. these standards are updated frequently to make sure they apply to current circumstances. in the context of sustainability reports and csr, the gri standards help organizations present relevant and inclusive data about material topics, business impacts on social, economic, and environmental aspects, and how these impacts will be addressed. the gri standard stip‑ ulates a specific effective date for its application, allowing companies or organizational entities to present disclosures related to the required aspects before this period. however, it mandates that the standard must be applied in its entirety during the publication period of the effective date. As elucidated by leitoniene and sapkauskiene (2015), the quality of sustainability reporting is contingent on the compre‑ hensiveness and depth of the information provided. rudyanto and pirzada (2021) assert that sustainable reporting with comprehensive options positively influences companies. gri mandates the disclosure of specific information including (1) gri 1 Foundation, (2) gri 2 general Disclosure, (3) Material impacts, (4) procurement practices, (5) Anti‑corruption, 6) Anti‑competitive Behavior, (7) tax, (8) Materials, (9) energy, (10) Water and effluents, (11) Biodiversity, (12) emissions, (13) Waste, (14) supplier environmental Assessment, (15) employment, (16) labor or Management relations, (17) occupational health and safety, (18) training and education, (19) Diversity and equal opportunity, (20) non‑Discrimination, (21) Freedom of Association and collect, (22) child labor, (23) Forced or 6 p. s. AsMoro etAl. compulsory labor, (24) security practices, (25) rights of indigenous people, (26) local community, (27) supplier social Assessment, (28) public policy, (29) customer health and safety, (30) Marketing and labelling, (31) customer privacy. gri developed these mandatory disclosure standards in stages, namely in 2016, 2018, 2019, and 2020. gri 2016 mandates submitting 27 core information disclosures with 59 sub‑core information disclo‑ sures. Afterward, the 2018 gri included two more core information disclosures: occupational health and safety and water and effluents, with 16 sub‑core information disclosures. in addition, the 2019 gri has four sub‑core disclosures related to taxes, whereas the 2020 gri contains five sub‑core disclosures related to waste. the significance of this revision to the universal standards lies in its potential to affect all organizations that utilize the gri standards, thereby facilitating companies’ ability to more effectively disclose their most notable impacts on the environment, people, and economy (carungu et al., 2021). however, Winter and Zülch (2019) argued that over‑disclosure and repetition create ambiguity among financial reporting addressees. since not all material issues are equally importance, it is expected that the priorities listed in the report will take this into account. H1: esg disclosure based on gri standards, either singly or in combination, can mitigate tAg by indonesian and Malaysian corporations. 2.2. ESG disclosure, political connection, and tax aggressiveness Businesses with political affiliations are more likely to engage in tax‑aggressive behavior, as indicated by Kim and Zhang (2016). Abdul Wahab et al. (2017) observed that firms with political connections tend to have lower effective tax rates (etr) than their non‑connected counterparts. Furthermore, the conclusions drawn by Kim and Zhang (2016) suggest that politically connected companies in the united states demonstrate increased tAg due to factors such as enhanced knowledge of tax regulations and enforce‑ ment, reduced risk of detection, decreased political costs associated with tAg, diminished pressure from the capital market for transparency, and an elevated propensity for risk‑taking. Abdul Wahab etal. (2017) argue that policies overlapping between the public and private spheres of political connections incentiv‑ ize favorable treatment towards connected companies, including corporate tax relief and potential tax‑free bailouts. in this context, the legitimacy theory posits that corporations seek to align their actions with societal norms and expectations to maintain their legitimacy. political connections can provide implicit support, reducing the perceived need for such alignment thereby facilitating tax‑aggressive behaviors. however, when these companies disclose esg information based on gri standards, they may be attempting to legitimize their operations by demonstrating transparency and accountability, thus mit‑ igating the negative perceptions associated with tAg. research conducted on the international landscape by Ajili and Khlif (2020) and Kim and Zhang (2016) has revealed a positive correlation between political connections and corporate tax avoidance. simultaneously, several studies have illustrated that political affiliations have a beneficial impact on cor‑ porate tax evasion strategies (sudibyo & Jianfu, 2016). east Asian nations employ a relationship‑based system that establishes direct, autonomous connections among the government, banks, politicians, and stakeholders (taghizadeh‑hesary et al., 2019). considering the systems employed in indonesia and Malaysia, it is logical to infer that businesses with political connections are inclined to exhibit greater tAg than those without such connections. From the legitimacy perspective, companies are motivated to maintain or regain legitimacy, especially when their political connections expose them to public scrutiny. By adhering to esg disclosures, these companies can signal their commitment to broader societal values, thereby reducing the legitimacy gap created by their tAg practices. H2: esg disclosure based on gri standards, in conjunction with political connections, can mitigate tAg by indonesian and Malaysian corporations. 2.3. ESG disclosure, governance, and tax aggressiveness Mitigating the impact of agency‑related issues in the implementation of tAg heavily relies on effective governance. A company is presumed to possess a robust governance system when it adheres to cogent Business & MAnAgeMent 7 disclosure and transparency protocols. this encompasses fulfilling tax obligations guided by the cultural principles ingrained in the governance system’s execution. From the legitimacy theory perspective, cor‑ porations engage in esg disclosures and adopt governance practices to align their actions with societal expectations and norms. such alignment helps them to gain and maintain legitimacy in the eyes of stakeholders, including regulators, investors, and the general public. consequently, weak cg is perceived to exploit the management’s oversight vulnerabilities, leading to deviations. When companies fail to meet these societal expectations, their legitimacy may be threatened, resulting in increased scrutiny and potential penalties. thus, adherence to esg disclosures and strong governance practices serves not only as a compliance measure but also as a strategic approach to preserving legitimacy. it is anticipated that the management or authority will undertake measures that foster improved performance and compli‑ ance or, conversely, instigate variations in adopting tAg practices (ramdhani et al., 2021). this approach promotes opportunistic behavior centered on maximizing short‑term profits. concerning cg, Jamei (2017) found in previous studies on gender diversity within boards of directors that boards with women tend to exhibit less risk‑taking behaviour, particularly in preparing the compa‑ ny’s financial statements. examining the influence of women on boards on tAg, Francis et al. (2014) discovered that female chief Financial officers, due to their risk‑averse nature, tended to have fewer or lower associations with tAg. Furthermore, Abdul Wahab et al. (2017) research indicated that the likeli‑ hood of accounting fraud increases with larger board sizes. similarly, pratama and pratiwi (2022) demon‑ strated that smaller boards outperform larger boards, leading to the inference that a larger board of directors may elevate the likelihood of aggressive corporate taxation. in this context, legitimacy theory suggests that diverse and smaller boards may be more attuned to societal expectations, reducing the likelihood of tax aggressiveness to maintain legitimacy. the concept of ceo duality, encompassing a lack of transparency and prioritization of personal interests over external shareholders’ interests when acquir‑ ing more authority, is also significant. Aburajab etal. (2019) empirically investigated the impact of board director characteristics, such as board duality, on tAg. their findings revealed a positive correlation between ceo duality and tAg. Without regulatory controls over the decision‑making process, duality may contribute to increased corruption and the adoption of fraudulent methods. however, from the legitimacy theory perspective, excessive concentration of power, as seen in ceo duality, may undermine a company’s legitimacy, as stakeholders may perceive this as a deviation from acceptable governance practices. consequently, companies may face a legitimacy crisis, prompting them to adopt more aggres‑ sive tax strategies to compensate for the loss of stakeholder trust. H3: esg disclosure based on gri standards, when combined with governance practices, can mitigate tAg by indonesian and Malaysian corporations. 2.4. ESG disclosure, political connection, governance, and tax aggressiveness political connections can serve as a means for firms to influence tax policies and regulations in their favor. companies with strong political ties may lobby for favorable tax treatment or exemptions, enabling them to lower their tax burden through legal channels. however, the relationship between political con‑ nections and tAg can be complex. From the perspective of legitimacy theory, the public scrutiny that accompanies strong political ties can compel firms to adopt more transparent and responsible tax prac‑ tices, as failure to do so could result in a legitimacy gap, wherein the firm’s actions deviate from societal expectations (lindblom, 1994). While political ties may provide opportunities for tax minimization, they can also attract public scrutiny and criticism, particularly if perceived as exploiting loopholes or receiving preferential treatment. in such cases, firms may face reputational risks that outweigh the potential tax benefits, leading them to adopt more conservative tax strategies. thus, companies may engage in esg disclosures as a strategy to close the legitimacy gap and mitigate reputational risks, thereby aligning their tax strategies with societal expectations (suchman, 1995). Moreover, the influence of gcg practices on tAg adds another layer of complexity to this dynamic. strong gcg frameworks promote ethical conduct, accountability, and integrity within organizations. companies with robust governance structures are more likely to prioritize compliance with tax laws and regulations, reducing the likelihood of engaging in tAg schemes. Additionally, effective gcg mechanisms 14 p. s. AsMoro etAl. etal., 2018; liesen etal., 2017). Drawing from raiborn etal. (2011), companies will disclose any expenses associated with managing environmental impacts to ensure legitimacy. this serves the dual purpose of heightening public interest and ensuring transparency. this substantiates the essential role of the 2018 gri (gri 303: Water and effluents; gri 403: occupational health and safety) in addressing tAg. unfortunately, in the case of indonesian companies, the addition of esg information is used as a tool to deceive stakeholders about unethical tax practices. this is what drives the addition of information based on gri 2020 to be irrelevant in stages 4 through 7. this fact indicates the presence of trade‑offs between two crucial aspects of csr: corporate tax behavior and environmental performance disclosure (Fallan & Fallan, 2019). corporations can strategically mitigate legitimacy risks associated with what some key stakeholders perceive as poor corporate tax behavior or environmental performance by prioritizing their perceptions of desirable or successful performance in the other csr element (Dowling, 2014). generally, tax information disclosure has been proven to control tAg practices in this research, both with or without the presence of political connection and governance factors together. there are several analyses of why the gri 2019 significantly impacts tAg and could mitigate tAg compared to other vari‑ ables. According to Khan et al. (2017), corporate tax payments indicate costs that lower a company’s available resources and after‑tax earnings, so investors may find this helpful information when making decisions about it. According to Desai and Dharmapala (2009) and goh et al. (2016), investors should respond favorably to corporate tax avoidance because they are interested in large (distributable) after‑tax profits. investors also account for the expenses associated with tAg. this could involve direct costs asso‑ ciated with resolving tax authorities’ disputes or indirect costs resulting from adverse effects on one’s reputation (Abdelfattah & Aboud, 2020; graham et al., 2014), unfavorable responses from customers (Antonetti & Anesa, 2017; hardeck etal., 2021), or political backlash (hoopes etal., 2018). göttsche et al. (2024) said that compared to the information on potential tax haven usage obtained from the cbcr, the specific information on tax haven usage—as mandated by the gri 207: 2019—gives investors a far clearer signal regarding the corporate tax strategy. this could be particularly effective in influencing cor‑ porate behavior toward reducing tAg. however, if information is not carefully sorted, stakeholders may adopt misguided policies. this study indicates that in the context of indonesian companies, political connections have a more dominant influence than cg in supporting the role of tax information disclosure in curbing tAg prac‑ tices. Despite the presence of good governance regulations and guidelines, their implementation is fre‑ quently hindered by inadequate law enforcement and a low compliance culture. When tested independently or in conjunction with political connections (as in stages 6 and 7), corporate governance does not show a significant impact on eliminating tAg or enhancing the role of tax information disclo‑ sure. Furthermore, only the size of the board affects tAg in the sixth step (p = 0.006 < 0.1), when gover‑ nance components are included in the model. superficially, larger enterprises appear to be invested in maintaining a positive reputation and, as a result, are less inclined to engage in tAg practices. this observation aligns with previous research indicating a direct correlation between board size and tAg (sari & tjen, 2016). however, the positive direction of influence provides a different explanation in this study. A larger board size typically implies a greater diversity of perspectives and expertise, which could theoretically enhance oversight and governance effectiveness. however, in practice, a larger board may also lead to challenges in decision‑making, communication, and coordination, potentially resulting in inefficiencies or inconsistencies in tax management strategies. Additionally, a larger board may signify a more complex organizational structure, which could provide opportunities for aggressive tax planning or oversight lapses. the legal system in indonesia is often perceived as weak in enforcing rules and regulations, allowing companies with political connections to exploit legal loopholes and receive preferential treatment (habib et al., 2017). this undermines the effectiveness of corporate governance in controlling tAg practices. Additionally, oversight mechanisms in indonesia, whether from the government or independent institu‑ tions, still face numerous limitations. Without the support of political connections that can provide addi‑ tional access and information, corporate governance may struggle to conduct effective oversight. Furthermore, the business culture in indonesia is heavily influenced by political connections and net‑ works (nasih et al., 2020), where companies frequently rely more on political relationships to gain com‑ petitive advantages and protection rather than on good governance practices. transparency and cogent Business & MAnAgeMent 15 accountability in business practices in indonesia also remain significant challenges. Without the backing of political connections, corporate efforts to implement good governance and avoid tax avoidance through tax information disclosure may not be robust due to a lack of incentives and external support to comply with existing regulations. this situation leads to the extent of tax information disclosure (gri 207) being insignificant at stage 6, but regaining influence in eliminating tax avoidance when political connections are included in the model. government officials or influential politicians may have personal or political interests in supporting certain companies, creating an environment where companies can be more aggressive in planning their tax strategies. however, based on legitimacy theory, these companies must consider public and social perceptions of their actions (crossley etal., 2021). this theory posits that companies must operate within the accepted norms and values of society to maintain their sustainability and reputation. therefore, despite incentives for tax avoidance, companies may feel compelled to disclose broader tax information as a form of transparency and accountability to the public. such disclosure helps reduce suspicion and criticism of their actions and enhances trust and legitimacy in the eyes of society (Bachmann & ingenhoff, 2016). political connections are like a double‑edged sword. on one hand, they can offer temporary pro‑ tection from external pressures; on the other hand, if unethical practices are exposed, these connections can become liabilities, increasing the negative impact on the company’s reputation and triggering strong reactions from the public and media. consequently, companies with political connections may be more motivated to comply with prevailing social and legal norms by transparently disclosing tax information to avoid political costs that could damage their relationships with stakeholders (Mgammal & Ku ismail, 2015). 6. Conclusion the study’s overall findings suggest that no combination of variables can mitigate tAg in both indonesian and Malaysian corporations. however, this study highlights the importance of gri 2018 and gri 2019 for indonesian companies in managing tAg. the disclosure pattern in indonesia underscores the pivotal role of tax disclosure in preventing tAg. the introduction of gri 2019 brought about a notable change. specifically, gri 2019 disclosure, particularly in the context of tax‑related indicators outlined in gri 207, emerged as a significant predictor of tAg. this underscores the importance of comprehensive and trans‑ parent reporting frameworks, such as gri 2019, in addressing tax‑related concerns and promoting responsible corporate behavior. Furthermore, the findings show that the effectiveness of esg disclosure in mitigating tAg varies depending on the specificity and clarity of reporting standards. While gri 2019 stands out for its strin‑ gent requirements regarding tax‑related disclosures, incorporating tax indicators from gri 2018 alongside gri 2019 can enhance the overall effectiveness of esg disclosure in addressing tAg. Additionally, the analysis highlights the role of political connections in influencing tAg, particularly in the indonesian context. companies with political affiliations may adopt more assertive tax strategies to maintain favor‑ able relationships with the government despite potential reputational risks. however, it is crucial to note that the impact of political connections on tAg may vary based on contextual factors and regulatory frameworks. on the other hand, the analysis of hierarchical regression on Malaysian companies presents contrasting findings. in Malaysia, no variables, including esg disclosure and cg mechanisms, influenced tAg significantly. this underscores the need for further exploration into the unique contextual factors shaping tax‑related behaviors in Malaysia, including the role of political connections and the effective‑ ness of governance structures in mitigating tAg. Moreover, larger board sizes are associated with lower tAg in indonesian corporations. it is important to note that not each expanded disclosure of information has the same effect on diminishing tAg. in the case of Malaysian companies, the results indicate that esg disclosure, political connections, women on the board, ceo duality, and board size do not significantly affect tAg. Despite Malaysia having laws mandating esg disclosure, the level of awareness among society and companies remains low, as they do not adhere to Bursa Malaysia’s mandatory reporting regulation. the study emphasizes the need for concerted efforts among authorities to inform stakeholders about the sDgs and elevate public aware‑ ness. overall, the findings underscore the importance of transparent and comprehensive reporting 16 p. s. AsMoro etAl. frameworks, such as gri standards, in addressing tax‑related concerns and promoting responsible cor‑ porate behavior. practical implications include the need for companies to enhance their esg disclosure practices, focus‑ ing particularly on tax information to mitigate tAg risks. For regulators in both Malaysia and indonesia, there is a pressing need to tighten oversight of political connections and improve the effectiveness of governance structures. Additionally, corporate managers should prioritize robust governance practices and transparent reporting to safeguard the company’s reputation and reduce the risks associated with tAg. Additionally, further research is warranted to understand the contextual nuances shaping tax‑related behaviors in different countries and regions, facilitating the development of targeted policy interventions and corporate practices to promote tax transparency and ethical tax behavior. Moreover, examining other industries would provide a more comprehensive understanding of how esg disclosure influences tAg, given the diverse business characteristics and tax risks inherent in each industry. introducing addi‑ tional variables into the model and employing alternative analysis methods could offer distinct perspec‑ tives, thereby contributing to a more robust exploration of the research topic. this study offers a novel perspective on esg disclosure using the gri index. it accomplishes this by conducting a comparative analysis of two developing nations and employing hierarchical regression to explore whether the requirement for more extensive information disclosure leads to information bias, consequently influenc‑ ing the tax‑aggressive behaviour of basic materials and energy companies. Acknowledgments the author is grateful for the moral and financial support extended by universitas Brawijaya, which facilitates inter‑ national research and collaborative publication with universiti teknologi Malaysia. it is important to clarify that the perspectives and discoveries presented in this research solely belong to the authors and do not reflect the stance of any organization or institution. consequently, they hold no legal binding and have no substantive influence on the primary entity or funders of this research. Any errors in the study are attributed to the authors. All authors of this manuscript have met all four criteria for authorship in the icMJe recommendations. Authors’ contributions priandhita sukowidyanti Asmoro: conceptualized and designed the research, critically revised all versions of the man‑ uscript, and approved the final manuscript. suresh ramakrishnan: critical revision of all manuscript versions, research supervision. sifa Arsyanda: statistical analysis, drafting all versions of the manuscript, critical revision of all versions of the manuscript. nurlita sukma Alfandia: collecting data, analysing and interpreting data, and approving the final draft. Devi nur cahaya ningsih: collecting data, statistical analysis, and approving the final draft. Dewi noor Fatikhah rokhimakhumullah: collecting data, analysing and interpreting data, and approving the final draft. Kadarisman hidayat: analysis and interpretation of data, approving the final draft. Disclosure statement no potential conflict of interest was reported by the author(s). Funding the funding for this research was obtained in 2023, originating from the Dosen Berkarya grant program facilitated by universitas Brawijaya based on letter no. 103.56/un10/Ks/2023. About the authors Priandhita Sukowidyanti Asmoro is an Assistant professor in the taxation study program, Department of Business Administration, Faculty of Administrative sciences, universitas Brawijaya. she is also a researcher focusing her work on environmental taxation, tax behavior, and taxation policy. Suresh Ramakrishnan is an Associate professor in the Department of Accounting and Finance, Faculty of Management, universiti teknologi Malaysia. he has published extensively in reputable journals with research interests include cor‑ porate social responsibility, capital structure, and financial economics. cogent Business & MAnAgeMent 17 Sifa Arsyanda serves as a lecturer assistant in the taxation study program, Department of Business Administration, Faculty of Administrative sciences, universitas Brawijaya. her research primarily focuses on international taxation. Nurlita Sukma Alfandia is an Assistant professor in the taxation study program under the Department of Business Administration at the Faculty of Administrative sciences, universitas Brawijaya. her expertise lies in the fields of international taxation and transfer pricing. Devi Nur Cahaya Ningsih holds the position of Assistant professor in the taxation study program, Department of Business Administration, Faculty of Administrative sciences, universitas Brawijaya. her specialization includes research on consumption tax. Dewi Noor Fatikhah Rokhimakhumullah is an Assistant professor affiliated with the taxation study program, Department of Business Administration, Faculty of Administrative sciences, universitas Brawijaya. her academic inter‑ ests focus on tax literacy and education. Kadarisman Hidayat, a professor in the taxation study program within the Department of Business Administration at the Faculty of Administrative sciences, universitas Brawijaya, is an expert in tax administration and local taxation policies. ORCID priandhita sukowidyanti Asmoro http://orcid.org/0000‑0002‑6157‑0467 nurlita sukma Alfandia http://orcid.org/0000‑0003‑2878‑6298 Data availability statement the data that support the findings of this study are available from the corresponding author, upon reasonable request. References Abdelfattah, t., & Aboud, A. (2020). tax avoidance, corporate governance, and corporate social responsibility: the case of the egyptian capital market. Journal of International Accounting, Auditing and Taxation, 38, 100304. https:// doi.org/10.1016/j.intaccaudtax.2020.100304 Abdillah Bin, A. A. B., & shaiful, n. A. B. (2022). the evolution of sustainability reporting in Malaysia. The 1st Youth Conference 202 Journal of Science & Management Research, 2600-738X, 10(2), 1–5. Abdul Wahab, e. A., Ariff, A. M., Madah Marzuki, M., & Mohd sanusi, Z. (2017). political connections, corporate gov‑ ernance, and tax aggressiveness in Malaysia. 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