Can Shari’ah supervisory board and Islamic bank characteristics reduce tax avoidance? Evidence in Indonesia and Malaysia
| DOI | https://doi.org/10.1108/JFC-03-2022-0059 |
| Published date | 25 April 2022 |
| Date | 25 April 2022 |
| Pages | 677-701 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial crime |
| Author | Muhammad Taufik |
Can Shari’ah supervisory board
and Islamic bank characteristics
reduce tax avoidance? Evidence in
Indonesia and Malaysia
Muhammad Taufik
Department of Accounting, Universitas Internasional Batam, Batam, Indonesia
Abstract
Purpose –This study aims to shed light on Shari’ah supervisory boards (SSBs) and the possibilities of
Islamic banks to reduce the tax avoidance. Performance and Shari’ah compliance have been extensively
studied;however, tax avoidance remains a challenge.
Design/methodology/approach –SSB characteristics, basedon resource dependence theory,influence
tax avoidance, including SSB size,educational level, expertise, reputation, remuneration and turnover. The
samples were obtained from Islamic banks in Indonesia and Malaysia (2010–2020) using the data panel
method.
Findings –Islamic banksavoid taxes through the effective tax rate and booktax difference. SSBs who have
more expertise play a role in investigating the complexity of tax avoidance, and SSB reputation, who is a
member of theIslamic bank regulator, understands immorality,resulting in reduced tax avoidance.Moreover,
the recruitment system has been effective, as SSBs with more expertise have become more prevalent.
Meanwhile, SSB from a Shari’ahbackground works only in regulated areas, simplifying Shari’ahcompliance,
in particular, attestation of financialreporting. A heavy workload is created by cross-membership,resulting
in the neglect of the immoral value of tax avoidance. The calculation of tax avoidance also includes
remunerationand bank assets.
Practical implications –Given the uniqueness of Islamic banks contributing to social welfare, tax
regulators need to review the appropriateness of fees that can be treated astaxes. Tax regulators can join
hands withIslamic bank regulators on this review.
Originality/value –To the best of the authors’knowledge, this study is one of the first to examine the
characteristicsof SSBs and Islamic banks on tax avoidance.Separating Islamic banks by country enrichesthe
analysis.
Keywords Tax avoidance, Shari’ah supervisory board, Islamic bank, Resource dependence theory
Paper type Research paper
Introduction
Islamic banks have a unique feature that conventional banks lack: the existence of the
Shari’ah supervisory board (SSB) (Ahmed, 2014;Ajili and Bouri, 2018;Ariffinet al.,2007;
Magalhães and Al-Saad, 2013). The SSB is responsible for directing, reviewing and
supervising (AAOIFI Governance Standard No.1 Paragraph 2; Ginena and Hamid, 2015;
Lahsasna, 2014;Nadwi, 2012). Thisresponsibility can include issuing fatwas (regulation)to
follow since they are part of Islamic law, overseeingall bank transactions, checking all bank
products, supervising all branches and departments and giving opinions on how Shari’ah
compliance is being achieved (Abbas et al., 2009;Iqbal et al., 1998;Sultan, 2007).
JEL classification –G21, G28
Shari’ah
supervisory
board
677
Received5 March 2022
Revised23 March 2022
Accepted23 March 2022
Journalof Financial Crime
Vol.30 No. 3, 2023
pp. 677-701
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-03-2022-0059
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1359-0790.htm
Accordingly, the purpose of the SSB is to monitor and control the implementation of and
adherence to Shari’ah by Islamicbanks (Buallay, 2019). In addition, SSB must be enforced to
ensure that Islamic bankscomply with Shari’ah provisions, as such an institution cannotbe
known as a Shari’ah bank (Ullah,2014).
The SSB’s responsibilities and functions also play a strong, critical and vital role ( Garas,
2012b;Ginena and Hamid, 2015;Grassa, 2013;Hakimi et al.,2018;Nadwi, 2012)inthe
relationship between Islamic banks and stakeholders, particularly customers (Hassan and
Chowdhury, 2004). Customer trust will be seriously eroded if they discover that the bank and
itsoperationsarenotSharīʿah-compliant (Ahmed, 2014;Bhambra, 2012), risques associated
with Shari’ah, and reputation may lead to the systemic instability of Islamic banks (Bhambra,
2012). Customers are likely to withdraw funds and cancel contracts, resulting in decreased
profit or performance (Hichem Hamza, 2013). An increasing number of Islamic bank customers
aresuspiciousofShari’ah compliance tend to have negative legitimacy (Kuran, 2004;Meera
and Razak, 2005;Yousef, 2004). Several scholars have pointed out that Islamic banks may be
“closes the front door of riba while opening the back door of riba”(Rosly, 2010), profitandloss
sharing as a concept but applying a system not unlike conventional banking (Chong and Liu,
2009), and using London Inter-bank Offered Rate (LIBOR), which is the benchmark interest
rate (Meera and Razak, 2005). In conclusion, Islamic banks must strengthen the legitimacy of
Shari’ah, which is achieved through the SSB.
Shari’ah compliance is proxied by legal and social requirements (Ahmed, 2011;
Muhammad et al., 2021;Taufik, 2020),where the two proxies represent form and substance.
Formally, the legalrequirement requires Islamic banks to comply withShari’ah rules, where
one of the proxies is an attestation of financial statements that financial reporting does not
indicate any elements of injusticeand prohibition, such as noncompliance income, usury and
maysir (gambling). Furthermore,the study of Islamic bank finance is inextricably bound up
with unethical activities (Ozili and Outa, 2017), such as income smoothing (including
derivatives) and the debate on displaced commercial risk (including profit equalization
reserves). To the best of our knowledge, there is little unethical Islamic bank finance
research relatedto tax avoidance.
Research conducted in the past focused on explaining that Islamic banks break Shari’ah
compliance principles by engaging in unethical practices like income smoothing (Boulila
Taktak et al.,2010;Ozili and Outa, 2017;Pramono et al., 2019;Shawtari et al., 2015;Taktak,
2011), loan loss provisions (Ashrafet al., 2015;Farook et al.,2014;Noor and Mohamed, 2019;
Soedarmono et al.,2017;Zulfikar and Sri, 2019), earning management (Abdelsalam et al.,
2016;El-Halaby et al.,2020;Kolsi and Grassa, 2017;Lassoued et al., 2018;Othman and
Mersni, 2014;Suripto and Supriyanto,2021;Zainuldin and Lui, 2021;Quttainah et al.,2013)
and profit equalization reserve (Noor and Mohamed, 2019), rate of return (Zainol and
Kassim, 2012), Islamic accounting conservativism (Almutairi and Quttainah, 2019) and
deposit rate of mudharabah (Latiff and Halid,2012). Furthermore, this study contributes to
filling two gaps. Althoughtax avoidance has no relevance to Islamic values, no studies have
been conducted on it in Islamicbanks. In addition, this study emphasizes the significance of
the SSB in maintaining the integrity of Shari’ah.
There is merit in examining the empirical relationship between corporate governance
and tax avoidance, leading to further research (Salhi et al., 2020). Furthermore, through
Indonesia Law No. 36 of 2008, Article 6, regulates the costs that may be treated as tax
deductions, including scholarships, donations and development costs related to social and
educational activities. In addition, Malaysia’s Income Tax Act 1967 Section 34 (6) permits
contributions to charities and community projects and expenses incurred in providing
services to be deducted from income tax. First, the two regulations promotetax avoidance,
JFC
30,3
678
To continue reading
Request your trial