Assessing the Indirect Impact of FAI on Firm Profitability through the Mediating Role of ETR

Abstract

Purpose: This study investigates whether the effective tax rate serves as an intermediate factor in the effect of fixed asset intensity on company profitability.

Design/methodology/approach: This quantitative study covers state-owned mining companies listed on the Indonesia Stock Exchange from 2020 to 2025, with a total of 246 annual reports. The analysis was conducted using Stata, employing multiple regression and mediation testing techniques, including path analysis and the Sobel test.

Findings: The results show that FAI negatively affects profitability and ETR, while ETR also negatively affects profitability. Furthermore, ETR mediates the FAI–profitability relationship in a negative direction. High FAI lowers ETR through depreciation expenses, and this reduction in ETR increases after-tax profitability. Thus, ETR mediation is effective when companies utilize fixed assets for tax efficiency to support net income.

Practical implications: Theoretically, this study reinforces tax shield theory and integrates financial accounting with taxation. Practically, it guides managers in asset investment and tax planning while emphasizing operational cost efficiency. For investors, ETR is a useful profit performance indicator. For the government, the findings inform evaluations of depreciation policies and corporate tax rates.

Originality/value: The novelty lies in testing ETR as a mediator in the FAI–profitability relationship, which is rarely explored. This study also combines financial accounting and taxation in one model and provides empirical evidence from the Indonesian mining sector, an underexplored area. Ultimately, it examines whether the depreciation tax shield genuinely boosts profits or is merely an illusion amid high operational costs.

Paper type: Empirical.