Journal of Governance and Regulation / Volume 11, Issue 2, 2022 8 THE IMPACT OF THIN CAPITALIZATION RULES ON CAPITAL STRUCTURE AND TAX AVOIDANCE Rahma Intan Anindita * , Ferry Irawan ** , Amrie Firmansyah * , Suparna Wijaya * , Resi Ariyasa Qadri * , Joko Sumantri * , Arifah Fibri Andriani * , Moh Luthfi Mahrus * * Polytechnic of State Finance STAN, South Tangerang, Indonesia ** Corresponding author, Polytechnic of State Finance STAN, South Tangerang, Indonesia Contact details: Polytechnic of State Finance STAN, Jalan Bintaro Utama Sektor V, Bintaro Jaya, South Tangerang, Banten 15222, Indonesia Abstract How to cite this paper: Anindita, R. I., Irawan, F., Firmansyah, A., Wijaya, S., Qadri, R. A., Sumantri, J., Andriani, A. F., & Mahrus, M. L. (2022). The impact of thin capitalization rules on capital structure and tax avoidance. Journal of Governance & Regulation, 11(2), 8–14. https://doi.org/10.22495/jgrv11i2art1 Copyright © 2022 The Authors This work is licensed under a Creative Commons Attribution 4.0 International License (CC BY 4.0). https://creativecommons.org/licenses/by/ 4.0/ ISSN Print: 2220-9352 ISSN Online: 2306-6784 Received: 01.10.2021 Accepted: 23.03.2022 JEL Classification: G32, H26, K34, K34 DOI: 10.22495/jgrv11i2art1 This study aims to examine the effect of the thin capitalization rules on capital structure (leverage) and tax avoidance. This is quantitative research using the difference-in-difference (DID) method, with multiple linear regression models. The sample used in this research is companies listed on the Indonesia Stock Exchange (IDX). The type of data used in this study is secondary data in the form of financial statements from 2013 up to 2018. The sample selection using the purposive sampling method with the number of samples amounted to 804 observations (firm-year). The regression method employs panel data with a period of six years (2013 to 2018). The results show that the thin capitalization rules reduced the leverage of companies with high and low debt-to-equity ratio (DER). Companies with high DER experience a decrease in leverage 2.3 times greater than companies with low DER. The results also show that the thin capitalization rules do not affect tax avoidance for companies with high and low DER. This research contributes to providing improvement in tax provisions. In practice, it provides recommendations to the Indonesian Tax Authority (ITA PMK ) to revise -169/PMK.010/2015 and that ITA using the should consider best practice suggested by the Organization for Economic Co-operation and Development (OECD) in conducting interest limitation (i.e., the fixed ratio rule). Keywords: Capital Structure, Tax Avoidance, Thin Capitalization, Thin Capitalization Rule Authors’ individual contribution: Conceptualization — R.I.A. and F.I.; Methodology — R.I.A., F.I., and R.A.Q.; Software — R.I.A., F.I., and S.W.; Validation — S.W., J.S., and M.L.M.; Formal Analysis — R.I.A., F.I., and A.F.; Investigation — R.I.A., A.F.A., and M.L.M.; Resources — R.I.A., F.I., and A.F.; Data Curation — R.I.A. and S.W.; Writing — Original Draft — R.I.A. and F.I.; Writing — Review & Editing — R.I.A. and F.I.; Visualization — F.I., A.F., and S.W.; Supervision — A.M. and R.A.Q.; Project Administration — J.S., A.F.A., and M.L.M.; Funding Acquisition — R.I.A., F.I., and J.S. Declaration of conflicting interests: The Authors declare that there is no conflict of interest. Acknowledgements: The Authors thank the Ministry of Finance of the Republic of Indonesia for facilitating the research. We also thank Polytechnic of State Finance STAN for giving us motivation and a good opportunity to improve our research skills, especially in accounting and taxation.