Essays on Korean business groups’ tax planning strategies

Abstract

In this study, I investigate tax motivation for income shifting behaviors and accounting conservatism of Korean business groups (chaebols). First, I examine tax-induced income shifting behaviors among affiliated firms in Korean business groups (chaebols). Korean corporate income tax law does not require consolidated tax returns, and business groups with a large number of affiliated member firms have incentives to shift income across member firms to reduce the overall taxes of the group. For a large number of Korean companies that are subject to external audits, we perform univariate and multivariate regression analyses on the income shifting behavior of chaebol firms compared with non-chaebol control firms. Our evidence suggests that tax-motivated income shifting activities exist among chaebol firms, and that the extent of income shifting is found to depend on its effect on non-tax cost factors such as the earnings, leverage, and cash flow rights of the controlling shareholders. We also find that income shifting is more pronounced in chaebol firms where the control-cash flow divergence is relatively large, suggesting that income shifting is affected by the controlling shareholders’ opportunism. Our study provides some insights on the intra-group income shifting activities where research is limited. The second chapter investigates whether the conservatism in financial reporting is driven by taxation in Korea. Although conservatism has been examined from the perspectives of contracting, shareholder litigation, and accounting regulation, few studies have examined the relation between taxation and accounting conservatism. Using unconditional conservatism measures, I find that the level of conservatism is positively related with a firm’s tax burden. Further study shows that the tax motivated conservatism is affected by the degree of book-tax conformity and the level of nontax costs. Firms with a closer link between book and taxable income are likely to have a ...