Related Party Transactions and Tax Avoidance of Business Groups

Abstract

This study aims to examine if the firms in business groups avoid tax by related party transactions. If other conditions are the same, firms have an incentive to maximize after-tax profits by minimizing tax burden. If the firms are in business groups, they tend to minimize tax at the business group level. It is expected that the level of tax avoidance of both parties of related party transactions will be high if tax is minimized at the business group level as the transactions will be made at a level that can minimize the tax of both the firm that reduces the taxable income through related party transactions and the firm whose taxable income increases. In addition, the effect of being in a Chaebol business group and the effect of the Unfair Related Party Transactions Tax Law on the association with related party transactions and tax avoidance are also examined. According to this study, the firms in business groups avoid tax by related party transactions. It is also found out that tax avoidance by related party transactions is done more aggressively in Chaebol member firms than non-Chaebol firms, while tax avoidance by related party transactions in Chaebol business groups decreases after the implementation of the Unfair Related Party Transactions Tax Law.

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