Effect of the Trusted Taxpayer Designation on Corporate Tax Avoidance Behavior: Evidence from Korea

Main Article Content

Jung-Wha Suh
Ho-Young Lee
Arnold Edward Kuk
Hyunsoo Ryu

Abstract

Manuscript type: Research paper
Research aims: This study focuses on the efficacy of the trusted taxpayer system in Korea by examining whether firms designated as trusted taxpayers are more likely to pay taxes faithfully, and consistently when compared to firms that are not designated.
Design/Methodology/Approach: This study uses the ordinary least squares (OLS) method, and specifically, the trusted taxpayer designation as an indicator of tax compliance while the book-tax difference (BTD), and the discretionary BTD are used as a measure of tax avoidance. Research findings: Results show that firms designated as trusted taxpayers are less likely to avoid taxes than firms not designated. Among firms that are designated as trusted taxpayers, it appears that firms with CEOs who come from founding families, firms that are non-SMEs (other than small and medium sized firms defined by the Small Business Act of Korea), and firms whose majority shareholder ownership is greater than the median, are less likely to avoid taxes.
Theoretical contribution/Originality: To the best of our knowledge, this study is the first to use a tax avoidance measure to examine the effect of the trusted taxpayer designation on corporate tax avoidance by comparing firms that are designated and firms that are not designated as trusted taxpayers.
Practitioner/Policy implications: This study shows that firms designated as trusted taxpayers are less likely to avoid taxes than firms that are not designated. This implies that the current trusted taxpayer system implemented by the Korean tax authority is effective and should be promoted.
Research limitations: The Korean tax authority announces the designation of trusted taxpayers separately for corporate businesses and self-employed businesses. The results of this study are confined to the data of corporate businesses only.
Keywords: Book-Tax Difference, Discretionary BTD, Tax Authorities, Tax Avoidance, Trusted Taxpayers
JEL Classification: H26

Downloads

Download data is not yet available.

Article Details

Section
Articles
Author Biographies

Jung-Wha Suh, Yonsei University, School of Business

JungHwa Suh is a Ph.D. Candidate at the School of Business

Arnold Edward Kuk, Yonsei University, School of Business

Arnold Edward Kuk earned a Master’s degree in accounting from Yonsei University and a Master’s degree in economics from Purdue University.

Hyunsoo Ryu, Dongguk University, School of Business

Hyunsoo Ryu is a Ph.D. in the Department of Accounting, Graduate School of Dongguk University.