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Tax Motivated Income Shifting and Korean Business Groups (Chaebol)

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  • Kooyul Jung
  • Boyoung Kim
  • Byungmo Kim

Abstract

This paper examines tax‐induced income shifting behavior 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.

Suggested Citation

  • Kooyul Jung & Boyoung Kim & Byungmo Kim, 2009. "Tax Motivated Income Shifting and Korean Business Groups (Chaebol)," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(5‐6), pages 552-586, June.
  • Handle: RePEc:bla:jbfnac:v:36:y:2009:i:5-6:p:552-586
    DOI: 10.1111/j.1468-5957.2009.02141.x
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    Cited by:

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    3. Kyoung-Soo Yoon & Yangsoo Jin, 2021. "Related party transactions, agency problem, and exclusive effects," European Journal of Law and Economics, Springer, vol. 51(1), pages 1-30, February.
    4. Granda, María L., 2021. "Tax haven ownership and business groups: Tax avoidance incentives in Ecuadorian firms," Journal of Business Research, Elsevier, vol. 130(C), pages 698-708.
    5. Jaehong Lee & Eunsoo Kim, 2019. "Foreign Monitoring and Predictability of Future Cash Flow," Sustainability, MDPI, vol. 11(18), pages 1-22, September.
    6. Sungwon Park, 2018. "Related Party Transactions and Tax Avoidance of Business Groups," Sustainability, MDPI, vol. 10(10), pages 1-14, October.
    7. Mohamed A. Elbannan & Omar Farooq, 2020. "Do more financing obstacles trigger tax avoidance behavior? Evidence from Indian SMEs," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 44(1), pages 161-178, January.
    8. Jaimin Goh & Wonwook Choi & Jungeun Cho, 2016. "Changes in chaebol firms’ overinvestment after the Asian financial crisis: a long-term perspective," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 23(1), pages 75-111, March.
    9. Nico Dewaelheyns & Cynthia Van Hulle, 2012. "Capital structure adjustments in private business group companies," Applied Financial Economics, Taylor & Francis Journals, vol. 22(15), pages 1275-1288, August.
    10. Doo, Seoyoung & Yoon, Sung-Soo, 2020. "Tax-motivated income shifting and board structure: Evidence from Korean business groups," Journal of Contemporary Accounting and Economics, Elsevier, vol. 16(3).
    11. Hyungseok Kim & Woochan Kim, 2020. "Does tunneling explain the sensitivity of executive compensation to other member firms’ performance?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(9-10), pages 1268-1289, October.
    12. Sara Saggese & Fabrizia Sarto, 2016. "Disproportional Ownership Devices: Reviewing the Last 25 Years of Research," International Journal of Business and Management, Canadian Center of Science and Education, vol. 11(4), pages 1-22, March.

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