ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

The Effect of Industry Membership and Corporate－life－cycle on Tax Avoidance

  • Sang Myung Kim Kyung Hee University Department of Accounting and Taxation

Asian Tax Journal Vol. 18 No. 6 (2017), pp. 151-175

Abstract

This study investigates whether corporate－life－cycle combined with the industry membership influences tax avoidance behavior. Prior literature finds that corporate life cycle influences a firm’s tax avoidance behavior, and firm characteristics to induce aggressive tax behavior rely on the industry membership. This suggests that the effect of corporate－life－cycle on tax avoidance would be affected by a firm’s industry membership. Our empirical findings reveal that firms do not tend to engage in aggressive tax activities at the introduction stage. On the other hand, firms in the industry of professional, scientific and technical activities exhibit high level of tax avoidance even at the introduction stage. We interpret that these firms bear lower initial investment costs, which induces lower tax shield, and thus they tend to have stronger incentives to engage in aggressive tax planning from the start. Next, the tendency to aggressive in tax planning at the growth stage is more pronounced in the industry membership of manufacturing and construction. In a case of the maturity stage, while firms in the industry of wholesale and retail trade are more aggressive in tax planning, firms in the industry of construction exhibit less aggressive tax activities compared with those in the other industry. This result is consistent with the finding of prior studies that corporate tax avoidance behavior of firms in the construction industry are sensitive to financial costs. Namely, due to the low necessity for external financing, such firms at the maturity stage have high liquidity, thus they are less incentivized to engage in aggressive tax planning. With regard to the decline stage, firms in the industry of construction are shown to be more aggressive in tax activities. This study contributes to the literature in a sense that it explains corporate tax behavior through firm characteristics as well as industry characteristics in multiple perspectives.

Keywords

  • tax avoidance
  • corporate－life－cycle
  • industry membership
  • cashflow

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