ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

Incremental Tax Avoidance and Tax Risk

  • Si－Hun Park Dongguk University
  • Kapsoon Kim Dongguk University

Asian Tax Journal Vol. 20 No. 6 (2019), pp. 191-218

Abstract

This study investigated the relationship between incremental tax avoidance and tax risk. Prior studies have expected that higher tax avoidance facilitates tax risk； however, the need arises to reconsider how tax avoidance should be measured as the results of previous studies have depended on the way they measured tax avoidance. Tax avoidance is commonly measured based on the consistently low level of the effective tax rate (ETR). However, specific companies or industries can show consistently low ETR because of consistent tax cut policy from the government. Since Long－term ETR reflects persistence in the ETR or offsets any volatility during the period in the ETR, a problem arises when interpreting the relationship between Long－term ETR and persistence or volatility of ETR. To solve such problems, we present the possibility of a new measure, incremental tax avoidance. Because tax avoidance is an action to reduce ETR, a decrease in ETR compared to the company’s previous periods may capture management intentions. We derived incremental tax avoidance by subtracting ETRt from ETRt－1, to ensure that the value reflects the size of tax avoidance. Because negative value means no tax avoidance, we excluded samples with negative values from our data. Tax risk is the standard deviation of Cash ETR or GAAP ETR during t＋1～t＋5. Data consists of KOSPI and KOSDAQ non－financial companies from 2003 to 2013. Our test results show a statistically significant positive effect of incremental tax avoidance on both tax risk measures based on Cash ETR and GAAP ETR. This study contributes to the literature in that it suggests and confirms the applicability of a new tax avoidance measure, which mitigates the problem of current tax avoidance measures.

Keywords

  • incremental tax avoidance
  • effective tax rate
  • tax risk

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Asian Tax Journal

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