ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

The Relation between Related Party Transactions and Tax Avoidance －Evidence from Disclosure Requirement by Fair Trade Commission－

  • Ga-Young Choi Ph.D. Program, College of Business Administration, Seoul National University
  • Woo-Jong Lee Seoul National University
  • Hee Chun Roh Soongsil University

Asian Tax Journal Vol. 21 No. 1 (2020), pp. 9-30

Abstract

Related party transactions (RPT) are often made based on discretionary contracts that benefit one party at the cost of the other party, but unlikely subject to strict monitoring of shareholders. These characteristics provide RPT firms with an effective means to engage in tax avoidance. To alleviate such adverse effect of RPT, two regulatory bodies in Korea require firms to provide information about RPT. First, Financial Services Commission requires firms to disclose in the footnote of financial statements whether they have related parties and how much they trade with those parties in aggregate (FSC disclosure). Second, Fair Trade Commission also requires member firms in business groups to disclose the details of each RPT (FTC disclosure). Although the FTC disclosure may contain incremental information beyond the FSC disclosure, the comparison between two types of disclosures has not been throughly studied in the literature. This study examines the association between RPT and tax avoidance, using both FSC and FTC disclosures. We document evidence that FTC disclosure frequency is positively related to the degree of tax avoidance even after controlling for the RPT magnitude in the financial statements, suggesting its incremental information value. However, we fail to find robust evidence that FTC disclosures interact with FSC disclosures in explaining tax avoidance. This paper contributes to the disclosure literature on the relation between non－tax disclosures and tax avoidance.

Keywords

  • Related party transaction
  • Tax avoidance
  • Disclosure
  • Regulation

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Asian Tax Journal

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