A Study on Corporate Tax Complaint and Stock Market Response
Asian Tax Journal Vol. 22 No. 3 (2021), pp. 133-152
Abstract
Corporate tax complaints affect the cash flow of a company based on the result of the complaint. Such a change of cash flow will ultimately have impact on enterprise value. This study tracks the progress of corporate tax complaints and analyzes how they are perceived in the stock market according to the results of the complaints. Most studies that analyzed the relationship between the results of a tax complaint procedure and enterprise value were conducted mainly on Supreme Court rulings. On the other hand, unlike previous studies, this study focused on the reaction of the stock market to the rulings of the Tax Tribunal, one of the tax complaint procedures. Recently, there has been a ruling by the Tax Tribunal on the claim made by dental implant manufacturers in South Korea. Implant manufacturers complained that the costs associated with return products should not be viewed as entertainment expenses. The tax authorities determined that the products that had been returned due to operation failure were attributable to the concerned dental clinic, and so accounts receivable given up voluntarily by the manufacturers were equivalent to entertainment expenses. The implant manufacturers objected the ruling and filed an appeal. In the end, the Tax Tribunal admitted the claim that the cost for the return goods shall not be regarded as entertainment expenses, and a refund was decided accordingly. As a result of analyzing the reaction of the stock market, the ruling of the Tax Tribunal brought about a positive share price reaction similar to or greater than the amount of the refunded tax. This reaction is attributed to the fact that the refund was made shortly after tax imposition and that the ruling of the Tax Tribunal was an important case that could impact the future sales policies and accounting methods of the two companies. The reason that the impact of reputation recovery was weak in previous studies is because of the nature of each tax complaint case. In the stock market, the degree of reputation recovery appears to be different depending on the seriousness of each tax complaint case.
Keywords
- Tax Complaints
- Stock Market Response
- Tax Tribunal
- Entertainment Expenses
- Sales Returns
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