조세소송과 조세회피와의 관계 = A Study on Association between Corporate Tax Lawsuits and Tax Avoidance

다국어 초록 (Multilingual Abstract)

The purpose of this paper is to evaluate the association between tax litigation and tax avoidance. Using firms that filed for any form of tax lawsuit as a result of tax investigation, we have tried to study if these firms have higher probability of engaging in tax avoidance activities compared to those that have not. Tax authorities‘ objective is to not only improve service for the tax paying public by facilitating voluntary participation in the tax system but also discourage and deter non-compliance activity by tax payers. However, after being audited, if the tax payers are dissatisfied with the outcome of the tax investigation, they can appeal their case to the tax authorities and try to avoid further taxation before going to the court. Recently, local press reported that the tax authorities are preparing to strengthen the defense in court by setting up a special team for future tax litigations as during the past four years, the cumulative amount that the tax authorities have lost in court exceeds 2 trillion won. Especially the loss for expensive lawsuit, lawsuit over 5 billion won, is around 1 trillion won. Therefore, by establishing and administrating an effective system of sanction, the tax offices aim to protect the government’s (public’s) wealth and preserve the national tax system. As for corporates, tax lawsuit can be a method of aggressive tax strategy. As a representative of shareholders, managers of a firm should try to increase shareholders’ wealth. In the process, the manager may engage in aggressive tax strategy that takes into consideration not only the explicit but also the implicit tax and nontax cost. Therefore, if the tax authority charges penalty, to avoid additional outflow of cash from the corporate to the government, the manager may aggressively seek to lower the tax by filing a lawsuit. However, tax lawsuit may not have any intention of tax avoiding strategy, but rather defending the firm itself by claiming a different interpretation of the law. This serves as a motivation for our study, as we believe that tax lawsuits directly impacts both the government and the corporate’s wealth. Therefore, understanding the relationship between the tax litigation and the tax avoidance (aggressive tax strategy) is important, as it serves as an indirect method of understanding why firms file for tax lawsuit. The paper will test whether for firms that have filed for tax lawsuit have higher tendency to participate in tax avoidance. Also, we will also investigate whether the consistency in tax strategy has any influence on the relationship between tax litigation and tax avoidance. Book-tax-difference (BTD) will be used as a proxy for change in tax strategy for our analysis. As tax litigation is infrequently a public information, there lies some limitation in gathering data. Therefore, tax litigation research is relatively seldom conducted from an accounting perspective. Nonetheless, the research on tax investigation and (general) lawsuit indicates that when litigation starts (disclosed), the market reacts negatively. However, if there is any positive news that can levy any uncertainty of the lawsuit, then the market is expected to react positively. Addition to the timetable of the litigation being difficult to estimate, the cost associated with the lawsuit (lawyer fee, auditor fee etc) is significantly high, and potential damage to the reputation that the lawsuit may bring is troublesome. So the fact that the manager decided to pursuit the lawsuit implies other benefit from the lawsuit will offsets the costs mentioned. (Scholes et al. 2015; Shackelford and Shelvin 2001) Prior literature documents that since recently tax department is being regarded as a profit center (rather then cost center), tax strategies are becoming more aggressive yet important. (Crocker and Slemrod 2005; Robinson et al. 2010) Graham and Tucker (2006) reports that for the 44 companies that have presence in the tax shelter, these firms displayed an improvement in the tax savings and leverage ratio through aggressive tax planning. Despite the positives of the effective tax strategy, the negatives also coexists. Mills and Sansing (2000) show that aggressive tax strategy can lead to increase in tax investigation cost. Frank et al. (2009) claim that firms that report lower tax earnings show lower quality financial report. Therefore firms report different result based on the tax strategy. Using listed non-financial companies in Korea from 2005 to 2013, we have hand collected companies that disclosed of engaging in any form of tax litigation and used a propensity score matching method to run a comparison test. The result of the paper indicates that companies that engage in tax litigation show that they have lower tax avoidance rate compared to similar companies that are not exposed to any litigation risk. Further as for companies that filed for tax lawsuit and display consistent tax strategy, these firms display lower tax avoidance level. Whereas, companies that have inconsistent tax policy (with litigation exposure) show higher tax avoidance level. The contribution of the paper is that not much empirical study has been done in analyzing the behavior of firms that engage in tax litigation. Especially, as tax strategy is becoming an important factor in management decision understanding the linkage between the tax litigation exposed company and tax avoidance seems important. The remainder of the literature is composed as follows. Section 2 explains the background of the research. Section 3 develops the hypotheses and provides information on the sample, data and shows the model used for the test. Section 4 presents the results and Section 5 concludes.

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