Related party transactions, tax avoidance and Korean Corporate Income Tax Law

Abstract

Prior studies document that related party transactions can be used as a channel for corporate tax avoidance. We examine whether Korean Corporate Income Tax Law is effective in limiting tax avoidance through the related party transactions. Specifically, we investigate whether abnormal related party transactions are associated with tax avoidance under the existence of the Provision on Rejection of Unfair Transaction in Korea. The empirical results show an insignificant relation between abnormal related party transactions and tax avoidance, suggesting that Korean Corporate Income Tax Law effectively prohibits managers from engaging in tax avoidance through the related party transactions. ©2015 International Information Institute.