Tax Avoidance

The Journal of Applied Business Research – May/June 2016 Volume 32, Number 3
Is Foreign Direct Investment

Effective From The Perspective Of Tax
Avoidance? An Analysis Of Tax Avoidance
Through The International Transfer Pricing
Behaviors Of Korean Corporations
Sung Jin Park, Sungshin Women’s University, South Korea
Woo Jin Park, Yonseil University, South Korea
Eun Jung Sun, Hannam University, South Korea
Sohee Woo, Woosong University, South Korea
ABSTRACT
This study examines whether multinational companies carry out tax avoidance through subsidiaries. An empirical
analysis was conducted of 4,585 Korean firms from 2001 to 2010 by company and year. The results are as follows.
First, MNCs that have become more internationally diversified through the establishment of overseas subsidiaries
generally show a higher tendency to avoid tax. Thus, the analysis results show a positive correlation between
globally diversified MNCs and corporate tax avoidance. This correlation is established due to the firms' active use
of tax strategies (investment tax credits, tax cuts) applicable to the various countries in which they have expanded
their businesses. Second, the analysis results showed that these firms actively avoided tax with overseas transfer
pricing behaviors when compared to companies without overseas subsidiaries. Thus, the adjustment of sales prices
and purchase value through actual transactions increased the propensity of the parent company to avoid tax.
This study holds significance in that it showed how foreign direct investment and overseas transfer pricing
strategies through foreign subsidiaries can be used by companies to avoid tax. This also explains why multinational
companies are recently increasing their efforts by building additional local production factories. In this sense, this
study has important implications that should be noted by national governments hoping actively to attract companies
in the future.
Keywords: Transfer Pricing Behavior; Tax Avoidance; FDI (Foreign Direct Investment); Overseas Subsidiary;
MNC (Multinational Company)
1. INTRODUCTION
F
oreign direct investment (hereafter, FDI) through an overseas subsidiary can be defined as a
company’s expansion into a new, less exploited market (Kogut 1983). Firms can expect various
positive effects through FDI. First, there is the investment portfolio effect. The loss sustained in a
market with poor performance can be offset by the profits generated in another market (Kogut 1985). The second
effect is a localization strategy. Market-appropriate investment decisions can lower risk while facilitating efficient
management (Denis et al. 2002). Third, knowledge and experiences accumulated in various markets can be used to
enhance the value of intangible assets such as manufacturing technologies, marketing techniques and management
abilities, which will in turn increase firm value (Hitt et al. 1997; Morck and Yeung 1998; Craig and Douglas 2000;
Geringer et al. 2000).
Furthermore, FDI can produce benefits in terms of tax laws. In an effort to attract investment, many countries,
developed and developing nations alike, have recently started to offer investment tax credits to foreign companies.
Copyright by author(s); CC-BY 917 The Clute Institute
In this sense, the importance of such tax-related effects has increased. Therefore, in-depth research on this and
related subjects is required.
The 2014 “Fortune Global 500” list of the world’s largest corporations includes 17 Korean firms, including
Samsung Electronics. Most of the listed companies are headquartered in the U.S., but the numbers of firms in
emerging markets such as China (ranked second) and Korea have increased significantly, climbing to parity with
those based in Western Europe or the U.S. This implies that FDI is no longer an act limited to advanced countries;
emerging market countries are now moving beyond their local market to invest actively in both developed and
developing nations. This also signifies the greater importance of analyzing emerging market nations.
Studies which examine the effect of FDI through overseas subsidiaries on corporate tax avoidance have mostly
focused analyses on corporations that are headquartered in an advanced country (Desaia and Dharmapala 2006,
Desaia and Dharmapala 2009, Rossing 2013). Thus, the firms surveyed in these studies were mostly companies that
were established in developed countries but which invested in other nations with a lower tax rate in an effort to
reduce their tax burden. However, the case of Korea is rather unique as the country actively invests in other nations,
such as the U.S. or various countries in Europe, despite the fact that its tax rate is generally lower than those of
advanced countries. As this study analyzes the effect of FDI through overseas subsidiaries on the manager’s
propensity to avoid tax by studying Korean companies, which have the traits of both developed and emerging
markets, it holds empirical significance which differs from that of precedent studies. In particular, this study has
important implications for Korean firms that are faced with limitations in domestic market growth, unlike companies
in the U.S. or Europe, and that must continuously increase FDI through overseas subsidiaries and transfer the
relevant models to developing countries in the future.
Furthermore, earlier studies related to FDI or tax law were mostly focused on tax rates and investment, whereas tax
havens have been the main topic of research on tax avoidance. Although there has been sufficient theoretical
research on tax avoidance through normal transactions, few researchers have conducted empirical analyses on these
and related matters. Studies that have carried out empirical analyses on relatively less advanced nations are
especially rare.
This study used the traditional measurement of tax avoidance (GAAP ETR) and the D&D (2006) model to verify the
effect of tax avoidance through FDI. Robustness is also verified through the W&L model.
The composition of this study is as follows. In Chapter 2, previous literatures are examined and the research
hypotheses are established. Chapter 3 elaborates on the research design and thus the research methods and materials.
Chapter 4 summarizes the empirical results, whereas Chapter 5 verifies the robustness of the empirical analysis.
Lastly, Chapter 6 presents the conclusion, contributions and limitations of the study results.
2. PRECEDENT STUDIES AND RESESARCH HYPOTHESIS
2.1 Precedent Studies
2.1.1 Foreign Direct Investment
The possession of an overseas subsidiary is one way firms can carry out FDI (foreign direct investment). Related
studies can be largely classified into those that study the effects of FDI-based global diversification on firm value,
the cost of equity capital, sales performance, and corporate tax rates. First, in relation to global diversification and
firm value, Errunza and Senbet (1981) find that corporations more diversified on a global scale tend to have a higher
firm value, as they gain exclusive profits by harnessing the imperfections of the local capital market. Furthermore,
Jung (2003) examines a positive relation between the level of global diversification and corporate sales
performance, as measured by market share, market development and product sales.
On the other hand, Harris et al. (1982) argue that as companies become more diversified internationally, it worsens
the issue of information asymmetry between the head office and the overseas branch, which in turn increases the
costs related to corporate decision-making and reduces the value of the company. Similarly, Denis et al. (2002) find

that firm value will decrease as a company becomes more globally diversified becomes due to inefficient
investments made in different business units. In addition, Lee (2003) posits that there is a negative relation between
global diversification and company value, as the firm must pay additional expenses to adapt to the local
circumstances of the relevant country.
There are also studies that centered their analysis on the cost of equity capital from among various factors that
influence firm value due to the lack of consistent empirical findings regarding the relation between global
diversification and firm value. For example, Hughes et al. (1975) posit that as a company becomes more diversified,
they experience a simultaneous decrease in both systematic and non-systemic risks. Similarly, Jiang et al. (2008)
find that global diversification significantly reduces the cost of equity. However, according to Yoo et al. (2010), the
cost of equity increases with greater diversification, as firms carrying out sales activities in various nations incur
higher levels of sales risk triggered by exchange rate fluctuations and political instability.
Meanwhile, recent empirical findings have been released on the effect of international diversification on manager’s
earnings management. Jiraporn et al. (2008) examine a negative relation between firm’s level of international
diversification and the level of earnings management. They posit that the more internationally diversified a firm
becomes, the greater reduction becomes in the volatility of company earnings, along with incentives for earnings
management. Similarly, Ahn et al. (2012) also find that international diversification is negatively related with the
level of earnings management by the firm. Meanwhile, El Mehdi and Seboui (2011) examine that the level of
earning management by a firm increases when the company becomes more internationally diversified because the
manager of a globally diversified firm manages earnings through overseas business units that present greater
information asymmetry. Similarly, Yoo et al. (2014) find that there is a positive relation between real earnings
management and international diversification.
Lastly, multinational companies (hereafter, MNCs) are making capital investments or income transfers from
countries with higher tax rates to those with lower tax rates. It was also reported that income transfers were made
though transfer pricing among corporations carrying out large-scale internal transactions between subsidiaries
(Grubert et al. 1993; Harris 1993; Klassen et al. 1993: Jacob 1996; Collins et al. 1998; Lo et al. 2010).
2.1.2 Tax Avoidance Behavior
The definition of ‘tax avoidance behavior’ differs according to the researcher. This study defines the term as all
actions taken to lower the corporate tax burden. In this sense, tax avoidance behaviors include ‘tax saving’, which is
the act of reducing the tax burden through the use of provisions on tax reduction and cuts stipulated in the tax law;
‘tax avoidance’, which refers to the technical reduction of the tax burden by taking actions not in compliance with
the legislative purpose of the tax law based on the law’s uncertainty or complexity, and ‘tax evasion’; which is the
act of reducing the tax burden through illegal behaviors, such as false reporting, income omission and over-
appropriation of expenses (Hanlon and Heitzman 2010; Ki 2012).
Previous studies related to tax avoidance behaviors are largely classified into two categories. The first category
includes studies that determine which factors influence the tax avoidance behaviors of firms, whereas the second
group of studies investigates how tax avoidance behaviors affect firm value. First, in relation to the determinants of
tax avoidance behaviors, Kim and Jeong (2006) find that a firm’s propensity to avoid tax increases with higher
levels of total assets and pre-tax income and decreases with a higher debt ratio. Furthermore, Ko et al. (2007) posit
that tax avoidance is positively related with the tax burden, profitability, and owner-controlled firms and negatively
related with tax benefits. Meanwhile, according to previous studies, there is a negative relation between corporate
social responsibility and tax avoidance. It means that diligently fulfilled their social responsibilities were less
inclined to avoid tax (Watson 2011; Jeong Hong 2011; Ki 2012).
Desai and Dharmapala (2006) find that tax avoidance behaviors generated by the deputy problem between
stockholders and management can be suppressed through stock options granted to the manager in a firm with a weak
governance structure. Furthermore, Ko et al. (2007) posit that owner-controlled companies with high managerial
ownership actively avoid tax. However, Jeong et al. (2011) find that that tax avoidance decreases with higher levels
of managerial ownership. On the other hand, Park & Hong Young (2009) find a negative relation between tax
avoidance and the amount of shares held by foreigners, but Lee(2010) find the opposite results.
Second, studies that observe the market response of tax avoidance include research conducted by Balakrishinan et
al. (2010), Kim et al. (2011), Cheng et al. (2012), Lee & Jeong (2008), Desai and Dharmapala (2009) and Ko et al.
(2007). Balakrishinan et al. (2010) find that the complexity and unpredictability of corporate tax avoidance
behaviors can worsen information asymmetry among market participants, such as credit rating agencies, finance
analysts and investors. In other words, when the firm’s propensity to avoid tax increases, it will increase the error
and variance in earnings forecasts by finance analysts to worsen market information asymmetry. Kim et al. (2011)
find a positive relation between corporate tax avoidance behaviors and stock price crash risk levels. On the other
hand, Cheng et al. (2012) posit that corporate tax avoidance decreased among firms that actively invested in hedge
funds. In other words, hedge funds will actively try to enhance firm value through the possession of undervalued
companies, and this process will facilitate higher efficiency in tax laws for the relevant company to reduce its tax
avoidance activities.
Lee & Jeong (2008) find a negative relation between tax avoidance and stock prices if the firm’s tax avoidance is
publicly disclosed. On the other hand, there is a significantly positive stock response on disclosure day for firms that
had completed tax payments faithfully. Meanwhile, there are some studies about the relation between corporate tax
avoidance and firm value. Desai and Dharmapala (2009) cannot find any significant results between corporate tax
avoidance and firm value. In contrast, Ko et al. (2007) find a positive relation between firm value and the estimated
amount of tax avoided.
2.2 Research Hypothesis
FDI through overseas subsidiaries refers to a company’s expansion into a new, less exploited market (Kogut 1983).
Positive effects can be produced through FDI. For example, the losses generated in unprofitable markets can be
offset by the revenue gained from others (Kogut 1985). In addition, market-appropriate investment decisions can
lower risk while facilitating efficient management (Denis et al. 2002). Furthermore, the knowledge and experiences
accrued in various markets can be used to enhance the value of tangible assets, such as manufacturing technology,
marketing techniques and management ability, which will in turn bring about higher firm value (Hitt et al. 1997;
Morck and Yeung 1998; Craig and Douglas 2000; Geringer et al. 2000). Companies that increase their levels of FDI
can accumulate more management assets, knowledge and knowhow, all of which can be effectively adapted to the
local business environment (Kogut and Zander 1993; Krugman 1991; Porter 1990).
In terms of tax law, firms that have expanded their business to various countries are more capable of actively using
appropriate tax strategies that meet local circumstances. In other words, FDI through overseas subsidiaries provides
a company with diverse ways to reduce their tax burden. For example, Article 104, Clause 15 of the Restriction of
Special Taxation Act stipulates that overseas resource developers investing in foreign subsidiaries for the
development of mineral resources must provide a tax credit for a certain amount of investment. Also, the law
permits tax credits in case the foreign subsidiary has provided dividends to the MNC which possesses the overseas
subsidiary (Corporate Tax Act, Article 57). In this sense, as there is a strong possibility that FDI through overseas
subsidiaries will increase the tax avoidance of MNCs, we establish research hypothesis 1, as shown below.
Research hypothesis 1: The possession of an overseas subsidiary increases corporate tax avoidance.
Tax avoidance refers to the act in which a taxpayer performs aggressive tax planning to reduce their tax burden
(Hanlon and Heitzman 2010; Ko et al. 2013). Aggressive tax planning is made possible due to different standards in
tax law and accountingi, in turn creating what is known as a BTD (book-tax difference). However, the BTD can be
influenced by various factors, such as the accounting earnings management of the manager, tax deductions or tax
credits, and the TP of the manager through overseas transactions.
In particular, to avoid tax, the company will typically reduce accounting income or increase expenditures. However,
a company’s ability to manage accounting income through sales or purchase transactions carried out with a business
counterpart is limited. Therefore, it is typical to manage earnings using internal transactions made through the TP of
a related party (Lo et al. 2010; Lee. 2010; Choi et al. 2011). For example, taxes can be avoided in related party
transactions when the tax-burdened party raises the purchase price or the less-burdened party lowers the sales price.

Meanwhile, MNCs are tempted to minimize taxation by arbitrarily determining transfer prices in transactions with
overseas subsidiaries (Grubert and Mutti 1991; Harris et al. 1994; Grubert et al. 1994). For example, if the overseas
subsidiary is based in a country which imposes high tax rates (or low tax rates), profits can be transferred to the
parent company (or overseas subsidiary).
In this regard, the manager will make decisions in consideration of mutual tax costs. In particular, it is highly likely
that the manager will use the transfer price in related party transactions to minimize the taxes incurred by the
corporate group. Based on these predictions, we establish research hypothesis 2, as follows:
Research Hypothesis 2: MNCs that carry out more related party transactions through TP are more likely to avoid
tax.
3. RESEARCH DESIGN
3.1 Measurement of Tax Avoidance
As an act carried out by a taxpayer to reduce the tax burden, ‘tax avoidance’ refers to the reduction of tax through
legal measures unapproved by the tax law (Dyreng et al. 2008; Hanlon and Heitzman 2010). Thus, tax avoidance
behaviors are typically based on the adjustment of the size of taxable income or on the use of various tax credits or
tax reduction systems (Dyreng et al. 2008; Hanlon and Heitzman 2010). It is difficult to measure a firm’s propensity
to avoid tax due to the non-disclosure of tax affairs reports, and various studies are continuously being carried out to
make up for such limitations (Manzon and Plesko 2002; Desai and Dharmapala 2006; Dyreng et al. 2008; Choi et al.
2011). This study uses the method newly presented by Desai and Dharmapala (2006) in addition to the GAAP ETR
measure, the conventional measurement of tax avoidance.
3.1.1 GAAP ETR
First, the GAAP ETR is the amount calculated by dividing the income tax expense in the income statement by pretax
income, as shown in Eq. (1) (Zimmerman 1983; Porcano 1986). This measurement value refers to the average level
of the tax burden; it is advantageous in that it provides unlimited data and is easy to calculate.
GAAP ETRt = Income tax expenset / pretax incomet (1)
Although corporate tax avoidance is negatively related with the GAAP ETR, to facilitate an intuitive understanding
of it and a comparison with other propensities, correlation analysis and regression analysis excluding descriptive
statistics use TS (tax sheltering), which involves the multiplication of the GAAP ETR by (-1) to convert the
correlation into a positive value.
TS1t= (-1) × GAAP ETRt (2)
3.1.2 Book-Tax Difference
Desai and Dharmapala (2006) posit that tax avoidance is included in a portion that is unexplainable by the manager’s
earnings management behavior as measured as the TA (total accruals) in the BTD (book-tax difference). Thus, Eq.
(3) is used to measure corporate tax avoidance, whereas the residual of Eq. (3) becomes the measurement value of
the second propensity for tax avoidance.

BTDt = α1TAt +εt (3)
BTDt : (Book Income t – Taxable Income t )/Total Assett-1
TAt : Total Accrual t (=NI t -OCF t)/Total Asset t-1
εt (=TS2 t): second measurement value of tax avoidance
As we mentioned earlier, tax avoidance is an act of aggressive tax planning to reduce the tax burden. Due to such
characteristics, tax avoidance naturally creates BTDs (Manzon and Plesko 2002; Dyreng et al. 2008; Desai and
Dharmapala 2006). In this sense, tax avoidance is closely related to the BTD. However, the BTD is influenced by
accounting earnings management, tax avoidance through TP, and tax deductions or tax credits (Mills and Newberry
2001; Phillips et al. 2003; Berger 1993; Klassen et al. 2004).
Thus, it is very possible for the amount of tax avoided by the firm to be included in the part of the BTD that cannot
be explained by the manager’s earnings management behavior. Therefore, the amount of avoided tax can be
measured only by removing from the BTD the effect of the earnings management behavior as measured by TA from
among the BTD factors. This means of measuring the amount of avoided tax is advantageous in that it facilitates
accurate measurements, as earnings management is a factor of the BTD (Joos et al. 2000; Philips 2003; Hanlon
2005). On the other hand, the effects of tax deductions and tax credits on the BTD partially control influential
factors (e.g., the firm size, depreciation expense and company investments) during the empirical analysis through the
inclusion of tax deductions and tax credits in the regression equation (Zimmerman 1983; Porcano 1986; Wang 1991;
Stickney and McGee 1982).
TA is calculated by deducting operating cash flow from net income (Dechow et al. 1995). Meanwhile, the dependent
variable of the BTD must be calculated to use Eq. (3). The BTD is calculated by deducting TI (taxable income) from
the earning before tax. As the taxable income is confidential information, this study calculates the CTB (corporate
tax burden) as noted in the financial statement by dividing it according to the firm’s statutory tariff, as shown in Eq.
(4) (Manzon and Plesko 2002).
!"#$
TIt= (4)
!
CTBt(corporate tax burden): corporate tax expenset+( deferred tax assetst- deferred tax assetst-1)-( deferred tax
liabilitiest- deferred tax liabilityt-1)
γ: statutory tariff
3.2 Research Model
We use Eq. (5) to analyze differences in tax avoidance behaviors between MNCs with overseas subsidiaries and
other corporations.
TS1~2t=α0+α1SUBt+α2RPTt+α3 SUBt☓RPTt+α4SIZEt+α5LEVt+α6ROAt+α7PPEt+α8OCFt
+α9FORNt+α10INVt+α11INTANt+α12MTBt +∑ YEAR +∑ IND (5)
Where
TS1t : tax avoidance behaviors measured by GAAP ETR

TS2t : tax avoidance behaviors measured by Desai and Dharmapala (2006)
SUBt: 1 if a firm has overseas subsidiaries for year t, and 0 otherwise;
RPTt: total transactions to the related-party sales scaled by total sales ;
SIZEt : log of total assets;
LEVt : debt-assets ratio;
ROAt : return-on-assets, net income scaled by average total assets ;
PPEt: property, plant and equipment scaled by average total assets ;
FORNt: the percentage of common shares held by foreign investors;
INVt: acquisition of machinery and equipment scaled by average total assets;
INTANt: intangible asset scaled by average total assets;
MTBt: market-to-book ratio
∑ YEAR: year dummy
∑ IND: industry dummy
We use Eq. (5) to examine Hypothesis 1 and Hypothesis 2. For the dependent variable, the propensity of the
manager to avoid tax, this study uses the method presented by Desai and Dharmapala (2006) along with the GAAP
ETR. SUB, the main interest variable of this study, verifies whether the firm is an MNC. Thus, companies with
overseas subsidiaries are given a value of 1 and those without a subsidiary will be scored with a 0. If a company
with an overseas subsidiary shows a higher propensity to avoid tax than a firm without a subsidiary, α1 will hold a
significantly positive number.
Furthermore, the possibility of tax avoidance increases in cases of internal transactions through related-party TP, as
mentioned in research hypothesis 1. Related to this, it is predicted that α2 will hold a significantly positive number if
the increase in internal transactions through related-party TP enhances the domestic firm’s propensity to avoid tax.
On the other hand, as mentioned in research hypothesis 2, α3 will also present a significantly positive number if a
higher propensity to avoid tax is shown among MNCs that have made many transactions through related-party TP.
On the other hand, Eq. (5) controlled variables that can influence corporate tax avoidance. First, we control the firm
size (SIZE), leverage ratio (LEV) and the return on assets ratio (ROA) as variables related to company
characteristics. Large companies can establish superior taxation strategies due to economies of scale while also
facing a greater risk of being exposed to various regulations, it raises the ‘political cost hypothesis’, which states that
large firms are more inclined to prefer tax smoothing rather than aggressive tax avoidance strategies (Zimmerman
1983; Porcano 1986; Wang 1991). As for the ROA, a variable related to corporate performance, lucrative firms are
expected to be more aggressive in avoiding tax to reduce tax-related cash outflow (Ayers et al. 2009; Atwood et al.
2010). On the other hand, as the tax reduction effects that can be gained through debt use require additional interest
costs, it is likely that firms will show a rather passive attitude toward tax avoidance, which is a non-debt tax
reduction method (Graham and Tucker 2006; Wilson 2009).
As companies with a high ratio of depreciable operating assets (PPE) can use various means to lower their tax
burden, firms without spare funds (OCF) will attempt to reduce corporate tax spending and will thus be more
inclined to avoid tax aggressively (Stickney and McGee 1982; Foley et al. 2007). Furthermore, foreign investors are
more likely to show interest in book income than in taxable income. In this sense, companies with a high foreign

investor rate (FORN) are likely to be more passive in avoiding tax due to the minimal incentive to reduce taxable
income. This implies that foreign investors actively influence managers to make decisions that maximize their
profits, such as the provision of high dividends through the maximization of book income rather than the
minimization of the tax burden through tax avoidance strategies (Park & Hong 2009; Ki 2012; Jeon & Park 2014).
As the tax law in Korea provides special taxation provisions for technology and manpower development, corporate
investment (INV) was included as a control variable. Thus, a higher level of investment is expected to lower taxes
significantly, as it leads to the provision of various tax credits (Berger 1993; Klassen et al. 2004). Intangible assets
(INTAN) will be positively related with tax avoidance, as they can be used as a means to transfer income and due to
possible differences between accounting and taxable depreciation methods (Chen et al. 2010). As companies with
high future growth potential (MTB) show a weak propensity to avoid tax in general, a negative relation can be
expected (Chen et al. 2010; Robinson et al. 2010). Lastly, a year dummy and a industry dummy were added to
control for year and industry effects.
3.3 Sample Selection
Among the companies listed on the Korea Exchange from 2001 to 2010, study samples were restricted to firms that
meet the following conditions.
(1) Firms that make settlements on December 31

(2) Firms unaffiliated with the finance industry, such as banking, investment banking, securities or
insurance
(3) Firms possessing information required for empirical analyses
(4) Firms with financial variables that remain in the annual top/bottom 1% percentile
Thus, to increase sample homogeneity, samples were restricted to companies that make settlements in December,
and finance-related firms were excluded. The reason for these exclusions stems from differences between financial
firms and manufacturing or product sales companies in terms of the management environment, strategies and
accounting management methods used. Furthermore, financial firms largely differed in terms of their financial
structure from general manufacturers. On the other hand, to minimize the effect of extreme values, companies with
financial variables deviating from the top/bottom 1% were also excluded. Table 1 summarizes the sample selection
procedure.
Table 1. Sample selection

Sample selection criteria Firm-years
Initial sample traded in Korea Exchange for 2001-2010 with December fiscal years
6,740
and in non-banking industries.
(-) Observations for which selected financial data are not available (1,919)
(-) Observations that selected financial data lie outside top or bottom one percentiles (236)
= Final sample 4,585
4. RESULTS OF THE EMPIRICAL ANALYSIS
4.1 Descriptive Statistics and Correlation Analysis
Table 2 presents the descriptive statistics of the main variables used in this study. The mean value (median) of the
GAAP ETR is 0.209 (0.242). The mean value (median) of TS2 is 0.012 (0.011), and the mean (median) value of
TS3 is 0.009 (0.005).
The mean value of SUB, the major interest variable in this study, is 0.049, showing that nearly 5% of sample firms
own overseas subsidiaries. The mean value of RPT (related party transactions) is 0.025. On the other hand, the mean
values of LEV and ROA is 0.453 and 0.072, respectively, implying that many lucrative firms with outstanding
capital structures are included in the study sample. The mean value (median) of FORN is 10.422 (2.800), thus
showing a large difference between the mean and the median. This appears to have resulted because foreign
investment is generally weighted toward a few large corporations.

Table 2. Descriptive Statistics of Selected Variables

Variables Mean Std.Dev. 1% 25% Median 75% 99%
GAAP ETRt 0.209 0.190 -0.506 0.155 0.242 0.293 0.631
TS2t 0.012 0.041 -0.089 -0.011 0.011 0.033 0.130
TS3t 0.009 0.025 -0.048 -0.003 0.005 0.016 0.104
SUBt 0.049 0.216 0.000 0.000 0.000 0.000 1.000
RPTt 0.025 0.136 0.000 0.002 0.012 0.031 0.118
SIZEt 26.447 1.483 23.877 25.403 26.169 27.238 30.707
LEVt 0.453 0.202 0.072 0.305 0.454 0.593 0.911
ROAt 0.072 0.354 0.002 0.028 0.053 0.090 0.267
PPEt 0.206 0.142 0.003 0.104 0.178 0.277 0.641
OCFt 0.073 0.092 -0.124 0.022 0.066 0.118 0.342
FORNt 10.422 15.405 0.000 0.090 2.800 14.940 64.390
INVt 0.006 0.014 0.000 0.000 0.002 0.007 0.071
INTANt 0.010 0.030 -0.030 0.000 0.002 0.009 0.126
MTBt 1.032 1.161 0.139 0.434 0.712 1.206 5.562
Table 2 presents the descriptive statistics of the main variables used in this study. The sample consists of 4,585 non-
financial firm-years that are traded over Korean Stock Exchange for 2001-2010 with non-missing data collected
from KIS-Value and database. GAAP ETRt is income tax at the end of year t divided pretax income. TS2t is tax
avoidance calculated as the absolute value of the residual estimated from the cross-sectional Desai and
Dharmapala’s (2006) model: BTDt = α1 TAt + et where BTDt is book-tax differences, and TAt is total accruals. TS3t
is tax avoidance calculated as tax subsidy on equity. SUBt is a dummy variable that equals 1 if a firm has overseas
subsidiaries, and 0 otherwise. RPTt is total transactions to the related-party sales scaled by total sales. SIZEt is log of
total assets. LEVt is debt-assets. ROAt is return-on-assets, net income scaled by average total assets. PPEt is
property, plant and equipment scaled by average total assets. FORNt is the percentage of common shares held by
foreign investors. INVt is acquisition of machinery and equipment scaled by average total assets. INTANt is
intangible asset scaled by average total assets. MTBt is market-to-book ratio.
Table 3 presents the correlations between the main variables. When observing the correlations between variables
showing tax avoidance, it becomes clear that tax avoidance as measured through the GAAP ETR (TS1t) and tax
avoidance as measured through the method given by Desai and Dharmapala (2006) (TS2t) have strong positive
correlation at 0.255 at the 1% significance level. The correlation between tax avoidance as measured through the
GAAP ETR (TS1t) and tax avoidance as measured through tax subsidies on equity (TS3) is significantly positive at
0.076 at the 1% significance level. Furthermore, tax avoidance measured through the method given by Desai and
Dharmapala (2006) (TS2t) has a statistically significant positive correlation of 0.060 with tax avoidance measured
through tax subsidies on equity (TS3t). Thus, correlations between measurements showing tax avoidance are
significantly positive in general.
Meanwhile, tax avoidance generally presents a positive correlation with ROAt, PPEt, INVt and INTANt, but it is
negatively related with FORNt and OCFt.

Table 3. Pearson Correlations

Variable TS2t TS3t SUBt RPTt SIZEt LEVt ROAt PPEt OCFt FORNt INVt INTANt MTBt
TS1t 0.255 0.076 -0.037 0.022 -0.044 0.023 0.025 0.057 -0.047 -0.076 0.064 0.007 0.004
TS2t 0.060 0.014 0.001 0.084 0.123 0.038 0.248 0.670 0.030 0.075 0.086 0.109
TS3t -0.011 -0.004 0.081 0.059 0.190 0.025 0.029 -0.024 0.008 -0.035 0.041
SUBt 0.001 0.187 0.109 -0.012 -0.102 -0.037 0.089 -0.033 -0.018 0.012
RPTt 0.074 -0.001 -0.002 0.034 -0.009 0.048 -0.003 -0.004 0.004
SIZEt 0.177 -0.048 0.173 0.074 0.478 -0.162 0.040 0.149
LEVt -0.007 0.228 -0.062 -0.115 -0.023 0.097 0.111
ROAt -0.032 -0.259 0.019 0.048 -0.005 0.335
PPEt 0.200 0.025 0.124 0.026 -0.031
OCFt 0.176 0.121 0.084 0.162
FORNt -0.039 0.027 0.284
INVt 0.064 0.078
INTANt 0.189
Table 3 presents the correlations between the main variables. TS1t is tax avoidance which multiplies (-) with the
GAAP ETR. TS2t is tax avoidance calculated as the absolute value of the residual estimated from the cross-sectional
Desai and Dharmapala’s (2006) model: BTDt = α1 TAt + et where BTDt is book-tax differences, and TAt is total
accruals. TS3t is tax avoidance calculated as tax subsidy on equity for year t. SUBt is a dummy variable that equals 1
if a firm has overseas subsidiaries, and 0 otherwise. RPTt is total transactions to the related-party sales scaled by
total sales. SIZEt is log of total assets. LEVt is debt-assets. ROAt is return-on-assets, net income scaled by average
total assets. PPEt is property, plant and equipment scaled by average total assets. FORNt is the percentage of
common shares held by foreign investors. INVt is acquisition of machinery and equipment scaled by average total
assets. INTANt is intangible asset scaled by average total assets. MTBt is market-to-book ratio. The sample consists
of 4,585 non-financial firm-years that are traded over Korean Stock Exchange for 2001-2010 with non-missing data
collected from KIS-Value and database. Two-tailed t-test, coefficients in bolds and italics are significant at less than
1% level.
4.2 Correlation Between MNCs and Tax Avoidance
4.2.1 Use of the GAAP ETR as a Measurement of Tax Avoidance
Table 4 presents the results of hypotheses 1 and 2. The GAAP ETR (TS1t)ii was used as the dependent variable. Our
main interest variables are (SUBt) and (RPTt) and we control the financial variables that can influence corporate tax
avoidance.
First, the result of the verification of hypothesis 1(α1) shows that there is no relation between MNCs and tax
avoidance. The absence of a relation between the two variables may have arisen due to the following reasons. Tax
avoidance is a taxation strategy for reducing the tax burden by applying tax laws to the taxpayer’s advantage
through the use of differences between tax laws and accounting. Due to such characteristics, tax avoidance naturally
creates BTDs (Manzon and Plesko 2002; Dyreng et al. 2008; Desai and Dharmapala 2006). In this sense, tax
avoidance is closely related to BTDs. However, BTDs are influenced by earnings management, tax avoidance
through TP, and tax deductions or tax credits (Mills and Newberry 2001; Phillips et al. 2003; Berger 1993; Klassen
et al. 2004). On the other hand, as the GAAP ETR merely shows the corporate tax burden without capturing the
fundamentals of corporate tax avoidance, it may not have the ability to distinguish a firm’s propensity to avoid tax
(Wilkie and Limberg 1993; Dyreng et al. 2008).
Next, when observing the second and third columns, it becomes clear that there is a significantly positive relation
between RPT and corporate tax avoidance as measured through the GAAP ETR (TS1t). The coefficient of RPT is
0.031 and significantly positive at the 5% level. Therefore, it was shown that companies minimized their tax burden
through arbitrary decisions about the transfer price in RPT.
On the other hand, α3 in the last column presents the results on the verification of research hypothesis 2. The
coefficient of SUBt *RPTt is 0.048 and significantly negative at 1% level. It means that among MNCs with overseas
subsidiaries, those that carried out many foreign RPTs showed a higher propensity to avoid tax.
To summarize the results of Table 4 below, there appeared to be no relation between MNCs and corporate tax
avoidance, but MNCs carrying out many foreign RPTs appeared to avoid tax aggressively by using TP.
Table 4. The Regression Analysis of Tax Avoidance Using TS1

Variables Exp. Sign Coeffs (t-stat)a Coeffs (t-stat)a Coeffs (t-stat)a
*
Intercept +/- -0.139 (-2.05) -0.109 (-1.65) -0.122 (-1.93) *
SUBt + -0.018 (-1.58) -0.040 (-1.14)
RPTt + 0.031 (2.11) ** 0.028 (1.88) *
SUBt*RPTt + 0.046 (1.76) *
SIZEt +/- -0.004 (-1.3) -0.006 (-2.1) ** -0.005 (-1.96) *
LEVt - 0.007 (0.28) 0.005 (0.21) 0.009 (0.36)
ROAt + 0.528 (4.86) *** 0.530 (4.71) *** 0.527 (4.68) ***
PPEt + 0.105 (2.91) ** 0.114 (3.24) *** 0.108 (2.96) ***
OCFt - -0.258 (-5.7) *** -0.259 (-5.87) *** -0.259 (-5.83) ***
FORNt - -0.001 (-4.5) *** -0.001 (-4.44) *** -0.001 (-4.34) ***
INVt + 0.718 (3.9) *** 0.700 (4.02) *** 0.714 (4.02) ***
INTANt + -0.057 (-0.47) -0.062 (-0.5) -0.067 (-0.54)
MTBt - 0.006 (0.88) 0.007 (0.95) 0.007 (0.94)
∑YEAR Included Included Included
∑IND Included Included Included
Adj. R2 0.191 0.190 0.191
Table 4 presents the results of hypotheses 1 and 2. The dependent variable is TS1t. TS1t is tax avoidance which
multiplies(-) with the GAAP ETR. SUBt is a dummy variable that equals 1 if a firm has overseas subsidiaries, and 0
otherwise. RPTt is total transactions to the related-party sales scaled by total sales. SIZEt is log of total assets. LEVt
is debt-assets. ROAt is return-on-assets, net income scaled by average total assets. PPEt is property, plant and
equipment scaled by average total assets. FORNt is the percentage of common shares held by foreign investors. INVt
is acquisition of machinery and equipment scaled by average total assets. INTANt is intangible asset scaled by
average total assets. MTBt is market-to-book ratio. The sample consists of 4,585 non-financial firm-years that are
traded over Korean Stock Exchange for 2001-2010 with non-missing data collected from KIS-Value database. a*,
**, *** is two-tailed t-test with t-statistics adjusted for clustering of standard errors by firm and year, significant at
less than 10%, 5%, and 1% levels, respectively.
When observing the other control variables that can influence corporate tax avoidance, SIZEt presents a statistically
significantly negative relation with TS1. These results imply that large corporations show a more passive stance in
terms of tax avoidance, as they prefer tax smoothing, as stated in the political cost hypothesis (Zimmerman 1983;
Porcano 1986; Wang 1991). As predicted, ROAt, PPEt and INVt are positively related with corporate tax avoidance.
A higher foreigner investment ratio was negatively related with corporate tax avoidance. This implies that foreign
investors who invest in Korea show a relatively passive attitude regarding tax avoidance, as they prefer high
dividends and value profitability indicators (Park & Hong 2009). As predicted, there is significantly negative
relation between operating cash flow and TS1, corresponds to the expectation that firms with insufficient liquidity
will be more aggressive in their efforts to avoid taxes (Foley et al. 2007).
4.2.2 Use of the Method Presented by Desai and Dharmapala (2006) as a Measurement of Tax Avoidance
Table 5 presents the regression results that measures tax avoidance using the method presented by Desai and
Dharmapala (2006). TS2 presented by Desai and Dharmapala (2006), the measurement of tax avoidance, is a
dependent variable. Our main interest variables are SUBt and RPTt. We also control the financial variables that can
influence corporate tax avoidance.
First, the results of the verification of hypothesis 1 show that tax avoidance increases among MNCs with overseas
subsidiaries and related parties transactions. Thus, there are a significantly positive relation between TS2(the
measurement of tax avoidance) and SUBt. Furthermore, the coefficient of RPT is 0.04 and significantly positive at
the 5% level.

Column 3 represents the result of hypothesis 2. The coefficient of SUBt* RPTt is 0.017 and significantly positive at
the 5% level. It means that among MNCs with overseas subsidiaries, those that carried out many foreign RPTs
showed a higher propensity to avoid tax.
To summarize the results of Table 5, a significantly positive relation was shown between MNCs and the manager’s
propensity to avoid tax, thus implying that managers of MNCs avoided tax through related-party TP. In this sense,
tax avoidance was more common among MNCs with overseas subsidiaries, and the propensity to avoid tax
increased among firms that carried out more internal transactions through related-party TP. It means that companies
actively pursued tax avoidance strategies for reducing their tax burden through both FDI and internal transactions
through TP between overseas subsidiaries.
On the other hand, when observing the other control variables that can influence corporate tax avoidance, ROAt and
PPEt are in general positively related with tax avoidance, as predicted. However, contrary to our expectations, TS2t
is significantly positive relations with OCFt and LEVt, a finding similar to the results in earlier studies (Park & Hong
2009; Choi et al. 2011: Jeon 2013).

Intercept +/- -0.015 (-1.06) -0.016 (-1.18) -0.012 (-0.83)
SUBt + 0.004 (3.31) *** 0.004 (2.73) **
RPTt + 0.004 (2.77) ** 0.004 (2.32) **
SUBt*RPTt + 0.017 (2.36) **
SIZEt +/- 0.000 (-0.03) 0.000 (-0.07) 0.000 (-0.3)
LEVt - 0.028 (3.92) *** 0.028 (3.97) *** 0.028 (3.94) ***
ROAt + 0.222 (5.54) *** 0.223 (5.54) *** 0.222 (5.52) ***
PPEt + 0.013 (3.04) *** 0.012 (2.96) ** 0.014 (3.08) ***
OCFt - 0.423 (35.64) *** 0.423 (35.88) *** 0.423 (35.44) ***
FORNt - -0.000 (-7.01) *** -0.000 (-6.84) *** -0.000 (-6.87) ***
INVt + -0.057 (-1.26) -0.055 (-1.25) -0.057 (-1.27)
INTANt + 0.017 (0.51) 0.014 (0.44) 0.015 (0.45)
MTBt - 0.001 (0.46) 0.001 (0.47) 0.001 (0.52)
Adj. R2 0.586 0.636 0.588
Table 5 presents the regression results that measures tax avoidance using the method presented by Desai and
Dharmapala (2006). TS2 presented by Desai and Dharmapala (2006), the measurement of tax avoidance, was used
as the dependent variable. TS2t is tax avoidance calculated as the absolute value of the residual estimated from the
cross-sectional Desai and Dharmapala’s (2006) model: BTDt = α1 TAt + et where BTDt is book-tax differences, and
TAt is total accruals. SUBt is a dummy variable that equals 1 if a firm has overseas subsidiaries, and 0 otherwise.
RPTt is total transactions to the related-party sales scaled by total sales. SIZEt is log of total assets. LEVt is debt-
assets. ROAt is return-on-assets, net income scaled by average total assets. PPEt is property, plant and equipment
scaled by average total assets. FORNt is the percentage of common shares held by foreign investors. INVt is
acquisition of machinery and equipment scaled by average total assets. INTANt is intangible asset scaled by average
total assets. MTBt is market-to-book ratio. The sample consists of 4,585 non-financial firm-years that are traded
over Korean Stock Exchange for 2001-2010 with non-missing data collected from KIS-Value database. a*,**, *** is
two-tailed t-test with t-statistics adjusted for clustering of standard errors by firm and year, significant at less than
10%, 5%, and 1% levels, respectively.
To summarize Tables 4 and 5, corporate tax avoidance increased in firms that carried out many internal transactions
through related-party TP, and MNCs pursued aggressive tax avoidance strategies to reduce their tax burdens by
carrying out internal transactions through overseas related-party TP. However, there are mixed results between
corporate tax avoidance and the possession of overseas subsidiaries. In other words, significant relations are not
found when the GAAP ETR (TS1t) was used as the measurement of tax avoidance, but there is a positive relation
between corporate tax avoidance and the possession of overseas subsidiaries during the use of the tax avoidance as
measured by Desai and Dharmapala (2006) (TS2t). In this sense, as the results of hypothesis 1 differ according to the
measurement of corporate tax avoidance, we conduct a robustness analysis using a different measurement of tax
avoidance.
5. ROBUSTNESS ANALYSIS
This chapter verifies hypotheses 1 and 2 with different measurements of corporate tax avoidance. Tax avoidance as
measured by the GAAP ETR failed to reflect the fundamental traits of tax avoidance. Tax avoidance naturally
creates BTDs, which are in turn influenced by earnings management, tax avoidance through TP, and tax deductions
or tax credits (Mills and Newberry 2001; Phillips et al. 2003; Berger 1993; Klassen et al. 2004). Thus, it is highly
likely that a manager’s tax avoidance behavior is included in the portion that is unexplainable by the manager’s
earnings management behavior carried out for accounting purposes with regard to the BTD. However, as the GAAP
ETR merely shows the corporate tax burden without capturing the fundamentals of corporate tax avoidance, it may
lack the ability to distinguish a firm’s propensity to avoid tax (Wilkie and Limberg 1993; Dyreng et al. 2008).
In this sense, TSE (tax subsidy on equity), which facilitates a more direct measurement of corporate tax benefits,
may be a more appropriate measure of corporate tax avoidance in terms of availability or credibility (Wilkie and
Limberg 1993; Park & Hong 2009). Therefore, TSE is used as a complementary measure of corporate tax avoidance,
as it meets the definition of tax avoidance specified in this study, which explicitly states that tax benefits also result
in the reduction of taxes. Thus, the third measurement of tax avoidance TSE (TS3t) is measured by Eq. (6).
TS3 t = (pretax incomet *statutory tariff t – CTB)/ total equity t-1 (6)
Where;
CTBt (corporate tax burden): corporate tax expenset+( deferred tax assetst- deferred tax assetst-1)-( deferred tax
liabilitiest- deferred tax liabilityt-1)
Table 6 reports the results of hypothesis 1 and 2. TS3t measured through TSE, the complementary measurement of
tax avoidance, is used as the dependent variable. Our major interest variable is SUBt and RPTt and we also control
the financial variables that can influence corporate tax avoidance.
First, the results of the hypothesis 1 show that managers of MNCs with overseas subsidiaries aggressively carried
out tax avoidance behaviors. Thus, there are statistically positive relation between TS3t and MNCs. It means that
managers of MNCs were more inclined to avoid tax than those of other firms. Furthermore, there are significantly
positive relation between TS3 and RPT. In summary, the results show that companies engage in active tax avoidance
behaviors by holding overseas subsidiaries or by carrying out internal transactions through related-party TP.
The last column in table 6 represents the results of hypothesis 2. The coefficient of SUB*RPT is 0.008 and
significantly positive at the 5% level. It means that among MNCs with overseas subsidiaries, those that carried out
many internal transactions through overseas related-party TP showed a higher propensity to avoid tax. When
observing the other control variables that can influence corporate tax avoidance shown in Table 6 below, SIZEt
presents a significantly positive relation with TS3 at the 1% level. This appears to be due to the abundant resources
possessed by large corporations, which that can be used to influence the political process to the firm’s advantage and
to organize corporate activities to avoid tax (Siegfried 1974; Choi et al. 2011). On the other hand, tax avoidance
(TS3t) shows a significantly positive relation with the control variables LEVt and ROAt and a negative relation with
FORNt, thus presenting results similar to those in Table 5.
In summary, the results of Table 6 show a significantly positive relation between MNCs and the manager’s
propensity to avoid tax, thus showing that managers of MNCs aggressively carried out tax avoidance behaviors. On
the other hand, among MNCs with overseas subsidiaries, those that carried out more foreign-related party
transactions showed a higher propensity to avoid tax. This implies that MNCs pursue aggressive tax avoidance
strategies by adjusting transfer prices between foreign-related parties.


***
Intercept +/- -0.057 (-4.8) -0.054 (-4.51) *** -0.054 (-4.53) ***
*
SUBt + 0.001 (1.95) 0.006 (1.85) *
RPTt + 0.004 (2.77) ** 0.004 (2.49) **
SUBt*RPTt + 0.008 (2.43) **
SIZEt +/- 0.002 (3.84) *** 0.002 (3.36) *** 0.002 (3.37) ***
LEVt - 0.013 (2.46) ** 0.013 (2.39) ** 0.013 (2.47) **
ROAt + 0.124 (6.4) *** 0.125 (6.44) *** 0.125 (6.42) ***
PPEt + -0.002 (-0.32) -0.001 (-0.15) -0.001 (-0.22)
OCFt - -0.011 (-1.0) -0.011 (-0.99) -0.011 (-0.99)
FORNt - -0.000 (-4.4) *** -0.000 (-4.55) *** -0.000 (-4.58) ***
INVt + 0.028 (0.73) 0.027 (0.71) 0.029 (0.76)
INTANt + 0.031 (2.12) * 0.032 (2.11) * 0.032 (2.14) *
MTBt - -0.001 (-1.01) -0.001 (-0.92) -0.001 (-0.93)
Adj. R2 0.245 0.244 0.245
The dependent variable is TS3t. TS3t is tax avoidance calculated as tax subsidy on equity. SUBt is a dummy variable
that equals 1 if a firm has overseas subsidiaries, and 0 otherwise. RPTt is total transactions to the related-party sales
scaled by total sales. SIZEt is log of total assets. LEVt is debt-assets. ROAt is return-on-assets, net income scaled by
average total assets. PPEt is property, plant and equipment scaled by average total assets. FORNt is the percentage of
common shares held by foreign investors. INVt is acquisition of machinery and equipment scaled by average total
assets. INTANt is intangible asset scaled by average total assets. MTBt is market-to-book ratio. The sample consists
of 4,585 non-financial firm-years that are traded over Korean Stock Exchange for 2001-2010 with non-missing data
collected from KIS-Value database. a*,**, *** is two-tailed t-test with t-statistics adjusted for clustering of standard
errors by firm and year, significant at less than 10%, 5%, and 1% levels, respectively.
6. CONCLUSION
This study verified whether additional tax avoidance effects exist in relation to the overseas subsidiaries of MNCs.
The following summarizes the results of the empirical analysis conducted with 4,585 Korean firms from 2001 to
2010 by company and year. First, we find that tax avoidance generally increases among MNCs that are
internationally diversified through the possession of overseas subsidiaries. In other words, the results show a
positive relation between globally diversified MNCs and corporate tax avoidance. This is likely due to the firms’ use
of aggressive tax strategies appropriate to the various countries in which they have expanded their businesses.
Second, we also find that MNCs use overseas TP behaviors to avoid tax actively when compared to firms without
overseas subsidiaries. Thus, the corporate tax avoidance strategies of the parent company were increased by their
adjustments of sales and purchase prices through actual transactions.
This study differs from previous literatures in the following respects. First, most studies researching the effects of
FDI through overseas subsidiaries on corporate tax avoidance mainly analyzed companies that are headquartered in
an advanced nation. However, this study analyzes the effects of FDI through overseas subsidiaries on the
management’s propensity to avoid tax by studying Korean companies that have the traits of both developed and
emerging markets. Second, previous studies related to FDI and tax law most typically studied tax rates and
investments, whereas tax havens have been the main topic of research in relation to tax avoidance. On the other
hand, this study provides empirical evidence of related theories through research conducted on tax avoidance
through normal transactions. Lastly, this study enhances the robustness of earlier results using various tax avoidance
measurements. This study uses the traditional tax avoidance measurement (GAAP ETR) and the D&D (2006) model
to verify the effects of tax avoidance through FDI. Robustness is also verified through the W&L model.
This study holds significance in that it showed how FDI and overseas TP behaviors through foreign subsidiaries can
be used by companies to avoid tax. This also explains why MNCs are recently increasing their efforts by to build

additional local production factories. In this sense, this study has important implications that should be noted by
national governments hoping actively to attract companies in the future.
AUTHOR BIOGRAPHIES
Dr. Sung Jin Park is an assistant professor at the department of business administration, Sungshin Women’s
University. His research focuses on financial accounting, auditing, management information system, management
& cost accounting, taxation. (1st author)
Dr. Woo Jin Park is an assistant professor at the college of Government and Business, Yonsei University. His
research focuses on International Financial Reporting Standards(IFRS), Continuous Auditing Systems, R&D
investment in IT industry, strategic management information systems, project management, international taxation
and accounting. (corresponding author)
Dr. Eun Jung Sun is an assistant professor at Hannam University. Research interests included management
information system, management & cost accounting, and government accounting. (co-author)
Sohee Woo is an assistant professor at Woosong University in Korea. Research interests included auditing,
corporate governance, financial management and capital market in accounting. (co-author)
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The Journal of Applied Business Research – May/June 2016 Volume 32, Number 3

Is Foreign Direct Investment

2. PRECEDENT STUDIES AND RESESARCH HYPOTHESIS

2.1 Precedent Studies

2.1.1 Foreign Direct Investment

Copyright by author(s); CC-BY 918 The Clute Institute

2.1.2 Tax Avoidance Behavior

2.2 Research Hypothesis

Copyright by author(s); CC-BY 920 The Clute Institute

3.1 Measurement of Tax Avoidance

3.1.1 GAAP ETR

GAAP ETRt = Income tax expenset / pretax incomet (1)

TS1t= (-1) × GAAP ETRt (2)

3.1.2 Book-Tax Difference

Copyright by author(s); CC-BY 921 The Clute Institute

BTDt = α1TAt +εt (3)

BTDt : (Book Income t – Taxable Income t )/Total Assett-1

TAt : Total Accrual t (=NI t -OCF t)/Total Asset t-1

εt (=TS2 t): second measurement value of tax avoidance

3.2 Research Model

TS1t : tax avoidance behaviors measured by GAAP ETR

Copyright by author(s); CC-BY 922 The Clute Institute

TS2t : tax avoidance behaviors measured by Desai and Dharmapala (2006)

SUBt: 1 if a firm has overseas subsidiaries for year t, and 0 otherwise;

RPTt: total transactions to the related-party sales scaled by total sales ;

SIZEt : log of total assets;

LEVt : debt-assets ratio;

ROAt : return-on-assets, net income scaled by average total assets ;

PPEt: property, plant and equipment scaled by average total assets ;

FORNt: the percentage of common shares held by foreign investors;

INVt: acquisition of machinery and equipment scaled by average total assets;

INTANt: intangible asset scaled by average total assets;

MTBt: market-to-book ratio

∑ YEAR: year dummy

∑ IND: industry dummy

Copyright by author(s); CC-BY 923 The Clute Institute

3.3 Sample Selection

(1) Firms that make settlements on December 31

Table 1. Sample selection

4. RESULTS OF THE EMPIRICAL ANALYSIS

4.1 Descriptive Statistics and Correlation Analysis

Copyright by author(s); CC-BY 924 The Clute Institute

Table 2. Descriptive Statistics of Selected Variables

Copyright by author(s); CC-BY 925 The Clute Institute

Table 3. Pearson Correlations

4.2 Correlation Between MNCs and Tax Avoidance

4.2.1 Use of the GAAP ETR as a Measurement of Tax Avoidance

Table 4. The Regression Analysis of Tax Avoidance Using TS1

Copyright by author(s); CC-BY 927 The Clute Institute

Table 5. The Regression Analysis of Tax Avoidance Using TS2

Copyright by author(s); CC-BY 929 The Clute Institute

Table 6. The Regression Analysis of Tax Avoidance Using TS3

Copyright by author(s); CC-BY 930 The Clute Institute

Copyright by author(s); CC-BY 932 The Clute Institute

Copyright by author(s); CC-BY 933 The Clute Institute

Copyright by author(s); CC-BY 934 The Clute Institute

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