Effect of the trusted taxpayer designation on corporate tax avoidance behaviour: Evidence from Korea

Manuscript type: Research paper Research aims: This study focuses on the efficacy of the trusted taxpayer system in Korea by examining whether firms designated as trusted taxpayers are more likely to pay taxes faithfully, and consistently when compared to firms that are not designated. Design/Methodology/Approach: This study uses the ordinary least squares (OLS) method, and specifically, the trusted taxpayer designation as an indicator of tax compliance while the book-tax difference (BTD), and the discretionary BTD are used as a measure of tax avoidance. Research findings: Results show that firms designated as trusted taxpayers are less likely to avoid taxes than firms not designated. Among firms that are designated as trusted taxpayers, it appears that firms with CEOs who come from founding families, firms that are non-SMEs (other than small and medium sized firms defined by the Small Business Act of Korea), and firms whose majority shareholder ownership is greater than the median, are less likely to avoid taxes. Theoretical contribution/Originality: To the best of our knowledge, this study is the first to use a tax avoidance measure to examine the effect of the trusted taxpayer designation on corporate tax avoidance by comparing firms that are designated and firms that are not designated as trusted taxpayers. Practitioner/Policy implications: This study shows that firms designated as trusted taxpayers are less likely to avoid taxes than firms that are not designated. This implies that the current trusted taxpayer system implemented by the Korean tax authority is effective and should be promoted. Research limitations: The Korean tax authority announces the designation of trusted taxpayers separately for corporate businesses and self-employed businesses. The results of this study are confined to the data of corporate businesses only.