Related party transactions and tax avoidance: does government ownership play a role?
Abstract
Purpose
This study aims to examine the association between related-party transactions (RPT) and tax avoidance. The study further investigates whether government ownership improves scrutiny of tax aggressiveness activities among Taiwanese group companies.
Design/methodology/approach
The authors used 16,061 firm-year observations derived from the Taiwan Economic Journal Database (TEJ) from 2005 to 2021. The authors applied GLS fixed-effect regression. Additional tests, such as a difference-in-difference examination, propensity score matching (PSM) analysis and other tests were performed to obtain more robust results.
Findings
The results show different consequences between eliminated and non-eliminated RPT toward tax avoidance. RPT enhances tax benefits aligned with the efficient contracting hypothesis. Under varying degrees of government control, this paper empirically reveals that government ownership has a role in mitigating tax avoidance. This implies that government control improves corporate governance by balancing opportunistic and efficiency-based tax avoidance.
Practical implications
This paper provides substantial practical implications since using the strategy of reducing taxes through RPT will result in greater tax savings at the business group level. Therefore, RPT is beneficial for enhancing business efficiency. Furthermore, government control increases corporate governance quality, which could lead to balancing tax aggressiveness activity.
Originality/value
Using a unique setting for RPT reporting in Taiwan, this paper divides RPT into eliminated and non-eliminated RPT. The findings offer significant insight for policymakers, investors and managers regarding the utilization of RPT to enhance efficiency in business groups. Additionally, this paper highlights the role of government control in preserving a harmonious balance in tax planning practices.
Keywords
Acknowledgements
The authors have greatly benefited from the valuable comments and suggestions of two anonymous referees. The authors are also grateful for the insightful guidance provided by Professor Gabriel Eweje (the Editor) during the review process. The first author would like to thank Professor Li-Jen He for the valuable insights and recommendations during the seminar discussion at the National Yunlin University of Science and Technology. The second author wishes to express gratitude for the financial support provided by the National Science and Technology Council in Taiwan, R.O.C. (MOST 110-2410-H-224-002).
Citation
Solikhah, B., Chen, C.-L., Weng, P.-Y. and Al-Faryan, M.A.S. (2024), "Related party transactions and tax avoidance: does government ownership play a role?", Corporate Governance, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/CG-01-2024-0003
Publisher
:Emerald Publishing Limited
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