Effects of business strategies on the selection of trusted taxpayers: case of South Korea

Abstract

ABSTRACT This study examines the effects of corporate business strategies on the selection of companies as trusted taxpayers in South Korea. The financial policies of companies with a prospector-type business strategy reflect inherent business uncertainties and risks, resulting in overvalued assets and profits and undervalued liabilities and expenses. By contrast, companies adopting a defender-type business strategy tend to accomplish economies of scale through various products and services, resulting in undervalued assets and profits and overvalued liabilities and expenses. Consequently, companies with a prospector-type business strategy are expected to be more likely to be selected as trusted taxpayers than companies using a defender-type business strategy. Our empirical analysis confirms that the probability of selection as a trusted taxpayer increases significantly when the company is a prospector and decreases significantly when the company is a defender. That is, prospector companies have a higher probability of selection as trusted taxpayers due to their aggressive accounting measures, whereas defender companies have a lower probability of selection as trusted taxpayers due to their conservative accounting measures. These findings have implications for tax authorities and executives by illustrating the characteristics required for companies to be selected as trusted taxpayers