Abstract
This study examines the association between the effective corporate tax rate and the volatility of future effective corporate tax rates in Korean companies. We analyzed the effect of corporate governance on the association between tax avoidance and tax risk. Our sample is comprised of all the firms listed on the Korea Composite Stock Price Index market. We measure each firm’s tax avoidance as GAAP ETR, Cash ETR, and BTD, and use the corporate governance rating of the Korea Corporate Governance Service to measure corporate governance. Our results show that the volatility of the effective corporate tax rate and the effective corporate tax rate would have a significant negative association. Our results show that tax risk decreases when the corporate tax avoidance level increases and the tax risk increases when the corporate tax avoidance level decreases. In addition, we find that the better the corporate governance structure, the higher the level of supervision and control of managers, thereby mitigating the impact of tax evasion on future corporate tax risk. The findings of this study regarding tax avoidance and corporate governance are important for investors because tax risk can significantly affect investor welfare.
Highlights
This study examines the association between the effective corporate tax rate and the volatility of future effective corporate tax rates in Korean companies
Our results show that tax risk decreases when the corporate tax avoidance level increases and the tax risk increases when the corporate tax avoidance level decreases
This study suggests that tax risk decreases as the level of corporate tax avoidance increases, suggesting that various approaches should be taken in researching the effect of tax avoidance on tax risk in the future
Summary
This study examines the association between the effective corporate tax rate and the volatility of future effective corporate tax rates in Korean companies. As suggested by previous studies, if a company implements a temporary tax avoidance strategy that cannot be maintained continuously in the future, the volatility of the effective corporate tax rate will increase in the future. Companies with good corporate governance will allow management to keep the volatility of the effective corporate tax rate low For this reason, there is an incentive for management to avoid tax through a more sustainable tax strategy. As a result of the analysis, this paper found that the better the corporate governance of a company, the higher the level of supervision and control of managers, thereby alleviating the uncertainty of the effective corporate tax rate in the future. This paper has the contribution of presenting empirical results that corporate governance plays a role in controlling future corporate tax risk
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