The Effect Of The Relationships Between Affiliated Firms On Direction Of Income Shifting Within Business Groups

Abstract

In this study, we examined how income shifting performs among affiliates in a business group to maximize the benefits of the entire business group in terms of minimizing the tax burden, with a particular focus on the direction of income shifting between affiliates within the business group. We find that tax-related decision-making for the entire business group is affected by the relationships between the affiliated firms, that is, the ownership structure of the whole business group. To analyze the ownership structure, we use centrality measures in a social network analysis. The results show that affiliates with the higher outdegree-centrality; that is, firms investing more shareholdings in other affiliates have a tendency to perform more income shifting. On the other hand, the affiliates with high indegree-centrality, that is, firms which are owned by other affiliates, were revealed to be given the income shifting from other affiliated firms to minimize the tax burden of the entire business group.