Is Foreign Direct Investment Effective From The Perspective Of Tax Avoidance? An Analysis Of Tax Avoidance Through The International Transfer Pricing Behaviors Of Korean Corporations

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Sung Jin Park
Woo Jin Park
Eun Jung Sun
Sohee Woo

Keywords

Transfer Pricing Behavior, Tax Avoidance, FDI (Foreign Direct Investment), Overseas Subsidiary, MNC (Multinational Company)

Abstract

This study examines whether multinational companies carry out tax avoidance through subsidiaries. An empirical analysis was conducted of 4,585 Korean firms from 2001 to 2010 by company and year. The results are as follows. First, MNCs that have become more internationally diversified through the establishment of overseas subsidiaries generally show a higher tendency to avoid tax. Thus, the analysis results show a positive correlation between globally diversified MNCs and corporate tax avoidance. This correlation is established due to the firms' active use of tax strategies (investment tax credits, tax cuts) applicable to the various countries in which they have expanded their businesses. Second, the analysis results showed that these firms actively avoided tax with overseas transfer pricing behaviors when compared to companies without overseas subsidiaries. Thus, the adjustment of sales prices and purchase value through actual transactions increased the propensity of the parent company to avoid tax. 

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