The effect of tax system of corporate tax on unappropriated earnings on the Tax avoidance: Focus on ESG-Scored performance

This study analyzes the impact of the non-refundable tax system on corporate tax planning at the financial reporting stage. A non-refundable tax system is a system that taxes a certain amount of corporate income as additional corporate tax if it is not spent on investment, wages, etc. Therefore, this study analyzed the impact of tax avoidance to reduce the burden of the reverse tax system in anticipation of its temporary introduction on long-term decisions such as investment and wages, and the impact of ESG performance of companies subject to the reverse tax system on tax avoidance in the early planning stage. To this end, we empirically analyze the relationship between ESG performance, tax avoidance, and earnings adjustment(AEM or REM) using ESG evaluation data(integrated score and evaluation score) from the Korea ESG Institute(KCGI) for companies listed on the KRX from 2015 to 2020, when the non-refundable tax system was applied. First, we found that the discretionary accruals(AEM) earnings adjustment of companies subject to the non-refundable tax system is higher than that of companies not subject to the system. However, we do not find an increase in the adjustment of real activity profit (REM) between the two groups. However, it is analyzed that the non-refundable tax-eligible companies use AEM to plan for tax avoidance at the financial reporting stage when making tax planning. When analyzing the relationship between ESG performance and tax avoidance, we found that Ab_CFO is related to ESG·T and ESG·E, and AB_Dis_Exp is related to ESG·S. In other words, if the ESG rating of a company subject to the unregistered tax is high, it is interpreted that the decision to avoid taxes through REM (adjustment of earnings through real activities) is already being made at the financial reporting stage, which is consistent with some previous studies. By examining the profit adjustment behavior at the financial reporting stage to analyze the tax avoidance impact of companies subject to the non-refundable tax system using ESG ratings, a non-financial performance of companies, this study has practical implications in that it empirically verifies the impact of ESG-related reports, which are currently being prepared for mandatory introduction in KOSPI in a phased manner from 2025, on companies' financial reporting and tax planning.