Tax Avoidance Behavior of Public Institutions

This study investigates how the role and interests of the government affect tax avoidance behavior of public institutions. Consistent with Tang, Mo, and Chan (2017), the government has incentives to act as either a controlling shareholder or a tax collector of public institutions. strong incentives of the government as a controlling shareholder (a tax collector) will increase (decrease) tax avoidance of public institutions. The results of the study provide empirical evidence that independent public institutions with the significant level of profit-making business engage in tax avoidance activities to a lesser extent than dependent public institutions with no or minimal levels of profit-making business. The results support the view that Korean government prefers collecting revenue from public institutions than achieving high after-tax profits through tax avoidance. The study also identifies that management-evaluation-based bonus amplifies the suppressing effects of the government on tax avoidance of public institutions. In additional test, this study finds that local public institutions exhibit tax avoidance to a lesser extent than do central public institutions. These results imply higher motivations of local governments to collect taxes from local public institutions to cover financial deficit. A series of robustness tests support our main results.