Taxes, Keiretsu Affiliation, and Income Shifting

Posted: 11 Mar 2004

See all articles by Jeffrey Gramlich

Jeffrey Gramlich

Carson College of Business

Piman Limpaphayom

Sasin GIBA of Chulalongkorn University

S. Ghon Rhee

University of Hawaii - Shidler College of Business; University of Hawaii - Department of Financial Economics and Institutions

Abstract

This paper provides evidence that keiretsu group member firms are subject to lower effective tax rates than independent firms in Japan. As one explanation for this phenomenon, we develop a hypothesis that keiretsu firms strategically shift financially reported income among affiliates in order to reduce overall effective tax rates. Empirical evidence supports this income shifting hypothesis since the positive relationship between pretax return on firm value and marginal tax rate status is significantly mitigated by keiretsu membership. Further, it appears that keiretsu income shifting activities intensify when Japanese firms face economic recession, contrasting conjecture of weakening strength of keiretsu affiliation during this period. We also find evidence supporting the view that benefactors of shifted income are compensated via increased dividends.

Keywords: Keiretsu, income shifting, marginal tax rate

JEL Classification: G32, H25, M41, M43, M47

Suggested Citation

Gramlich, Jeffrey and Limpaphayom, Piman and Rhee, S. Ghon, Taxes, Keiretsu Affiliation, and Income Shifting. Journal of Accounting & Economics, Vol. 37, No. 2, pp. 203-228, June 2004. Available at SSRN: https://ssrn.com/abstract=482042

Jeffrey Gramlich (Contact Author)

Carson College of Business ( email )

Wilson Rd.
College of Business
Pullman, WA 99164
United States

HOME PAGE: http://https://business.wsu.edu/research-faculty/institutes/hoops-institute/

Piman Limpaphayom

Sasin GIBA of Chulalongkorn University ( email )

Chula 12, Phyathai Road
Bangkok, 10330
Thailand
662 2184058 (Phone)
662 2153797 (Fax)

S. Ghon Rhee

University of Hawaii - Shidler College of Business ( email )

2404 Maile Way
C-304, FEI/CBA
Honolulu, HI 96822
United States

University of Hawaii - Department of Financial Economics and Institutions ( email )

United States

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