A Study Of Related Party Relationships And Tax Administration

Related party transactions are one of the recurring areas of concern raised by recent corporate scandals. These transactions are often diverse complex business transactions between a company and its managers, directors, or principal owners.In public accounting, they are considered difficult to audit and a potential indicator of audit risk.In taxation,it is a crucial task to identify potential problems that may arise from those transactions . Although rencently questions, concerns and uncertainties about the underlying nature of related party transactions exist, there is little rigorous academic research to confirm the views of them. In this paper, in order to describe the extent of related party transactions in companies and investigate the underlying nature,the writer attempts to do some research on related party ralationships,transactions and tax administration.The writer makes the following three contributions to existing literature. First, he offer a comprehensive description of related party relationships,he finds that the definition of related party in Taiwan corporate tax law article No 43(1) is too simple and should be enlarged .and then,the writer present a detailed description of these transactions, including contents, types, forms, and terms. The detailed description of related party transactions allows us to know that currently implemented tax law in Taiwan include no specific criteria .In case of tax escaping and double taxation,he advocates Taiwan financial bureau make more detailed technical provisions and practical handbooks.Second,the writer investigates nature of related party transactions:a related party is anyone directly linked by blood or bearing a relationship to the taxpayer as described in IRC sections 267(b) or 707(b)(l),the transaction between them are controlled and not independent, in which the underlying nature is to help management 'agency responsibility to shareholders or a board of director' monitoring function.Therefore ,he believes thats among all the legal and economic factors , the related party relationship is a very important term in distinguishing between an arm'length transaction and a related party transaction.Third,he focuses on tax law related to transfering price.According to CECDguidance , laws and regulations in mainland or in USA , five adjusting methods are recommended to controlled transactions .They are:Comparable Uncontrolled Price Method,Resale Price Method,Cost Plus Method,Transaction Net Margin Method,Profit Split Method.the writer finds that recently published draft about transferring price is too unclear to practice,therefore ,he suggests further detailed standards and criteria to be made.In the end,some suggestions given to tax authority of Taiwai are as follows:1) making of particular standards and regulations ;(2)special training of auditors(3)improvement of technical skills ;(4)more academic research on accounting and tax theories..