Gift through Related Party Transaction and Gift Tax Act

Abstract

I examine the gift through related party transaction (Gift-through-RPT). I measure the magnitude of Gift-through-RPT using two components: the amount of related party sales for gift (RPS-for-gift) and the operating margin ratio of the RPS-for-gift. I find that the group owners relatives equity holding in unlisted related companies is the main determinant for RPS-for-gift and that the operating margin ratio of the RPS-for-gift is not different from similar transactions with the third parties. When I classify related party sales (RPS) into RPS between parent and subsidiaries and RPS between non-parent-subsidiaries relationship, I find that RPS between non-parent-subsidiaries relationship is more adequate to measure RPS-for-gift than the aggregated RPS. For additional test, I compare the difference in the amount of RPS-for-gift and the operating margin ratio of the RPS-for-gift between 2008 ~ 2011 and 2012, to see the effect of the enforcement of the article 45(3) in Inheritance and Gift Tax Act (the Gift Tax Act regarding Gift-through-RPT), effective in 2012. I find the Gift Tax Act is not effective in diminishing the amount of RPS-for-gift as well as the operating margin ratio of the RPS-for-gift in 2012.