Abstract
Abstract Though there are a number of data and studies about the impact of tax incentives on investment, research and development, no detailed and systematic analysis has been elaborated on the effectiveness of taxation of profit to the financial performance of businesses in general. Businesses avoid corporate income tax to get more net profit. Evasion leads to economic stagnation. It is time to call for changes of the corporate income tax system and introduce tax suspension - tax only shared profit. The aim of the research is to assess the impact of corporate income tax suspension on retained corporate income. The research extends applicable theoretical foundation and comprehension of elements and factors affecting firms’ behaviour. The results show that the corporate income tax reform would change capital structure of businesses and improve company’s sustainability. The findings also give grounds for the development of an applicable model that would help government authorities choose the most effective way of taxation of corporate income.
Highlights
The degree of stability and reliability of tax legislation has the strongest influence on the sustainable functioning of country’s businesses
Several studies have attempted to investigate the country-wide effect of changed rules for corporate income tax and potential results on financial performance of businesses if income tax is suspended, changes in company’s capital structure and dividend distribution, and effects on performance (Masso, Meriküll, & Vahter, 2013)
A similar difference in differences (DiD) approach was used to study the effect of corporate income tax reform in Estonia by Masso, Meriküll, and Vahter (2011, 2013)
Summary
The degree of stability and reliability of tax legislation has the strongest influence on the sustainable functioning of country’s businesses. Corporate income tax (CIT) is a crucial factor for entrepreneurial activity. Several studies have attempted to investigate the country-wide effect of changed rules for corporate income tax and potential results on financial performance of businesses if income tax is suspended (see, for example, the analysis by Guziejewska, Grabowski, & Bryndziak, 2014), changes in company’s capital structure and dividend distribution (for example, Hazak, 2009), and effects on performance (Masso, Meriküll, & Vahter, 2013). Businesses try to hide profit, increase business expenses or make other fictive activities to avoid deduction by the tax.
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