Cash Tax Research Articles

How Do Firms Use Cash Tax Savings: A Cross-Country Analysis

Cash tax avoidance activities can serves as a significant source of additional cash flows for firms; how managers utilize this additional cash source and the resulting consequences is an empirical question. To answer our research question, we examine the association between the spread between a country’s enacted statutory rate for the year and the cash effective tax rate, and two uses of cash – investment and dividend payout – for an international sample of firms. In the cross-section, we find the firms are more likely to invest cash tax savings rather than distribute them in the form of dividends and find that this results in inefficient over investment for firms. When partitioning on country-level governance, we find that firms located in weak-governance countries actually under invest and pay out larger amounts of tax savings in the form of dividends. Our results suggest that firms’ cash tax avoidance activities have a real effect on firm decisions, namely investment and payout policies, and this effect varies based on the country in which the firm operates.

Is Tax Avoidance Related to Firm Risk?

ABSTRACT We test whether tax avoidance strategies are associated with greater firm risk. We find that low tax rates tend to be more persistent than high tax rates and that measures of tax avoidance commonly used in the literature are generally not associated with either future tax rate volatility or future overall firm risk. Our evidence suggests that, on average, corporate tax avoidance is accomplished using strategies that are persistent and do not increase firm risk. We also find that the volatility of cash tax rates is associated with future stock volatility, suggesting that tax rate volatility and overall firm risk are related. JEL Classifications: M41.

Can a Single Country Increase the Taxes of Multinational Corporations? Evidence from the Impact of the 1993 Corporate Tax Rate Increase on Fortune 500 Companies

There is a debate in the literature about the ability of multinational corporations to use legal mechanisms, such as transfer pricing and intercompany debt, to prevent any one country from meaningfully increasing effective tax rates (ETRs) on corporations. Evidence suggests that tremendous shifting of profits across borders is occurring, leading to calls for significant policy responses. At the same time, multinational companies are also observed relocating their headquarters or reincorporating in foreign jurisdictions, at least in part for tax reasons. This has led many to claim that international tax in a globalized world has devolved into a race to the bottom. In response, multinational organizations such as the OECD and G‐20 have called for increased multilateralism and cooperation as the last, best hope for the international tax regime. Yet, to date little has been written on the extent to which any one, single country can meaningfully increase taxes on multinational companies unilaterally through changes in rate. We contribute to this literature by designing an empirical study of whether and to what extent a largely unanticipated tax rate increase in a single country affects the ultimate tax liability of multinational corporations. We do so by examining how an actual increase in corporate tax rates in the United States impacted worldwide cash taxes for Fortune 500 companies. Using the 1 percent corporate tax rate increase enacted in 1993, which was enacted for one year without any accompanying base changes, we find that this rate increase led to an increase in worldwide cash taxes reported by multinational companies across the board. We include a number of case studies to further explore the implications of this tax increase. These case studies support the contention that little tax avoidance occurred immediately in response to the increase in the tax rate.

Drilling Down on Royalties: How Canadian Provinces Can Improve Non-Renewable Resource Taxes

From coast to coast, non-renewable-resource taxation is a key source of provincial government revenue – and political rancour. Alberta has recently started a comprehensive review of its oil and natural gas extraction tax system. Newfoundland and Labrador is looking at a redesign of its royalty system. And British Columbia has set up a new tax on liquefied natural gas production. These provinces can all improve their current resource tax systems to raise more money without jeopardizing investment. The key problem with current resource taxes in Canada is not the tax rates, but the design of the taxes. Canadian policymakers should be looking at international best practices in resource tax design. Australia and Norway have best-in-class resource taxes that are based on the cash flows of resource production. That better design means that resource companies in those countries pay a high tax rate on cash flows but still have a strong incentive to invest. Western Canadian provinces instead rely on economically distorting gross-revenue royalties for most onshore oil and gas taxation. These provinces should change their gross-revenue royalties to more efficient cash-flow taxes. Cash-flow taxes are a better way of reflecting the cumulative costs that resource companies face to extract energy than are gross revenue royalties. Although Alberta’s oil sands cash-flow tax and Newfoundland and Labrador’s offshore royalty follow many international best practices, both have room for improvement. Those provinces should rethink the rules around how companies pre-pay gross revenue royalties, the limits on the kinds of expenses companies can deduct, and having a royalty rate that fluctuates with oil prices. British Columbia’s mining tax hits many of the right notes. However, the province’s tax on liquefied natural gas exports would be unnecessary if it changed its gross-revenue royalties on natural gas extraction to cash-flow taxes. Likewise, the federal government should consider reforms to its own corporate income tax system to tax cash flows, not profits. Canadian provinces have collected about $79 billion in resource-specific tax revenues from 2009 to 2013. But the provinces can collect more while not harming investment in mining and oil and natural gas extraction if they change their distortive gross-revenue royalties into better designed cash-flow taxes.

Financial Constraints and Cash Tax Savings

ABSTRACT We investigate the association between financial constraints and cash savings generated through tax planning. We predict that an increase in financial constraints leads firms to increase internally generated funds via tax planning. We measure financial constraints based on changes in firm-specific and macroeconomic measures. We find that firms facing increases in financial constraints exhibit increases in cash tax planning. Our results indicate that among profitable firms, firm-years with the largest increases in firm-specific constraints are associated with declines in firms' cash effective tax rates ranging from 3.00 to 5.14 percent, which equate to between 2.87 and 4.82 percent of operating cash flows. We also find that (1) the impact of financial constraints on tax planning is greatest among firms with low cash reserves, and (2) constrained firms achieve a substantial portion of their current tax savings via deferral-based tax planning strategies, despite the lack of a financial statement benefit. JEL Classifications: E69; H25; H60. Data Availability: Data used in this study are available from public sources identified in the paper.

Measuring income tax accrual quality

We develop and validate a measure of tax accrual quality. Tax accrual quality captures variation in the extent to which the income tax accrual maps into income tax-related cash flows, with lower variation indicating a higher quality tax accrual. Low tax accrual quality arises from (1) management estimation error and (2) financial reporting standards that lead to differences between income tax expense and income tax cash flows not captured by deferred tax assets and liabilities. We validate our tax accrual quality measure by showing it is associated with firm characteristics that capture both constructs and by demonstrating it predicts future tax-related restatements and internal control material weaknesses. We illustrate the importance of our measure by showing that investors view tax expense as more informative in firms with better tax accrual quality. Future researchers can use tax accrual quality to address questions related to estimation error in the income tax account.

One Size Does Not Fit All: How the Uniform Rules of FIN 48 Affect the Relevance of Income Tax Accounting

ABSTRACTOur study examines how the uniform rules of FIN 48, which governs accounting for income tax uncertainty, affect the relevance of income tax accounting. By requiring all firms to follow the same recognition and measurement process, the FASB intended FIN 48 to improve the relevance of income tax accounting. However, practitioners argue that reserves reported under FIN 48 lack relevance because they represent liabilities that will never be paid to tax authorities. Consistent with these concerns, we estimate that over a three-year period, only 24 cents of every dollar of reserves unwind via settlements. Moreover, contrary to the FASB's intention, we find no evidence that FIN 48 increased the ability of tax expense to predict future tax cash flows. Rather, we find that the predictive ability of tax expense for future tax cash flows decreases among firms for which FIN 48 is most restrictive. Finally, we find no evidence that investors identify firms for which reserves overstate future tax cash outflows and incorporate this into their valuations. Our results provide evidence that the uniform accounting rules of FIN 48 negatively affect the relevance of income tax accounting.JEL Classifications: H25; M41; M48.

Do Stock-Based Compensation Deferred Tax Assets Provide Incremental Information about Future Tax Payments?

ABSTRACTWe explore whether an accounting treatment similar to that required under IFRS improves the ability of the stock-based compensation component of deferred tax assets to predict future tax payments, relative to U.S. GAAP. Using hand-collected data for S&P 500 firms, we estimate the deferred tax assets related to employee stock options (ESOs) and restricted stock units (RSUs). We find that the RSU deferred tax asset is negatively related to future cash tax payments, while we fail to find that the ESO deferred tax asset is. However, after reducing the ESO and RSU deferred tax assets by their corresponding estimated impairments, we find that both variables are negatively associated with future tax payments. Additional analysis provides evidence that supports the conjecture that using a revaluation approach to account for stock-based compensation deferred tax assets may be more useful in predicting future tax cash flows, relative to current U.S. GAAP.JEL Classifications: H25; M41.

Trade-Offs between Tax and Financial Reporting Benefits: Evidence from Taxable Acquisitions

U.S. GAAP requires assets acquired in business combinations to be recognized at fair value. The tax basis of assets acquired in taxable asset acquisitions must also be adjusted to reflect fair values. Managers can increase the net present value of cash tax savings by allocating a greater portion of the purchase price to shorter-lived assets. However, this conforming tax planning strategy results in lower book income immediately following the acquisition. Taxable acquisitions are therefore a powerful setting to investigate tradeoffs between tax and financial reporting benefits. We predict and find that managers with stronger tax incentives relative to financial reporting incentives shift a greater amount of the purchase price from intangible to depreciable assets. We also find that managers facing both strong financial reporting and tax incentives allocate more to intangibles relative to managers with only strong tax incentives. These results suggest managers trade off cash savings to report higher net income.

United Kingdom VAT Court Challenges as Signals of Motivated Overall Tax Minimization Planning

Recent evidence shows that activities to minimize value added taxes (VAT) have become important to overall tax reduction planning. Utilizing the sample of companies in the United Kingdom that have contested their VAT burdens in the courts for 2004 through 2009, the characteristics of companies that engage in such VAT minimization activities are identified. Companies that engage in such VAT minimization activities exhibit statistically significant lower effective tax rates (ETRs) and cash effective tax rates (CETRs). They also have statistically significant larger book-tax differences (BTDs).

Improving the Aquisition Profit of Cross Border Transactions by Adjusting the Tax Due Diligence Process – a Theoretical Model Based on a German Target

M&A-transactions are often used by the top management for increasing their shareholder value for realizing identified synergy potentials of the target, like economies of scale and scopes. From a tax perspective they are interesting for the acquirer to reduce the group cash tax paid and the effective tax rate as well by using loss carry forwards of the target or utilizing the tax rate differences between the group entities. Simultaneously potential risk factors have to be captured early in the planning process to save the acquisition profit over all phases of an (m&a) transaction. In that context an important instrument is the so-called due diligence. Actually empirical studies show that nearly 30 percent of all (m&a) transactions are not successful (Deloitte, 2012, p.27). Furthermore, the empirical results indicate that due diligence analyses could not be shaped efficiently as well. For improving and structuring the due diligence process, a holistic standard has not been established until now. The main goal of this article is to develop a risk oriented, mathematically based approach for the tax due diligence, which helps to improve the issues for planning, assessing and monitoring the anticipated acquisition profit of a transaction under consideration of specific tax conditions related to the target. The proposed model can systematically capture tax risks within the framework of tax due diligence. That makes standardization of the tax due diligence process possible, which in turn makes adoption into a(n) (inter)national standard for conducting due diligence activities.

The Economic Effects of Special Purpose Entities on Corporate Tax Avoidance

This study estimates the corporate tax savings facilitated by special purpose entities (SPEs). From 1997 to 2013, we find that firms using SPEs have lower book and cash effective tax rates (ETRs) than non-users. We also find that more extensive use of SPEs is related to reductions in both book and cash ETRs, and estimate the annual cash tax savings for the average SPE user at $10.5 million. These results equate to aggregate cash tax savings between $111 billion and $223 billion for the entire sample of SPE users, or 2.5% to 5.0% of U.S. corporate income tax collections. Finally, we find evidence that SPEs facilitate tax savings by increasing (1) debt capacity, (2) financing for R&D, (3) income shifting across jurisdictions with intangibles, (4) tax credit and loss duplication, and (5) repatriation tax deferrals. Collectively, these findings provide economic insight into the magnitude and mechanisms of SPE-based corporate tax avoidance.

Directorss and Officerss Liability Insurance and Tax Aggressiveness

This paper examines the relationship between directors' and officers’ liability insurance (D&O insurance) and tax aggressiveness. Using large Canadian public companies listed on TSX300 and relying on several proxies for tax aggressiveness including GAAP and cash effective tax rates and the book-tax difference, I find that D&O insurance exhibits a strong negative relationship with the GAAP effective tax rates and a relatively moderate positive relationship with the book-tax difference, but there is no evidence that the D&O insurance is associated with the cash effective tax rates. I interpret these results as indicating that D&O insurance reduces the tax expenses reported in the financial statements but not the actual tax paid. In other words, the D&O liability insurance contributes to financial tax management but not to cash tax savings.

Determining the Relationship between the Items of the Cash Flow Statement with Abnormal Output in the Companies Enlisted in Stock Exchange Organization

The continuity of the operations, growth or decrease in the business activities of any company is in line with the on time and optimized funding of cash liquidity and suitable as well as the proper use of them in investment paths in the direction of creating output and ultimately, to increase the shareholders wealth. The goal of this research is to determine the relationship between cash liquidity and abnormal output of stocks. For this purpose, 130 companies were selected by employing simple random method among the companies were enlisted in Stock Exchange Organization. Different cash liquidities included the operational and non-operational cash flows were taken as the five main independent variables, the divisible profits, financial leverage and the size of the company were defined as other independent variables; and, the abnormal output of stock was considered as dependent variable. After analyzing the pre-hypothesis by using combined multi-variable regression and based on the panel data analysis, five linear relations were assessed. The results of the research showed positive relationship between different cash flows, except tax cash flow and the abnormal output of stock. With respect to the determining coefficients which were obtained, the assessed relationship was considered very weak linear relation. The results of T.Student and Fischer showed that the assessed relationship was not significant in the statistical society level. Analyzing the non-parametric correlation showed similar results.

Product Market Power and Tax Avoidance: Market Leaders, Mimicking Strategies, and Stock Returns

ABSTRACTProduct market power provides firms with comparative advantages through more persistent profitability and insulation from competitive threats. These advantages likely provide firms with the ability to engage in greater tax avoidance. We present evidence consistent with this hypothesis. We also show that firms mimic the tax outcomes of their product market leaders. Among firms with greater product market power and comparatively high cash tax avoidance, we find stock prices to be less informative and that investors require additional compensation for the risks associated with comparatively high cash tax avoidance. Our results survive numerous robustness tests. Overall, our results suggest that industry dynamics, particularly related to a firm's competitive position, play a meaningful role in corporate tax policy.

Are Cash Flows Better Stock Return Predictors than Profits?

Although various income statement–based measures predict the cross section of stock returns, direct method cash flow measures have even stronger predictive power. We transform indirect method cash flow statements into disaggregated and more direct estimates of cash flows from operations and other sources and form portfolios on the basis of these measures. Stocks in the highest-cash-flow decile outperform those in the lowest by over 10% annually (risk adjusted). Our results are robust to investment horizons and across risk factors and sector controls. We also show that, in addition to operating cash flow information, cash taxes and capital expenditures provide incremental predictive power.

The Burden of Attention: The Impact of CEO Publicity on Tax Avoidance

We use Google search volume index for a CEO’s name and stock ticker to measure CEO publicity, and examine the competing hypotheses on its effect on the tax behavior: On the one hand, CEOs who receive higher attention from the retail investors are motivated to engage in tax avoidance activities to inflate earning to meet investors’ performance expectation; on the other hand, they concern more about public image and therefore avoid to be labeled as tax avoiders. Based on the analysis of the CEOs of S&P500 firms between 2004 and 2011, the finding supports the former and shows that the CEOs with higher publicity manage to enjoy lower effective tax rate and cash effective tax rate. In addition, such effect is moderated by board independence. Finally, we find that firms with higher CEO publicity pay auditors more tax fees, suggesting that these CEOs tend to purchase more tax planning service from external auditors. Our findings are robust to alternative measures of tax avoidance, and have important implications on both tax authority and investors.

Crisis of Care

When the quality of childcare services is dependable, the cost is affordable and access is readily available, the initial result is a significant reduction of unrealistic societal demands on both fathers and mothers. Mothers will no longer dread the stigma of selfishness which society unfairly attaches to women who, because of eager pursuit of their careers, are perceived to be lacking in concern for their children’s well-being. On the other hand, fathers will be less pressured to earn additional income to afford the expenses that come with the birth of a new member of the family. We shall see less fathers burning the midnight oil in the office and more of them reading stories to their children at bedtime. Hence, mothers and fathers will be emancipated from their stereotyped roles of nurturer and provider, respectively. Moreover, parents who entrust their children to childcare centers staffed by trained professionals working under a standard curriculum closely monitored by state institutions can do so without being consumed by feelings of guilt or haunted by unfounded fear that their children are left in an unsafe and unhealthy environment. Instead, there is a strong sense of confidence that children are not only properly cared for but are likewise adequately prepared for the next stage of life, primary education. The good results, however, do not end here. The ultimate gain for society would be the early cultivation of the concept of equality among children who grow-up interacting with a diverse set of playmates in an environment that is supportive of their intellectual, social and emotional development. The cure to the crisis of care is society’s recognition that raising children is not a purely domestic issue confined to the private realm of the home but one that requires government support and contribution. In the past centuries that we allowed it to remain a domestic matter, we saw how patriarchy resulted in the concentration of parenting duties on mothers instead of an equitable division between mothers and fathers. When women started working outside the home, they turned to other women in the family - mothers, aunts, sisters, cousins, or older daughters - or, even outside the family - female neighbors and friends, or hired house helpers - instead of soliciting the assistance of their husbands, sometimes to keep the peace, oftentimes simply because such is the norm. Thus, we see women passing on childcare duties to other women who likewise have childcare duties passed on to other women, in an unending chain of female domestic bondage.On the other hand, fathers have long been driven to devote their time to work, and more work, to be able to provide for the growing needs of the family, forgetting that they also need to devote time to bond with their children. The result is lack of competence and confidence that they, too, are capable of caring, hence, they readily leave the task in the hands of their wives whom they perceive to be more skilled. Still a few others may continue to fear the probability of being branded as henpecked husbands as soon as friends and neighbors start to notice their assumption of childcare duties. In the affluent countries herein examined, government intervention is evident in more ways than one, ranging from strict regulation of daycare facilities and professionalization of caregivers in the United States to the grant of subsidy for childcare expenses incurred by parents in Canada which take the form either of outright cash allowances or tax credits. The same benefits are available in Singapore and in Hong Kong in even more generous terms, as well as in France and Sweden, where these are complement by a universal system of childcare that is reliable, affordable and accessible to all families regardless of economic status coupled with the provision of wage or salary replacement for parents who opt to personally attend to the needs of their children. Not all of these are immediately possible in the Philippines because of the economic difficulties that the country is grappling with. But, for the time being, nothing prevents, at the very least, implementation of strict regulation of daycare facilities, professionalization of caregivers, and grant of tax credits for the amounts spent by parents in paying for daycare services or in hiring professional caregivers for their children.

Predictable Uncertainty: The Relation between Unrecognized Tax Benefits and Future Income Tax Cash Outflows

This study examines competing arguments about whether Financial Interpretation No. 48 (FIN 48, now ASC 740-10-25) provides information to financial statements users regarding the realizability of future income tax cash outflows related to reserves for unrecognized tax benefits (UTBs). Critics believe FIN 48 provides substantial discretion in accruing UTBs, while proponents argue the Interpretation improves the reliability and comparability of UTBs. Our results show that, on average, UTBs are predictive of income tax cash outflows up to three years in the future. This link is economically significant as UTBs explain 8.2 percent as much of the variation in future income tax cash outflows as do contemporaneous income tax cash outflows. Using data provided by the IRS, these results hold in validation tests linking UTBs to future IRS audit settlements. In cross-sectional analyses, we find that UTBs are more informative for future income tax cash outflows in firms that (1) purchase tax services from their auditor; (2) engage in relatively less tax avoidance; and (3) are subject to greater IRS audit scrutiny. Our results should interest financial statement users, standard setters, and tax authorities as these parties estimate the future economic consequences of uncertain tax positions.

A Contingent Claim Approach to Bank Valuation

In this paper, the model formulated incorporated stochastic variables such as bank loans and deposits as well as some deterministic variables: cash available, depreciation, capital expenditure, tax and costs, comprising variable costs and fixed costs. This paper assumes that the dynamics of bank loans and deposits at time t follow a geometric Brownian motion, therefore, it satisfies certain stochastic differential equations (SDEs) formulated on some probability space. On the other hand, the growth rate μL(t) in loan at time t, growth rate μD(t) in deposit at time t, and the variable cost η(t) at time t are assumed to be driven by mean-reverting Ornstein-Uhlenbeck processes. The SDEs of the dynamics of bank loans, growth rate in loans, bank deposits, growth rate in deposits and variable cost arising from the model were solved by means of the ItO Lemma. Discrete time approximations of the exact solutions of the SDEs were derived and used in a Monte Carlos simulation software.