Corporate Income Research Articles

Transfer pricing and local file documentation from the perspective of tax law

Transfer pricing is an important issue for related companies and their accounting. Capital groups use transfer pricing to share revenue or as a form of control. However, tax authorities have recognised the risk of related companies using transfer pricing for tax avoidance. Therefore, the topic of transfer pricing is inextricably linked to the Arm’s Length Principle and the market value of transactions as such. To counteract possible tax avoidance, rules have been established to control transactions that may lead to such abuse, both domestically and internationally. The objective of the case study described in the article is to demonstrate that transactions between affiliated entities, and more specifically the sale of programming services by ABC PL to its parent company was made according to the Arm’s Length Principle. The transfer pricing applied in the transactions made in 2020 was analysed by accounting for applicable regulations, including changes introduced in 2019 by the amendment of the Corporate Income Tax Act.

Tax tools for smoothing the negative consequences of the COVID-19 pandemic: foreign experience

The COVID-19 pandemic has become a serious challenge for the entire world community. National governments were forced to introduce restrictive measures to prevent the spread of a new coronavirus infection. However, the self-isolation regime announced in many countries is one of the main factors of the recession into which the world economy has plunged. As a confirmation, the article presents the results of a study conducted by the International Monetary Fund. In connection with these events, anti-crisis programs were developed in many countries of the world, which provided for several packages of financial support measures for the population and businesses. One of the basic tools for implementing the approved economic recovery programs were tax measures, which are the subject of this study. A review of the world practice of using tax instruments allowed us to distinguish two groups. The first group includes tax measures adapted to the new socio-economic realities, which, despite the reduction of the tax burden, are not tax expenditures. The second group includes tax expenses. The scientific novelty of the study lies in the fact that, based on the results of studying international experience, a classification of tax expenditures used to offset the negative consequences of the COVID-19 pandemic was developed. The purpose of the provision is selected as a classification feature. The conducted research allowed us to conclude that the most popular tax expenditures were such tax expenditures as the reduction (exemption) of indirect taxes on medical products and products of firms affected by the introduction of restrictive measures. In addition, tax expenditures in the form of tax deductions and credits for taxes on individual and corporate income have become widespread, encouraging taxpayers to direct savings to finance investments and activities of small and medium-sized businesses, special funds to combat COVID-19.

Article: Global Minimum Corporate Tax: A Death Knell For African Country Tax Policies?

The idea that a global minimum corporate income tax rate should be introduced has been publicized with intense fanfare. Not as widely publicized is the fact that this, along with the other provisions of Pillar Two, has negative implications for the corporate income tax policies currently implemented in African countries. Moreover, Pillar Two may also affect the implementation of the United Nations’ Sustainable Development Goals (SDGs) in Africa. In systematically delineating these implications, this article argues that a more nuanced approach to global harmful tax competition should be followed in the practice of inter-nation equity. This approach is as follows: all countries should cooperate to halt virtual tax competition. Moreover, all developed countries should cease both virtual and real tax competition while developing countries continue to engage in real tax competition – provided that their tax incentives meet certain criteria. Should a developing country not adhere to such criteria, it would forfeit its exemption. This article further argues that African countries are already demonstrating that the fears that such an approach elicits are unfounded. The time is opportune for African countries to advocate for meaningful reform in international tax that would result in fairer outcomes for all developing countries. Pillar Two, global minimum corporate tax rate, Africa, inter-nation equity, fairness, tax incentives, virtual tax competition, real tax competition, developing countries, Sustainable Development Goals

Country Note: Analysis of Turkey’s Controlled Foreign Company Regime

This study analyses Turkey’s current position against the policies it has carried out, especially regarding the controlled foreign companies (CFC) taxation regime by the Organization for Economic Cooperation and Development (OECD). As a member of the OECD and G20 during both the preparation and processing of the OECD’s Base Erosion and Profit Shifting (BEPS) Project, Turkey has undertaken various roles. Nevertheless, it is observed that existing CFC rules and current developments regarding Turkey’s CFC regime fall below the minimum standards recommended in the BEPS Action 3 Final Report, and there is a certain ‘resistance’ that continues to regulate some matters. This study seeks to critically analyse and display Turkey’s position for coping with the BEPS Action Plan concerning CFC regulations. Controlled Foreign Company (CFC), Base Erosion and Profit Shifting (BEPS), Turkish Corporate Income Taxation, International Taxation Principles, Tax Avoidance.

Assessment of regional measures of tax support for business in the context of the COVID-19 pandemic

The implementation of quarantine measures and the decline in economic activity in 2020 became an impetus for the implementation of a stimulating tax policy not only at the federal, but also at the subnational level. The article examines the experience of countercyclical fiscal policy in the OECD countries, highlights the factors of relatively modest tax support provided to small and medium-sized businesses at the subnational level. The object of the study is stimulating tax expenditures provided in accordance with the legislation of the Russian regions to support economic entities in the conditions of restrictive measures caused by the spread of a new coronavirus infection. The research methodology is based on the methods of formal logic, statistical and econometric analysis. The scientific novelty of this study consists in conducting a comprehensive analysis covering all subjects of the Russian Federation in which stimulating tax expenditures were actually provided, and assessing the regional tax policy implemented during the COVID-19 pandemic through the prism of key budget parameters and indicators of socio-economic development. The regional tax policy was carried out in conditions of large-scale fiscal support from the federal center and deterioration of the state of subnational finances due to the growth of deficit budgets. During the 2020 pandemic, the constituent entities of the Russian Federation provided tax benefits on taxes that account for a small share in the revenues of regional budgets. Since the main purpose of tax incentives was to solve liquidity problems and maintain employment, investment tax incentives for corporate income tax were not introduced in Russian regions. The study of the actual and forecast dynamics of GRP allowed us to conclude that the tax support measures implemented in the Russian subjects stimulated economic activity and helped to smooth out the negative consequences of the coronacrisis.

Debate: International Company Tax Developments And Some Reflections On Ways Forward For The African Continent

The article comments on the contribution in this edition entitled ‘Unilateral Digital Services Tax in Africa; Legislative Challenges and Opportunities’. The current paper also serves as an independent reflection on contemporary developments in company taxation and potential ways forward in this regard for the African continent. With a view to submitting suggestions that could cater to the needs and revenue mobilization interests of African countries and – building on the observations of the commented paper’s author – the current paper proposes some suggestions for potential tax policy approaches for Africa. These are based on securing two objectives: (1) maintain and/or attract investment while (2) devising ways and means to further securing sustainable revenue mobilization policies. The first objective could be pursued by prudently continuing to compete for investment to the extent possible considering the available scope for such under the envisaged Pillar Two approach and on a regionally coordinated basis. Meeting the second objective could occur by furthering the market-based tax base division agenda that has emerged in recent years along with the spread of digital services taxes and in the context of developments towards the construction of the Amount A concept in Pillar One. Such a policy direction could also be pursued if the envisaged Pillars collapse. Corporate Income Tax, base erosion and profit shifting (BEPS), Pillar One, Pillar Two, tax competition, special tax zones, tax incentive regimes, developing countries, developing world, Africa, capacity building, human resource development, fairness.

Tax Structure and Its Relationship with Economic Growth – Bangladesh Context

Purpose: The paper aims to explain the current tax structure of Bangladesh. It also intends to identify the relationship between different categories of taxes and the country’s economic growth. Methods: Data have been gathered from different publications of the government for a period of 29 years from 1989-90 to 2017-18. Both descriptive and inferential statistics are utilized to achieve the purpose of the study. Results: Results reveal that tax revenue constitutes, on average, 84.20% of the total revenue of the Government of Bangladesh, while 70.47% of the total tax comes from indirect sources. VAT has been found as the largest source of tax revenue (34.12% of the total tax) followed by income tax (27%). Supplementary duty and customs duty contribute significantly to the national exchequer amounting to approximately 15% of the total tax each. Concerning the influence of taxation on economic growth, indirect taxes are found significant. When corporate and personal income taxes are considered, only personal income tax is identified as having a significant impact on economic growth. As far as the specific categories of taxes are concerned, customs duty, excise duty, and non-tax revenue are found significant, while income tax, VAT, supplementary duty, and other taxes do not have any significant relationship with the economic growth of Bangladesh. Implications: The paper recommends enhancing the collection of indirect tax, as well as expansion of the tax net to bring more and more people under the umbrella of taxation rather than increasing the tax rate which may impede entrepreneurial enthusiasm at the individual level. Limitations: The study combines some types of taxes such as import duty, export duty, narcotics duty, land tax, motor vehicle tax, surcharge, etc. under one heading, namely other taxes. As such the impact of these taxes per se on economic growth remains unveiled.

Внутренний контроль как фактор снижения налоговых рисков

Purpose: To consider the possibility of creating a subsystem of internal tax control aimed at providing accounting (financial) reporting reliability as well as at observance of legislation requirements, regulating conduct of an accounting. Methods: The theoretical basis of the study was an analytical review of scientific publications of professionals specialized in tax risk matters as well as it was federal laws and regulatory legal acts of the Russian Federation in the field of taxation. We can underline from the considered models the major components of internal control system (ICS): risk assessment, control means, control environment, information and communication, monitoring. Results: It’s pointed that the most important element of internal control system is, namely, the process of risk clarifying and analysis as an effective mean of business protection and, incidentally, the need in author’s development of tax risk matrices on the example of value added tax and corporate income tax as an integral part of the internal tax control subsystem model. Practical importance: The possibility for creating an effective subsystem of internal tax control, taking into account enterprise individual features, their specifics and activity scale.

Mobility responses to the establishment of a residential tax haven: Evidence from Switzerland

I analyze mobility responses to a tax reform that established the Swiss canton of Obwalden as a tax haven in 2006. The reform, which included a regressive income tax schedule, was explicitly aimed at attracting the top 1%. Difference-in-Differences (DiD) estimations comparing Obwalden to all other cantons confirm that the reform successfully attracted high-income taxpayers: by 2016, the share of top earners in the canton had doubled, and average income per taxpayer was 16% higher relative to 2005. Based on individual tax return data, I estimate the mobility elasticity with a two-stage least square (2SLS) approach, which isolates the identifying variation in the tax rate stemming from the 2006 reform only. I find a large elasticity of the stock of high-income taxpayers of 1.5–2 with respect to the net-of-average-tax rate. The corresponding flow elasticity is 7.2. Despite these large behavioral responses, the reform did not increase revenue per capita in the canton. Finally, I find small positive effects on local employment. However, in-movers with high incomes were not more likely to also work in the canton, and I cannot rule out that employment effects were driven by the simultaneous reduction in corporate income taxes.

Combined Business Tax Statistics 2016 of the Federal Statistical Office of Germany – A Micro Data Set for Scientific Use

Abstract This article aims to give background information of the combined business tax statistics 2016 of the Federal Statistical Office of Germany. The micro data set includes the different German business tax statistics, which are linked together (i.e. trade tax statistics, corporate income tax statistics, turnover tax statistics, statistics on business partnerships and associations as well as additional information of the statistical business register). With more than three million businesses the micro data set provides linked information on the German business structure and is available in anonymised form for scientific use at the Research Data Centre of the Federal Statistical Office.

Tax regulation of enterprise R&D expenditures: special aspects and problems of regulation

The subject of the research is a corporate income tax regime of tax accounting of intangible assets and R&D spending. The working hypothesis is that realization of the regulative potential of tax policy in relation to stimulating R&D activity and creation of intangibles assets shall be streamlined and adapted to increase the effectiveness of innovations. Authors suggest that the key tax policy goal of the mechanism is the widening of the volumes of commercialized R&D results and intangibles, lowering the tax risks, and increasing the legal certainty. The aim of this research is formulation of tax policy proposals for subsequent reforming this mechanism of direct taxation of transactions related with R&D.To achieve the aim of the research the following research approach was employed by the authors. As a first step authors present a literature review on the issue. As a second step authors are performing the analysis of current rules related to tax accounting of R&D costs and intangibles in accordance with Tax Code of Russian Federation. As a third step authors delineate the barriers and legal obstacles in the performance of tax incentives for R&D by reviewing the judicial cases and analytical reports on the issue. Finally, authors formulate their tax policy proposals for the subsequent tax reforms in relation to tax accounting of R&D.The results and the scope of the study. Author’s working hypothesis is based on the idea that the effective application of tax policy instruments can contribute to success of the jurisdiction in winning in global tax competition game. This is particularly important in context of digitalization and for attracting investments and parts of activities of multinational enterprises to the territory of the state. Intangible assets and key people which coordinate the processes of the creation of intangibles can be regarded as the crucial value-added factors in the modern economy where technological MNEs are increasingly dominating. Countries compete internationally for these talented people and favorable and certain tax regime can positively impact on MNE decisions to make a profit center in any jurisdiction, while tax uncertainty can negatively impact this decision.Conclusions. One of the key results of this research is that R&D tax incentives in Russia remain rather unpopular instrument in corporate practice. Authors explain this with the existing legal barriers and legal uncertainty. This uncertainty leads to tax risks for taxpayers which impacts their decisions for using the incentives. Review of judicial cases related to tax accounting of R&D costs when calculating corporate income tax base showed that there are many different areas of disputes between taxpayers and tax authorities. It is important to note that some of this uncertainty is already addressed in recent amendments to Article 262 of Tax Code. Authors propose to reduce uncertainty by extending the scope of R&D tax incentives to all types of R&D activity. The goal of the research is therefore can be considered as achieved.

Reflections on the proposals of the European Commission for a digital tax

Digitalisation leads to significant changes in many areas of the economy. Chancellor Angela Merkel believes that the increasing collection and the use of consumer data associated with digitalisation is creating fundamental justice problems. The public debate focuses on the taxation of international digital companies. Facebook and other Internet giants make high profits in Europe, but they are hardly taxed there. In the opinion of many politicians, this is unacceptable - but it complies with the applicable standards of the international tax system. The current corporate tax rules are built on the principle that profits should be taxed where the value is created. The tax rules were mainly conceived in the early 20th century for traditional businesses. They define what triggers a right to tax in a country ("where to tax") and how much of corporate income is allocated to a country ("how much to tax") largely based on having a physical presence in that country and without reflecting the value created by user participation. That means that non-residents for taxation purposes become liable to tax in a country only if they have a presence that amounts to a permanent establishment there. The Commission has made two legislative proposals in 2018. The new rules would ensure that online businesses contribute to public finances at the same level as traditional 'brick-and-mortar' companies. 1. A digital platform will be deemed to have a taxable 'digital presence' or a virtual permanent establishment in a Member State if it fulfils certain criteria. 2. The European Commission intends to introduce a 3% tax on sales through the sale of user data, the provision of online advertising and the provision of online marketplaces. The tax will apply to companies with a total turnover of EUR 750 million worldwide and a digital turnover of EUR 50 million in the EU. The digital tax raises various questions about the justifications. Especially for the export nation Germany, it could turn out to be a dangerous boomerang.

Reasonable Compensation: Circuit Court Differences Create Confusion and Inconsistency

ABSTRACT An incentive exists for closely held C corporations to pay owner-employees higher salaries and lower dividends to avoid the double tax on corporate income. For this reason, the Internal Revenue Code and Treasury Regulations limit corporate compensation deductions to “reasonable compensation”; however, primary tax authorities do not provide a standard definition, leaving the courts to determine what is reasonable and what is not. The courts have generally followed two approaches: a multi-factor test and an independent investor test. We provide an in-depth exploration of reasonable compensation case law with a focus on disparity within and across court circuits. We supplement this exploration with an analysis of whether multi-factor determined court outcomes would have changed under the independent investor test. Overall, our findings show disparity in reasonable compensation court determinations within and across circuits and highlight the need for a consistent standard to create tax equity in employee-shareholder compensation practices.

Country Note: Assessing the Corporate Use of Tax Relief Measures in Portugal in the Wake of the Pandemic: A Survey

The covid 19 pandemic has been affecting the social and economic system of every country. In the economic domain, policymakers have used an array of measures to alleviate the financial stress of individuals and firms. A broad strand of literature has discussed the wide range of tax relief measures and their possible effectiveness. In the corporate sector, one year after the outbreak of the pandemic, it is time to assess how firms took advantage of tax relief measures enacted by governments and to analyse which of those are more appropriate. The purpose of this article is therefore to connect the literature about fiscal policymaking with the effective use of covid 19 relief measures in the corporate sector. Based on a survey of 200 chartered accountants with comprehensive knowledge of Portuguese firms´ utilization of fiscal measures, the authors present an analysis related to the utilization of tax relief measures in three important areas: the VAT, corporate income tax, and individual income tax. The VAT payment deferral emerges as the most important area for tax relief considering its more immediate impact on cash flows and liquidity. Additionally, respondents were requested to offer their opinions about the economic sectors in which relief measures had a more intensive use. Tax relief, global tax policymaking, pandemic, covid 19 relief measures, corporate tax

Discussion of Dhaliwal, Goodman, Hoffman, and Schwab (2019): Revisiting Tax-Related Reputational Costs

Discussion of Dhaliwal, Goodman, Hoffman, and Schwab (2019): Revisiting Tax-Related Reputational Costs

Tax Salience and Cyclical Asymmetry in Tax Rate Adjustments: Testing the Indirect Tax Hypothesis

In this paper, we explore the hypothesis that politicians prefer using direct taxes with relatively high salience for tax cuts during booms, while they prefer using indirect taxes with relatively low salience for tax increases during recessions. Using a panel data set of U.S. states from 1992 to 2014, we analyzed how cyclical fluctuations in resource availability affect the statutory rates of five major state taxes: general sales tax, personal income tax, corporate income tax, and two excise taxes (gasoline and cigarette taxes). Our results suggest that cyclical improvements in resource availability during booms lead to reductions in personal income tax rates, whereas cyclical deteriorations in resource availability during recessions result in increases in general sales tax rates.

Book Review

Book Review

KEBERADAAN PROFITABILITAS, BIAYA OPERASIONAL DAN LEVERAGE TERHADAP PAJAK PENGHASILAN BADAN PADA PERUSAHAAN PUBLIK SEKTOR KESEHATAN

Tax is the largest income for the state. For companies, taxes are a burden that will reduce profits. Therefore, companies try to take advantage of taxes through various ways, such as using debt and maximizing operational costs. This study aims to analyze the effect on profitability, operating costs, and corporate income tax leverage. The object of research is a company that is included in the health sector based on the Indonesian Stock Exchange Industry Classification which is listed on the Indonesia Stock Exchange during 2018-2020. Sampling using non-probability sampling technique with purposive sampling technique. The results showed that the data passed the coefficient similarity test and the classical assumption test. The variation of the dependent variable is explained by the independent variable of 82.5%. The variables of profitability, operating costs and leverage simultaneously have an effect on corporate income tax. In the t-test, profitability and operating costs of Sig 0.000 mean that the second variable has a significant effect on corporate income tax. While decent leverage Sig 0.734 means that there is no evidence that leverage has a significant effect on corporate income tax. The conclusion of this study is profitability and operating costs have a positive and significant effect on corporate income tax. Meanwhile, there is no evidence that leverage has a positive and significant effect on corporate income tax.

Corporate income tax and its role in the formation of budget revenues at different levels

Corporate income tax and its role in the formation of budget revenues at different levels

ТИЖОРАТ БАНКЛАРИНИНГ КРЕДИТЛАР БЎЙИЧА ЭҲТИМОЛИЙ ЙЎҚОТИШЛАРИ УЧУН РЕЗЕРВЛАРГА СОЛИҚ ТАЪСИРИНИ БАҲОЛАШ

THIS ARTICLE PROVIDES AN EMPIRICAL ANALYSIS OF THE IMPACT OF THE INCOME TAX RATE ON RESERVES ON POSSIBLE LOSSES ON LOANS IN COMMERCIAL BANKS. THE ANALYSIS REVEALED A HIGH POSITIVE CORRELATION BETWEEN THE AMOUNT OF RESERVES FOR POSSIBLE LOSSES ON LOANS AND THE CORPORATE INCOME TAX RATE.