Corporate Tax Research Articles

The interaction between incentive and opportunity in corporate tax planning: Evidence from financially constrained firms

Prior studies document that incentive factors (i.e., equity compensation, shareholder activism, financial constraints, etc.) motivate managers to avoid more taxes, which suggests that managers overlook tax planning opportunities (TPOs) in the absence of incentives. In this study, I use a prediction model to capture TPOs and find that the positive association between financial constraints (my proxy for incentive) and tax avoidance is stronger for firms with higher levels of TPOs. My results are robust to a variety of identification strategies. To shed light on a possible source of tax uncertainty, I show moderate evidence that firms with lower levels of TPOs adopt risky tax planning strategies under financial constraints to increase tax avoidance. Overall, my study contributes to the literature by demonstrating corporate tax planning as an incentive-opportunity story and identifying an important cross-section in which the connection between incentive and tax avoidance is more prominent.

Economic impacts of federal reserve policies on taxation and corporate finance

Federal Reserve policies play a pivotal role in shaping the U.S. economy, influencing not only macroeconomic stability but also the financial strategies and tax implications for corporations. Broadly, the Federal Reserve's use of monetary tools—such as interest rate adjustments, Quantitative Easing (QE), and inflation targeting—affects the economic environment within which businesses operate, impacting costs of capital, investment incentives, and overall corporate behaviour. Through mechanisms like lowering interest rates, the Federal Reserve reduces borrowing costs, which encourages companies to adjust their capital structures and debt levels, with significant implications for tax planning due to interest deductibility. QE, on the other hand, drives asset prices higher, promoting increased investment activity, stock buybacks, and changes in dividend policies that indirectly influence corporate taxation. This article examines the nuanced relationships between Federal Reserve decisions and corporate finance, analysing how shifts in policy impact tax revenue and how governments adapt tax policies to manage economic conditions such as inflation. By presenting case studies from the 2008 financial crisis and the COVID-19 pandemic, this analysis illustrates the practical effects of the Federal Reserve's actions on corporate financial decisions and the broader tax landscape. The article concludes by addressing the future of Federal Reserve policies in light of technological advances in finance and the adaptive strategies that corporate and regulatory bodies may adopt to navigate an increasingly dynamic economic environment.

Corrupt tax bureau commissioners and corporate tax avoidance

Corrupt tax bureau commissioners and corporate tax avoidance

Politics of Economic Rents and Petroleum Resources Taxation in Oil and Gas Industry

This paper argues the politics of economic rents and petroleum resources taxation in oil and gas industry. It does this through the understanding concept of economic rent, royalties, corporation tax, resource rent tax and brown tax. It surveys the comparative merits and demerits of royalties, corporation tax, resource rent tax and brown tax. The paper discusses the concept of tax structure and proposes that it should be progressive and fair to both government and investors. The principles of a good tax structure should include simplicity, convenience, ability to pay, economical, equity and certainty. While the characteristics of a good tax structure should include proportionality, it should ensure fairness and acceptability by both the government and the citizens together with foreign investors. This way, it enhances the longevity of that particular tax system and rewards will be very high. Although taxation is mandatory to all income earners and profits gainers, there are key economic considerations in designing a tax structure for new petroleum producing countries. The paper argues these economic considerations to include ownership of petroleum resources, good investments laws, strong, accountable and transparent economic institutions, good fiscal and monetary policies, land ownership, strong private banking industry, market driven insurance policies, market for consumption of petroleum products, dynamic and friendly technology, strong regulatory environment and affordable trained workforce. As the taxation is implemented, the concept of source and residence taxation become very handy and the paper argues that source of the income and residence of the investor should be taken into the consideration from the onset of the designing of tax system and particularly in oil and gas industry. While the source of income may be in the country and residence outside the country, the tax system should carefully consider this so that the investor and the tax agency (the government) consent and each party plays it role conveniently. Although advantages and disadvantages of source tax and residence tax stand, the main rules in determining sources of investment income remains of source rules. The paper notes interest-based politics has let to unsuccessful implementation of tax system in oil and gas industry. While the paper reviews copies of empirical literature, it uses comparative method and process-tracing in understanding politics of economic rents and petroleum resources taxation in oil and gas industry. It concludes that incremental sliding scale taxation is appropriate in oil and gas industry and politics of greed affects the tax regime implementation in petroleum industry. Keywords: politics, economic, rents, petroleum, resource, taxation, structure, oil, gas, industry

Corporate taxation and macroeconomic dynamics in a monetary union: the French case

Using a post Keynesian stock-flow consistent (SFC) model with two countries in a monetary union (France and the rest of the euro area), we simulate different institutional configurations and highlight the relative inefficiency of public aid “à la française.” This result can be explained by the absence of any conditionality on the aid and by the context of financialization in which the tax cut is implemented. This observation leads us to question the reduction of public aid in a context of high public debt, the increase of which is limited by the institutional framework of the euro area. A second set of simulations, focusing on the increase in corporate taxes, reveals several results. If companies try to suppress wages in order to maintain profitability, an increase in levies on profits would have very high economic and social costs. To be effective, the introduction of differentiated taxation (higher levies on dividends paid) would have to be accompanied by a major institutional change, involving structural reforms aimed at reducing the importance of the financial sector and promoting productive, sustainable, and socially useful investment.

Can the optimal fiscal policy counteract corporate tax evasion without harming job creation?

PurposeThis paper studies the relation between corporate tax evasion, job creation and optimal fiscal policy. Job creation depends on firms’ profits since firms open (“create”) new jobs when profits increase. In turn, firms’ profits depend on incentives (rewards) and disincentives (penalties) to comply with tax rules. Hence, any fiscal policy to combat tax evasion also has repercussions on job creation.Design/methodology/approachThis paper is both theoretical and empirical. From a theoretical point of view, a modified and extended version of the search and matching model of the labor market is used. In this framework, moreover, the welfare function of workers and firms is closely related to the job creation condition. Empirically, a panel analysis of a system of two simultaneous equations that covers 54 countries (both developed and developing) and four years (2018–2021) is carried out.FindingsThe paper finds that anti-tax evasion policies should be related to job creation policies. Also, anti-tax evasion and job creation policies change according to the extent of tax evasion in the economy. Precisely, when tax evasion is widespread, a lower tax burden (tax cuts or provision of fiscal rewards) requires tighter tax audits, whereas, where most people comply with tax rules, a decrease in tax audits is possible.Practical implicationsThe empirical analysis supports the model-generated theoretical relationships. Eventually, therefore, the optimal fiscal policy suggested by this work can counteract corporate tax evasion and, at the same time, reduce the firm’s tax burden, thus promoting job creation.Originality/valueAs far as we are aware, this is the first paper that considers the close and direct link between fiscal policy, corporate tax evasion and job creation.

Raising the stakes: How progressive tax rates affect risk‐taking by pass‐through businesses

AbstractWe examine how progressive individual tax rates affect risk‐taking by pass‐through businesses (PTBs). PTBs generate over 60% of US business income and make up roughly 95% of business tax returns, yet there is limited research on how progressive tax rates affect project selection. We study PTBs using the setting of thoroughbred racing and examine how progressive tax rates affect the decision to enter a risky stakes race or a less risky allowance race. This setting provides a unique opportunity to observe the choice between two mutually exclusive projects that differ only in expected payoffs and risk. Using a difference‐in‐differences design surrounding the reduction in progressivity under the Tax Cuts and Jobs Act, we find that investment in stakes races increases in the United States relative to Canada. We find further evidence of a negative relation between progressive tax rates and risk‐taking using a plausibly exogenous shock in progressivity in California and exploiting cross‐sectional variation in the progressivity of state tax rates. Overall, our findings should be of interest to policy‐makers considering changes to progressive rates. Results indicate that increases to progressive tax rates may discourage risk‐taking by the small businesses that drive economic growth.

Transfer Pricing End-of-Year Adjustments in Germany

While the transactional net margin method including transfer pricing adjustments at quarter-end or year-end is commonly applied by German taxpayers, there are some pitfalls from a German corporate income tax, VAT and custom perspective. German tax auditors and customs auditors are likely to investigate those transfer pricing adjustments more closely. Transfer pricing adjustments at quarter-end or year-end, however, can still be successfully managed in Germany, also during German tax audits.This article is part of a special issue of the International Transfer Pricing Journal on transfer pricing end-of-year adjustments. The other articles include the General Report and contributions on Belgium, France, Ireland, Italy, Korea, the Netherlands, Spain, the United Kingdom and the United States.

Transfer Pricing End-of-Year Adjustments in Germany

While the transactional net margin method including transfer pricing adjustments at quarter-end or year-end is commonly applied by German taxpayers, there are some pitfalls from a German corporate income tax, VAT and custom perspective. German tax auditors and customs auditors are likely to investigate those transfer pricing adjustments more closely. Transfer pricing adjustments at quarter-end or year-end, however, can still be successfully managed in Germany, also during German tax audits.This article is part of a special issue of the International Transfer Pricing Journal on transfer pricing end-of-year adjustments. The other articles include the General Report and contributions on Belgium, France, Ireland, Italy, Korea, the Netherlands, Spain, the United Kingdom and the United States.

Data Breach Notification Laws and Corporate Tax Planning

ABSTRACTThis study explores the impact of data breaches on corporate tax planning in the United States. The results reveal that when a firm's headquarter is located in a state that has adopted a data breach notification (DBN) law, there is a significant 3.8% decrease in the long‐term effective tax rate. This reduction translates to annual tax savings of approximately $8.13 million. Furthermore, tax sheltering is found to decrease by 19.17% compared to the sample average. These effects are particularly pronounced in financially constrained firms and those operating in high‐tech industries. The findings suggest that after the introduction of mandatory data breach disclosure requirements, firms are less inclined to engage in aggressive tax avoidance practices, which could otherwise lead to increased litigation costs. Instead, they prioritize efficient tax planning strategies to improve after‐tax cash flows.

Transfer Pricing End-of-Year Adjustments in Korea

While Korean transfer pricing regulations legally allow year-end transfer pricing adjustments after the filing of a corporate tax return, it is advisable to adjust transfer prices throughout the fiscal year with a well-established business plan and robust transfer pricing documentation.This article is part of a special issue of the International Transfer Pricing Journal on transfer pricing end-of-year adjustments. The other articles include the General Report and contributions on Belgium, France, Germany, Ireland, Italy, the Netherlands, Spain, the United Kingdom and the United States.

The Effect of Changes in Tax Laws on Stock Liquidity: Evidence From the Tax Cuts and Jobs Act

ABSTRACTThis paper investigates the effect of the Tax Cuts and Jobs Act of 2017 (TCJA) on stock liquidity. The TCJA brought significant changes, including a reduction in corporate tax rates and provisions incentivizing the repatriation of foreign earnings. We find a negative association between TCJA‐related events and the liquidity of U.S. stocks, persisting even up to 60 days following legislative announcements. However, despite the negative impact on liquidity, there is evidence of improved price efficiency following the TCJA enactment, driven by increased informed trading. Additionally, our analysis extends to non‐U.S. stocks traded in U.S. markets and indicates similar relations.

Socialising of Harmonising Tax Regulation for Micro, Small and Medium Enterprises (MSMEs) in the Village of Kerinjing

The aim of this community service is to give a better understanding of harmonizing tax regulations on micro, small and medium enterprises (MSMEs) in the village of Kerinjing. Tax assistance related to the Socialisation of Harmonisation of Tax Regulations for MSMEs in Kerinjing Village, Tanjung Raja Sub-district, Ogan Ilir Regency that will be carried out aims to provide information and for MSMEs based on applicable provisions both those regulated in Law N0. 7 of 2021 concerning Harmonisation of Tax Regulations. The implementation team made three visits for location surveys, implementation and evaluation of community service activities. Implementation of this community service is on 26 October 2022. The number of participants was 30 people. Implementation methods are lectures, tutorials and discussions. During the implementation, questions and answers and discussions were held to see the understanding of the activity participants. From the results of the service activities, it is clear that there are still many MSME actors who do not yet have an understanding of the harmonization of tax rules. Micro, Small and Medium Enterprises (MSMEs) are expected to report their business tax results as well as possible and to refer to the current tax laws and regulations. The socialisation of harmonisation of tax regulations for MSMEs in Kerinjing Village provided participants with an understanding of the definition of tax, the subject and object of income tax and also provided participants with an understanding of tax obligations related to income tax and value added tax.

Collectivist Culture and Corporate Tax Avoidance: Evidence from China

Collectivist Culture and Corporate Tax Avoidance: Evidence from China

Public Revenues and Educational Sector Productivity in Nigeria

This study examined the influence of public revenue on the productivity of the educational sector, focusing on how various tax policies and expenditures impact education’s contribution to the Gross Domestic Product (GDP), focusing on the role of Company Income Tax (CIT), Education Tax (EDT), Research and Development Investment (R&DI), and Capital Expenditure (CAPEX). Using annual data spanning from 1994 to 2023, the study employs econometric techniques, including the Autoregressive Distributed Lag (ARDL) model, to analyze the relationship between these variables and the education sector’s economic performance. The findings reveal that CIT and EDT positively influence the education sector’s contribution to GDP, suggesting that these forms of taxation play a crucial role in funding educational activities and stimulating economic growth within the sector. Additionally, R&DI and CAPEX exhibit mixed effects on the education sector, with lagged investments showing a more significant impact on economic performance over time. It was recommended that there is a need by policy makers and stake holders for continued efforts to create a conducive fiscal environment for businesses operating in the education sector, including favorable tax policies and incentives to stimulate investment and innovation. Keywords: Nigerian tax system, educational sector, Company Income Tax, Education Tax, Capital Expenditure.

Political cycles, fiscal policy and capital flight in Africa

PurposeThis paper examined the interactive role of Political Cycles on the relationship between Fiscal Policy and Capital Flight in Africa.Design/methodology/approachA two-step System Generalized Methods of Moment empirical estimator was employed. This study used data on 40 African countries from 2009 to 2018.FindingsThe findings revealed that the interaction between political structures and fiscal policy is positive and significant, indicating that fiscal policies during election periods or different regimes would increase capital flight. The study found that political cycles positively affect capital flight, indicating that election periods and possible government changes promote capital flight activities. The tension and volatile atmosphere characterizing election periods in most African countries cause investors to use all alternatives, including illegal systems, to fly funds to a potentially stable economy.Practical implicationsThis study recommends that government and policymakers maintain fiscal discipline during election years and enact pragmatic policies to ensure the continuity of critical fiscal policies to promote business climate and economic stability, especially when there is a change in government.Originality/valueThis study contributes to capital flight literature in two forms. One, the study, to the best knowledge of the authors, is the first to proxy tax with corporate tax (a sound proxy for tax within the business space). Also, this study is the first to empirically show that elections worsen the effect of fiscal policy on capital flight in Africa.Peer reviewThe peer review history for this article is available at: https://publons.com/publon/10.1108/IJSE-02-2024-0130

Corporate tax collection in times of Covid-19 pandemic: An analysis of the Peruvian economy

Corporate tax collection in times of Covid-19 pandemic: An analysis of the Peruvian economy

Does the presence of a sustainability committee strengthen the impact of ESG disclosure on tax aggressiveness? Insights from North America

AbstractWe investigate the influence of ESG disclosure on tax aggressiveness within the North American Travel and Leisure (T&L) sectors, specifically examining the role of sustainability committees in this relationship. Our analysis utilizes longitudinal panel data from the USA B3000 and Canadian S&P/TSX indices over the period from 2010 to 2020. Employing fixed-effects panel quantile regression with two distinct measures of tax aggressiveness, our findings indicate that firms with a focus on ESG tend to display higher levels of tax aggressiveness. This suggests that some companies might use strong ESG performance as a facade to obscure aggressive tax strategies. Moreover, our research introduces new evidence that the existence of sustainability committees can both hinder corporate tax aggressiveness and foster an ethical corporate culture, which aligns higher ESG engagement with lower tax aggressiveness. Our study underscores the importance of fostering tax compliance in T&L companies, emphasizing that individuals and corporations, which often seek direct state benefits, regard robust public services as essential for encouraging adherence to tax regulations. Furthermore, sustainability committees play a crucial role in enabling firms to address broader social issues, including tackling tax aggressiveness, thus shaping their sustainability agendas.

Board Gender Diversity and Tax Avoidance in Pakistan: A Comparison of Shariah Compliant and Non-Shariah Compliant Firms

Corporate tax avoidance has merged an important regulatory issue around the globe, where the issue seems to be more severe for developing countries like Pakistan due to poor regulatory and institutional controls. Literature on the determination of corporate tax avoidance highlights the role of board gender diversity to curtail corporate tax avoidance. Considering these notions, this study investigates whether board gender diversity could improve corporate tax avoidance or not. Considering data from 231 Shariah Compliant and 33 Non-Shariah Compliant firms for six years, this study find that board gender diversity has negative influence on the corporate tax avoidance for only Shariah Compliant firm in Pakistan, whereas variables of audit committee size, and board independence had a negative but weak influence on corporate tax avoidance in Non-Shariah Compliant firms of Pakistan. This study argues that improving gender diversity in the board of Shariah Compliant firms could force these firms to lower their tax avoidance.

Corporate Tax Aggressiveness and Managerial Capabilities: Insights From Indonesian Firms

This study aims to investigate the effect of management ability, business strategy, and profitability on corporate tax aggressiveness. This study uses mediation analysis with the Smart PLS approach on a sample of basic materials sector companies listed on the IDX from 2020 to 2022. The results show that more capable management tends to adopt a conservative approach in tax management practices. In addition, business strategies such as prospector and defender have a significant impact on tax aggressiveness. More profitable companies tend to implement more aggressive tax strategies. Companies need to improve managerial capabilities to manage taxes more effectively, as well as formulate appropriate business strategies to mitigate tax risks in the future. With a better understanding of tax risks, companies can minimize potential tax disputes and protect their reputation and long-term performance. This study extends the research time scope to 2022 and uses corporate governance mechanisms as moderating variables, both internal and external, which have not been widely studied in previous studies.