Effective Corporate Income Tax Rate Research Articles

Effective corporate income taxation and its effect on capital accumulation: cross-country evidence

Abstract It is debated to what extent corporate taxation discourages capital formation, and the related empirical cross-country evidence is inconclusive. This paper provides new insights into this matter for a large sample of developed and developing countries. In the first step, national accounts data is used to calculate backward-looking effective corporate income tax rates (ECTR) for 77 countries during 1995–2018. In the second step, dynamic panel data regressions are used to estimate the effect of ECTR on aggregate corporate investment. The main findings of this exercise are that (i) statutory corporate income tax rates (SCTR), on average, are twice as high as ECTR, (ii) average ECTR has been relatively stable but show distinct dynamics across countries and (iii) no significant negative relationship exists between ECTR and investment. The latter finding is robust to different specifications and samples and when publicly available SCTR or forward-looking effective tax rate measures are used as alternative tax rate proxies.

Do firms benefit from public information services: Evidence from a tax hotline program in China

We investigate the effect of a public information service program in taxation on firms' effective corporate income tax rate (ECITR), taking advantage of a tax hotline program that lowers the cost of access to tax information. Using Chinese firm-level administrative data and exploiting a stacked difference-indifferences model, we find that firms experienced decreases in ECITR after the hotline adoption, and this effect is more pronounced for smaller firms and younger firms. This effect is driven by the hotline helping existing policies transmit more efficiently, and firms claim more tax credits. Furthermore, the tax windfall brought by the hotline has real impacts on firms by increasing their cash flow, investment, and returns on assets.

Tax competition among local governments: Evidence from the spillovers of location-based tax incentives in China

This paper exploits the tax incentives in China's Great Western Development (GWD) Program to identify tax competition among local governments. The reform reduces the statutory corporate income tax rate in GWD regions. Using this exogenous tax reduction as a quasi-natural experiment and adopting a difference-in-differences approach, we find that the reform in GWD regions leads to a 1.6328 percentage point decline in the effective corporate income tax rate and a 0.658 percentage point decline in the macro tax burden in non-GWD counties adjacent to the policy boundary. The results suggest that there are strategic interactions as well as a race to the bottom among counties in their tax setting. The results are stable across a series of robustness tests such as excluding other mechanisms of tax rate interaction and excluding the impact of other incentive policies in the GWD Program. Combined with the tax reduction effect in border GWD counties, we find that the tax interaction coefficient for the effective corporate income tax rate and macro tax burden between GWD and non-GWD counties along the border are 0.8718 and 0.3553, respectively. This reflects the intense tax competition among local governments in China. In addition, we demonstrate that tax competition mainly exists between geographically adjacent counties, as no such spillover effects are observed in non-GWD counties far from the policy boundary.

BRING ON THE LIGHT: REDUCTION OF THE CORPORATE SHADOW ECONOMY BY TAX REFORM

Background: Our preliminary research shows that tax reform can have a meaningful impact in reducing the corporate shadow economy of a society. Countries are constantly applying lower tax rates to attract large businesses to their territory. They are also trying to improve tax collection efficiency in their jurisdiction area. We study the relationship between the Baltic countries' tax systems and the shadow economy level within their respective economies. Our research examines how economic growth can reduce the corporate shadow economy due to changes in tax collections. Methods: Based on quarterly data from 2002-2022, a panel regression was chosen for the analysis, which allows for determining the impact of each specific tax on the level of the shadow economy separately, considering all three samples as one synergistic system. Results and Conclusions: Thus far, we find that for all types of taxes, the models have the same structure, which allows for comparing the impact of gross domestic product on tax collections both in the short and long term. Our analysis showed that the effective income tax rate growth increases the shadow economy; that is, the country's citizens attempt to move into the shadows. At the same time, the growth of the effective corporate income tax rate, on the contrary, reduces the level of the shadow economy. A positive increase in the effective VAT rate also contributes to the growth of the shadow economy. The long-term effect for general taxes is almost 19% higher than the growth of the tax base. Thus, as to the Lithuanian economy, for example, it has a tendency for a reduction of the shadow economy, which means that there are significant opportunities for further improvement.

법인세의 분배효과에 관한 연구

This study analyzes the effect of corporate income tax on income distribution in Korea. Studies on the economic effects of corporate income tax have mainly focused on investment and employment effects. This research trend is due to the prevailing idea that the investment effect of corporate income tax is decisive, employment and wages are determined incidentally, and that companies are merely conduits for distributing profits to shareholders. However, corporate income tax also affects the labor income share and household income distribution through changes in employment and wages, dividends, and internal reserve fund of a company. If corporate income tax cuts increase investment, but employment growth is weak and real wage growth rates falls short of labor productivity growth rates, the labor income share will decrease and household income inequality will widen. According to the results of the empirical research, the effects of corporate income tax rate on investment and employment are weak. The expanded investment is also capital-intensive, so the employment effect is not significant, and more the real wage increase does not keep up with labor productivity. As a result, a reduction in the effective corporate income tax rate lowers the labor income share and increases income inequality. Therefore, to increase the distribution effect of corporate income tax, corporate income tax should be reformed in a way that supports employment growth and real wage increases while including investment.

An alternative measure of profit shifting and corporate income tax losses

The aim of this paper is to assess an alternative method of estimating the amount of profit shifting and corporate income tax revenue losses. We propose a nonstandard methodology to refine the measurement of profit shifting beyond the traditional semi-elasticity procedure. A four-stage Data Envelopment Analysis (DEA) is used to estimate the relative technical efficiency of profits before taxation reported by foreign-owned companies in Czechia. The efficiency gap resulting from the difference between the first-stage and third-stage technical efficiency scores represents the level of profit shifting. Using the statutory and average effective corporate income tax rates, we calculate the amount of corporate income tax revenue losses attributable to profit shifting. The estimated mean level of profit shifting by foreign subsidiaries involved in the manufacturing and service sectors between 2009 and 2016 is over 570 million EUR, and the mean amount of tax losses exceeds 100 million EUR. In relative terms, profit shifting leads to a decrease in total corporate income tax revenues of 2% in Czechia. Foreign-owned companies involved in the manufacturing sector are less efficient than foreign-owned companies from services industries in terms of relative technical efficiency scores, while companies involved in the service sector have a considerably high efficiency gap with respect to companies involved in the manufacturing sector.

What is the average federal individual income tax rate on the wealthiest Americans?

Abstract I estimate the average federal individual income tax rate paid by America’s 400 wealthiest families, using a relatively comprehensive estimate of their Haig–Simons income: their change in wealth, plus US individual taxes. I do so using publicly available statistics from the IRS Statistics of Income Division, the Survey of Consumer Finances, and Forbes magazine from 1992 to 2020. This paper’s baseline analysis uses all years of data and systematically varies start and end years. The baseline estimates of the average federal individual income tax rate on the wealthiest 400 families are 9.6 per cent in nominal terms and 12.0 per cent in real (inflation-adjusted) terms. Sensitivity analyses yield nominal estimates in the 6.7–14.6 per cent range and real estimates in the 8.4–17.9 per cent range. These estimates can be combined with effective corporate income tax rates to estimate all-in effective income tax rates on the wealthiest.

Reinvestment and effective corporate income tax rates in V4 countries

Research background: In the Visegrad Four (V4) countries (Poland, the Czech Republic, Hungary, and Slovakia), the inward foreign direct investment (FDI) shows high shares in the exports and gross domestic product (GDP). Furthermore, reinvested earnings play a significant role in the national balances of payments (BoP). Therefore, it is crucial to investigate the reinvestment rates and effective corporate income tax rates (ETRs) of transnational corporations (TNCs) and financial institutions settled in the V4 countries and compare them with the said rates in other European Union (EU) Member States. It is essential to unveil factors shaping investors? decisions to reinvest profits. Policymakers should reflect on them when cultivating the overall business climate to boost citizens? welfare. Purpose of the article: We aim to identify the determinants of the FDI profit reinvestment rate in the V4 countries as host economies from 2014 to 2019 and draw a comparison with the EU?27 average. We dedicate special attention to the correlation between the reinvestment and the ETRs and other selected business climate indicators as specified in the World Bank?s Ease of Doing Business (World Bank, 2020). Methods: To assess the determinants of the reinvestment rates, we employ a three-stage model of multiple linear regression, where we analyse extensive datasets published by the International Monetary Fund (IMF), Eurostat, World Bank, and public and aggregate country-by-country reports (CbCR) provided by the respective financial institutions and TNCs. Findings & value added: Our research shows that the corporate income tax (CIT) rate and ETRs significantly correlate with the reinvestment rate. The same applies to three Ease of Doing Business sub-indicators (Starting a business, Getting credit, and Contract enforcement). Contrary to the findings of Lundan (2006), Beugelsdijk et al. (2010), Nguyen and Rugman (2015), and Sutherland et al. (2020), macroeconomic factors, the profitability of corporations, and exchange rate stability turned out to be statistically insignificant. Our research has policy implications, for it can contribute to policy discussions on enhancing business environments in the V4 countries and ways to motivate foreign investors to reinvest their profits. The added value combines macroeconomic data with the unique and relatively new CbCR databases.

Prosečna efektivnost poreza na dobit na primeru kompanija na listingu Beogradske berze

The fiscal policy of a country is a crucial source of successful and normal functioning of that country's economy. The implications of fiscal policy can be reflected in both the private and the functioning of the public sector of a country's economy. Public finance is an area of economics dealing with the analysis of tax policy and government spending policy. One of the important areas of public finance research is corporate income tax. Corporate income tax is a direct tax imposed at the national level for the purpose of taxing the profits of certain companies, whether state-owned or privately owned. The aim of this paper is to look at the actual amount of profit tax paid, i.e. by observing the profit before taxation of companies listed on the Belgrade Stock Exchange. The paper considers the effective tax rate of companies and points out the deviation of the same from the legally prescribed corporate income tax rate in the Republic of Serbia and the implications of corporate income tax on the company's business results. The paper presents graphical and tabular representations of the effective tax rates of each company as well as the average effective tax rate of companies listed on the Belgrade Stock Exchange in relation to the law in the period from 2013 to 2020 in the Republic of Serbia. Finally, a statistical analysis of the presented results is given in order to understand more precisely the deviation of the effectiveness of corporate income tax of companies listed on the Belgrade Stock Exchange as well as the analysis of the correlation between the growth of the average pre-tax profit and the growth of the average effective corporate income tax rate.

Human Freedom and Effective Corporate Income Tax Rates of CEE Listed Companies

This paper analyses firm-specific and country-specific factors that have an impact on the effective corporate income tax rates (ETR) for CEE listed companies based on data obtained from the BvD Amadeus database. Business factors analysed in this research are the company size, leverage, capital and inventory intensity, and return on assets. Concerning the country-specific factors, chosen were the statutory corporate income tax rate and cultural factors represented by personal and economic freedoms covered by the Human Freedom Index (HFI), making this study different from others. The tested hypotheses predict significance of all the stated variables. Nine models were analysed based on three ETR denominators (EBT; turnover; cash flow) and three groups of countries (whole sample; sample excluding Russia; sample consisted of Bulgaria, Croatia, Poland, and Romania). Based on the panel data regression analysis and particularly the Feasible Generalised Least Squares estimator, a significant impact on the ETR was found for all variables in all the models. The main variable of interest, the HFI, came always with a negative coefficient demonstrating that, for CEE countries, a higher level of freedom is associated with a lower ETR. Findings for the remaining variables are in line with the existing literature.

PROFIT SHIFTING TO EUROPEAN TAX HAVENS: THE CASE OF SUBSIDIARIES OF MULTINATIONAL COMPANIES IN SERBIA

Due to the presence in a number of countries, multinational companies (MNCs) are in position to register a considerable part of pre-tax profit in countries with a preferential tax regime in order to avoid paying taxes at high rates. In other words, MNCs are able to shift profit from countries with a high tax burden to countries with low tax burden. In this paper, it is examined whether Serbian subsidiaries of MNCs, directly owned by European tax haven entities, more intensively shift profit to tax havens relative to other subsidiaries. A list of tax havens published by Oxfam in 2016 is used. Statistical tests and regression analysis showed that there is no significant difference in profit shifting to tax havens between two mentioned groups of subsidiaries. Therefore, it is possible that MNCs consider Serbia as a country with preferential tax regime due to relatively low statutory and effective corporate income tax rates. However, for the purposes of a detailed analysis, national tax authorities should insist on public disclosure of company tax reports to make tax practices of MNCs more transparent.

Effective Corporate Income Tax Rates: Southern and Northern Economies of the European Union

In the present study, we attempt to investigate the determinants of the effective corporate tax rate of companies of the European Union (EU) discriminating between northern and southern economies. We adopt in our analysis the period after the outbreak of the crisis in the Eurozone up today including some years before 2009 in the assessed period. Our empirical investigation is based on three alternative approaches to effective income tax rate based on accounting information. We investigate the determinants of ECITR assessing two sub-samples of firms from all the aforementioned industrial sectors for 16 member countries of Europe. The first sub-sample consists of firms from 12 member countries of "North" European Union and the second sub-sample consists of firms from 4 member countries of "South" European Union. The analysis covers the period 2004-2016. Estimation results point out that the effective corporate income tax rate is variously affected by firm-specific determining factors for both northern and southern economies. The relation between ECITR and determining factors is ascertained to be less significant (sensitive) during the pre-crisis period in comparison with the respective empirical findings after the outburst of the economic crisis in the European Union. Empirical findings indicate that effective corporate income tax rate is more vulnerable to financial leverage for southern economies in comparison to the northern economies signaling financing structure differences between the two EU-country groups. Finally, there is evidence that there is an indisputable and positive coexistence between business profitability and tax burden.

Determinante profitabilnosti poljoprivrednog sektora u Vojvodini - uloga poreza na dobitak

Due to considerable share in total employment and foreign trade exchange, agriculture represents an important sector of the Serbian economy. It is, therefore, necessary to continuously analyze the financial performance of agricultural companies and key determinants of financial performance. The objectives of this paper are to analyze the corporate income tax burden of agricultural companies in Vojvodina, as well as its impact on company profitability. Statistical tests showed that effective corporate income tax rates (ETRs) in agricultural companies are significantly lower than the statutory corporate income tax rate. Furthermore, nearly 69% of observations have both a current ETR and cash ETR of 0%, which indicates that agriculture is an industry with an exceptionally low corporate income tax burden. Panel regression showed that agricultural companies with lower ETRs are more profitable than companies with higher ETRs. Results of the analysis are not sensitive to changes in corporate income tax burden and profitability proxies.

Utjecaj poreza na dobit na kretanje izravnih stranih ulaganja u zemljama članicama Europske unije

Većina raspoloživog kapitala nalazi se u posjedu pravnih osoba, odnosno poduzeća (najčešće multinacionalnih kompanija) sklonih ulaganju u širenje vlastitog poslovanja, što ne donosi samo dodatno uvećanje profita poduzeća, već indirektno utječe i na povećanje zaposlenosti, rast gospodarstva, razvoj domaćeg financijskog tržišta te općeniti napredak države. Zato države širom svijeta aktivno utječu na formiranje povoljnog poslovnog okruženja koje će imati učinak na povećan priliv izravnih stranih ulaganja (Foreign Direct Investments – FDI). Cilj ovog rada je utvrditi utjecaj oporezivanja dobiti na privlačenje izravnih stranih ulaganja u zemljama članicama Europske unije. Statička panel analiza provedena je za razdoblje od 1998. do 2017. godine na 28 zemalja članica u cjelini, te posebno na starim članicama (EU 15) i novim članicama (EU13). Uz različite kontrolne varijable, kao nezavisna varijabla analizirane su različite stope poreza na dobit – zakonska (službena, nominalna) stopa poreza na dobit i efektivne (prosječna i granična) porezne stope u cilju ispitivanja stvarnog poreznog opterećenja trgovačkih društava i njihovog utjecaja na kretanje izravnih stranih ulaganja. Zaključeno je kako porez na dobit značajno utječe na kretanje izravnih stranih ulaganja trgovačkih društava u novim zemljama članicama Europske unije (koje karakterizira niže porezno opterećenje), ali ne kao primarni čimbenik, pri čemu se ističe društveni proizvod. U tom kontekstu najveći utjecaj ima efektivna prosječna porezna stopa.

Stay or Go? Intra-government Tax Competition and Firms’ Location Decisions in China

ABSTRACT The impact of the intra-government (vertical) tax competition on firms’ location choices is seldom studied in the literature. In this paper, we use the local corporate income tax revenue retention rate to represent the outcome of the vertical tax strategic interactions between the central and local governments in China. Theoretically and empirically, we find that a higher local corporate income tax revenue retention rate attracts newly-established firms, even when we simultaneously take into account the effect of the horizontal tax competition, i.e., the local effective corporate income tax rates. Such positive effect of the local corporate income tax revenue retention rate on firms’ location decisions is robust to a battery of sub-sample analyses and alternative model specifications, and is heterogeneous across firms with different ownership structures. This effect is more prominent in provinces with weaker agglomeration forces as well.

The heterogenous impact of taxation on FDI: A note on Djankov et al. (2010)

Summary:Taxes in the host country matter a lot for FDI inflows, but only for non-OECD countries. Taking advantage of the rich dataset constructed by Djankov et al. (2010), we show, for example, that raising the first-year effective corporate income tax rate by 10 pp reduces FDI inflows by 3.4 to 1.9 pp in non-OECD countries; and the effect is null for OECD countries. Not taking this heterogeneity into account upward (downward) biases the estimated impact of the corporate tax on FDI inflows for OECD (non-OECD) countries.

Intergovernmental transfers and tax noncompliance

This study investigates the effect of intergovernmental transfers on firms’ tax noncompliance. Using data from China where intergovernmental transfers vary substantially, we find that a large amount of intergovernmental transfers leads to a high degree of firms’ tax noncompliance. This finding is robust to the instrumental variable approach, an analysis based on a natural experiment, and various robustness checks. We also find that firms that communicate more frequently with the government than others engage more in tax noncompliance. In addition, the composition of intergovernmental transfers matters, that is, a high proportion of conditional transfers decreases firms’ tax noncompliance. Finally, we find that intergovernmental transfers are negatively correlated with the effective corporate income tax rate.

Evaluation of Application of Provisions of Business Accounting Standards and Law on Corporate Tax of the Republic of Lithuania

[only abstract in English; full article and abstract in Lithuanian]
 The financial statements have to be prepared in accordance with Business Accounting Standards or International Accounting standards, but the data in the financial statements is still affected by the provisions of Lithuanian legislation. Although the Lithuanian legislation and business accounting standards have been harmonized since 2004, there are some differences which can cause an impact on the elements of financial statements. The biggest differences are noticed between the provisions of Business Accounting Standards and the Corporate Income Tax Law. Therefore, the purpose of this article is to determine the differences between the provisions of Business Accounting Standards and the Corporate Income Tax Law and their impact on the financial statements and decisions taken by the users of the financial statements. The following research methods are used: comparative analysis of scientific literature and information sources, synthesis, data collection and analysis, graphical data representation, statistical analysis, comparison, extrapolation, systematization. The article investigates the concept and meaning of financial and tax accounting; presents the methodology for the analysis of differences in the provisions of Business Accounting Standards and Corporate Income Tax Law; the evaluation of the results of the Business Accounting Standards and the Corporate Income Tax Law provisions’ application.
 The study revealed that the differences between the provisions of the Business Accounting Standards and the Corporate Income Tax Act affect both profitable and unprofitable enterprises. Comparing the effective corporate income tax rate with the fixed corporate income tax rate, it was found that in the majority of enterprises these figures do not match. The differences in the provisions of the Business Accounting Standards and Corporate Tax Law influenced the profitability indicators of 84.4% of enterprises. Therefore, the performed research revealed that there are differences between Business Accounting Standards and Corporate Income Tax Law provisions’ and they do the significant impact on financial statements and decisions taken by the users of financial statements.

The Effect of Corporate Taxation on Investment and Financial Policy: Evidence from the DPAD

This study estimates the investment, financing, and payout responses to variation in a firm's effective corporate income tax rate in the United States. I exploit quasi-experimental variation created by the Domestic Production Activities Deduction, a corporate tax expenditure created in 2005. A 1 percentage point reduction in tax rates increases investment by 4.7 percent of installed capital, increases payouts by 0.3 percent of sales, and decreases debt by 5.3 percent of total assets. These estimates suggest that lower corporate tax rates and faster accelerated depreciation each stimulate a similar increase in investment, per dollar in lost revenue. (JEL D22, D25, G31, G32, H25, H32)

Effects of IFRS adoption on tax avoidance

ABSTRACT This study investigates the association between mandatory International Financial Reporting Standards (IFRS) adoption and corporate tax avoidance. In this study, tax avoidance is defined as a reduction in the effective corporate income tax rate through tax planning activities, whether these are legal, questionable, or even illegal. Three measures of tax avoidance are used and factors at the country and firm level (that have already been associated with tax avoidance in prior research) are controlled. Using samples that range from 9,389 to 15,423 publicly-traded companies from 35 countries, covering 1999 to 2014, it is found that IFRS adoption is associated with higher levels of corporate tax avoidance, even when the level of book-tax conformity required in the countries and the volume of accruals are controlled, both of which are considered potential determinants of this relationship. Furthermore, the results suggest that after IFRS adoption, firms in higher book-tax conformity environments engage more in tax avoidance than firms in lower book-tax conformity environments. It is also identified that engagement in tax avoidance after IFRS adoption derives not only from accruals management, but also from practices that do not involve accruals. The main conclusion is that companies engage more in tax avoidance after mandatory IFRS adoption.