Intra-group Transactions Research Articles

ANALYSIS OF COURSE DIFFERENCES AS PROCEDURE OF INTERNAL AUDIT OF A GROUP OF RELATED ENTERPRISES

Introduction. Increase in currency risks is observed in the activity of a group of enterprises, in which the functional currency of the activity of the main enterprise-investor differs from the functional currency of the activity of one of the group's enterprises. The article is devoted to the study of the processes of audit of exchange rates, which are reflected in the reporting of the group of enterprises on the results of intragroup transactions and external operations of individual enterprises of the group. Purpose. The article aims to develop a methodological approach to the implementation of the analytical procedures of internal audit of exchange differences that are reflected in the consolidated statements of the group and to provide the recommendations of the internal auditor on the formation of a strategy for managing the currency risk of a group of enterprises. The internal audit of individual group reporting and consolidated reporting by the group should ensure the detection of areas with high currency risk. Results. The analytical audit procedures of exchange rate changes based on the matrix methodological approach that can determine the result of currency risk management group and form the internal auditor recommendations towards improving the management of exchange rate differences (due to the impact on business enterprise group or rationalization of intragroup transactions group) has been proposed in the article.

INTERNAL CAPITAL MARKETS, FORMS OF INTRAGROUP TRANSFERS, AND DIVIDEND POLICY: EVIDENCE FROM INDIAN CORPORATES

AbstractFirms in a business group share ownership structures, allowing them access to sources of intragroup financing not available to independent firms. Resources could be transferred within a group either through intragroup transactions, primarily operational activities (internal transfers), or through dividends permitting insiders to make investments in other group firms (external transfers). The first strategy predicts lower dividends, and the second predicts the reverse. Using a large data set of listed Indian firms, we look at the costs of internal transfers versus external transfers and find that dividend policies of group firms are better explained by the external transfer hypothesis.

Auditor Choice and Its Implications for Group‐Affiliated Firms

AbstractWe examine which of two opposing financial reporting incentives that group‐affiliated firms experience shapes their accounting transparency evident in auditor choice. In one direction, complex group structure and intragroup transactions enable controlling shareholders to pursue diversionary activities that they later hide by distorting reported earnings. In the other direction, as outside investors price‐protect against potential expropriation, controlling shareholders may be eager to improve financial reporting quality in order to alleviate agency costs. To empirically clarify whether group affiliation affects company insiders' incentives to address minority shareholders' concerns over agency costs, we examine auditor selection of group firms relative to stand‐alone firms. In comparison to nongroup firms, our evidence implies that group firms are more likely to appoint Top 10 audit firms in China, especially when their controlling shareholders have stronger incentives to improve external monitoring of the financial reporting process. After isolating group firms, we find that the presence of a Top 10 auditor translates into higher earnings and disclosure quality, higher valuation implications for related‐party transactions, and cheaper equity financing, implying that these firms benefit from engaging a high‐quality auditor. In additional analysis consistent with our predictions, we find that group firms that are Top 10 clients pay higher audit fees and their controlling shareholders are more constrained against meeting earnings benchmarks through intragroup transactions and siphoning corporate resources at the expense of minority investors. Collectively, our evidence supports the narrative that insiders in firms belonging to business groups weigh the costs and benefits stemming from auditor choice.

Why are Pyramid-Affiliated Firms More Tax Aggressive?

This paper examines why pyramid-affiliated firms are more tax aggressive than other firms. While firms in the US are generally widely held by small shareholders, many large firms in Canada belong to business groups, which are typically organized as pyramids. This study, using Canadian listed companies for the time periods of 2010-2013, finds that firms affiliated with pyramid structures are more tax aggressive because: (1) pyramidal groups are likely to have intra-group transactions, which enable the affiliated firms to be more tax aggressive; (2) internal financing in pyramidal groups enables the affiliated firms to be more tax aggressive; and (3) pyramidal groups are likely to occupy political connections, which enable the affiliated firms to be more tax aggressive.

The Determinants of Tax Avoidance within Corporate Groups: Evidence from Moroccan Groups

This paper examines the major tax avoidance determinants within the corporate groups, based on a hand-collected sample of 45 publicly-listed Moroccan corporate groups, over the 2011–2015 period. The literature review indicate that there are several practices of Moroccan corporate groups, used to reduce their tax liabilities, specially, we find, Group size, Intra-group transactions, Profitability, Intangible Assets, Debts, and Multinationality. Finally, our regression results show that only the multinationality, intra-group transactions and Debts are used to maximize tax avoidance opportunities, therefore to reduce the group’s tax liabilities.

The legal Regulations on Intragroup Transactions in Corporate Groups

The legal Regulations on Intragroup Transactions in Corporate Groups

Cross-Border Financial Transactions and Arm’s Length Interest Rates: A Two-Step Approach

Financial transactions between related parties are often scrutinized in tax audits. In order to analyse whether the conditions (transfer prices) underlying these transactions, in particular regarding intercompany loans, are appropriate from a tax point of view, they have to be in line with the arm’s length principle. Given this, there is a substantial burden for the taxpayer as there are no precise regulations on how the arm’s length prices are to be determined, neither on a national nor on an international level. Subject of this article is to discuss cross-border financial intra-group transactions by taking into account economic as well as administrative reasoning. Basing on this discussion, a two-step approach is developed which combines the two pillars by providing an indication on how arm’s length prices could be determined on the one hand while also focusing on administrative issues on the other hand. This two-step approach could be applied to any kind of financial transactions.

Cross-Border Intra-Group Financial Transactions - Evidence from Germany

Literature provides evidence of profit shifting of MNEs, particularly by intercompany debt. Therefore, we conducted a broad empirical investigation (survey), focusing on specific issues regarding cross-border intra-group financial transactions. This paper aims to work out empirical evidence of cross-border intra-group financial transactions behavior of MNEs in Germany and tends to introduce and evaluate the respective empirical results in order to provide first significant insights regarding this (not only) tax relevant issue.

Stemming the Tide of Transfer Pricing: A Critical Evaluation of the Efficacy of Ghana’s Transfer Pricing Rules on Services

Several countries have enacted transfer pricing regulations to address the problems associated with the pricing of intra-group transactions. Ghana enacted its transfer pricing regulations in 2012 to address issues relating to transfer pricing in the country. This article considers the efficacy of Ghana’s transfer pricing regulations in the context of services, specifically as regards the aim to defeat current artificial tax planning schemes.

Corporate Leverage Strategy in an Emerging Market

This study empirically investigates whether the introduction of a new corporate governance system in the Korean economy (where controlling shareholders dominate business groups and corporate-bank relationships are prominent) affects corporate leverage strategies. We find evidence suggesting that improved corporate governance, measured by appointments of outside directors and controlling shareholder’s ownership, constrains corporate borrowing. Chaebol firms, on average, have higher levels of borrowing than stand-alone firms. However, the largest chaebols, who are heavily involved in multinational ventures, showed the opposite trend, ostensibly due to more diversified business opportunities and sources of financing available in international markets. This suggests that government policies designed to improved corporate governance among “average” chaebols may be ineffective (or only partially effective), because such policies do not account the heterogeneity that exists across chaebols. Lastly, we find that intragroup transactions among affiliates increase corporate borrowing, but they are not consistently related to chaebol borrowing as a whole.

Tax Consolidation Regimes: Australia and Japan Compared

The Australian and Japanese Governments have both introduced a tax consolidation regime effective fiscal year 2002103. The two regimes have many similarities. In particular, they both mandate 100 per cent ownership as the threshold for consolidation, consolidation is voluntary but if elected all eligible companies must consolidate, and intra-group transactions are largely ignored. The regimes have been held out as reducing both tax liabilities and compliance costs, removing double taxation, enhancing corporate restructuring, and providing greater commercial flexibility and competitiveness. However, the Australian corporate sector remains cautious, primarily because of concerns over the compliance costs associated with the transition to the new regime and the potential loss of existing tax credits and losses. Whilst these transitional issues are less of a concern to Japanese companies, in the absence of existing rules permitting the transfer of tax attributes, a Japanese surtax of 2 per cent over the first two years of consolidation has to be weighed against the apparent benefits of the regime. A comparison of the two regimes also reveals a very different approach to the treatment on consolidation of inherent gains and losses.

Sharing the Benefits of the EU’s Common Consolidated Corporate Tax Base within Corporate Groups

One of the main features of the CCCTB Draft Directive, the formulary apportionment of the consolidated group income, leads to a significant change in corporate income taxation paradigms. Currently, corporations are taxed on a separate entity basis using the arm’s length principle to evaluate intra-group transactions. Similarly company law uses a separate entity approach with regard to transactions between related parties. The CCCTB Draft Directive will regularly lead to allocation results that are explicitly not at arm’s length as the arm’s length principle will not be necessary anymore for tax purposes. However, without a corresponding change in company law paradigms – which is not foreseeable – the current lockstep between corporate income tax law and company law will cease to exist. Yet, not only the proposed CCCTB regime but also existing group taxation systems produce taxable outcomes that are not in accordance with the domestic company laws’ single entity approaches. This article therefore analyses group taxation systems currently employed by EU Member States and shows that the vast majority of group taxation systems employ instruments to (re-)unite the results from the joint taxation with company law’s separate entity approach. These accompanying mechanisms ensure a fair distribution of the advantages and disadvantages of the respective intra-group loss-offset system to all group members. However due to various reasons, one being the fact that every group member of the CCCTB will be responsible for a share of the group’s overall tax liability, another being the fact that different tax rates will apply within one CCCTB group, these currently employed mechanisms and techniques are not suitable for the CCCTB concept. Therefore this article develops a distinct mechanism to share the benefits of the CCCTB concept within the whole group. The current international debate on the suitability of the arm’s length to continue as a standard for the allocation of taxing powers in intra-group transactions and the new impetus for the common tax base in some EU Member States may suggest that there is a new potential momentum to make progress in the introduction of formulary apportionment within the European Union.

Productive and Unproductive Reactions of MNEs to International Tax Differentials

I provide initial evidence that international taxation impacts the magnitude of R&D investments in the UK. Relying on a simple theoretical model, I show that the observed response is consistent with the mispricing of intra-group transactions. My structural estimates suggest that transfer prices for internally provided innovation increase by around three percent in response to a one percentage point increase in foreign taxation. This response is more pronounced than previous estimates of aggregate profit shifting indicate, supporting concerns on the susceptibility of intangible assets to facilitate profit relocation. (author's abstract)

Transfer Pricing and Tax Havens for Attracting FDI

Enterprises seek profit maximization that comprises tax optimization which, within multinationals, includes the shifting of profits from the less to the most favorable countries using transfer pricing of intra-group transactions and tax havens as the “middle man”. Because FDI is an important engine of economic growth of, at least, the less developed countries and multilateral agreements impose limitations on the allocation of direct subsidies to businesses, in our research we explore the hypothesis that countries could use the relaxation of regulation on transfer pricing as a fiscal policy instrument for attracting FDI. Using a good composed of two parts, the brand and the hardware, and consumers with concave utility on the brand, we conclude that countries can use the relaxation of regulatory acceptance of transfer pricing to attract FDI when 1) the creation and development of the brand is an important part in the total cost of the good and 2) the increase in production costs of relocating the production from the most to the less developed country is not very large. Our results seem in accordance with empirical evidence.

The Next Rising Tax Haven

The Next Rising Tax Haven

Does The Market React Differently To Chaebol Firms?

<p class="EEH2">Based on a sample of Korean firms listed on the KOSPI and KOSDAQ from 2001 to 2011, we examined whether the affiliation of a firm with a Chaebol group affects the sensitivity of stock prices to earnings surprises. We found that the market response to positive (negative) earnings surprises is more positive (negative) for Chaebol firms than for non-Chaebol firms. In addition, we investigated how intra-group transactions affect the ERCs of Chaebol firms by comparing with those of non-Chaebol firms. Our results show that the intra-group transactions of Chaebol firms are positively related to ERCs under both positive and negative earnings surprises. However, we did not find the same results from the analyses of non-Chaebol firms.</p>

The Treatment of Late Filings in Indian Merger Control

In 2013, the Competition Commission of India (CCI) adopted three decisions fining companies for delay in notifying transactions under the relevant provisions of Indian merger control law. The decisions are notable because they relate to transactions that: (1) are not reportable under the laws of most merger control regimes around the world (e.g., intra-group transactions), (2) advisors would not routinely expect to require notification in India (i.e., transactions with no immediate, substantial, or foreseeable effect in India), and/or (3) were not ultimately implemented. Critically, there is no suggestion that these were necessary because the transaction in question was likely to give rise to an appreciable adverse effect on competition in India. This article seeks to identify and analyse the implications of those decisions for companies (and their advisors) who do business in India.

Earnings Management in Business Groups: Tax Incentives or Expropriation Concealment?

This study provides evidence that Belgian firms affiliated to a business group (holding) manage their earnings more than stand-alone firms. Earnings management is especially more prevalent in fully owned group firms compared to group firms with minority shareholders. This evidence is consistent with the hypothesis that controlling shareholders face fewer constraints to manage earnings if opportunistic earnings management cannot adversely affect the value of minority shareholders and is inconsistent with the claim that group firms would engage in earnings management to hide controlling shareholders' self-serving transactions. On the incentive part, we find that group firms strategically manage earnings in response to tax incentives. More specifically, we show that signed discretionary accruals of group firms depend significantly more on the marginal tax rate status of the firm as compared to independent firms. Finally, we document that earnings management is particularly facilitated through intra-group transactions.

Related party transactions and separation between control and direction in business groups: the Italian case

Purpose–Under IAS 24 a related party transaction (RPT) is a “transfer of resources, services or obligations between related parties, regardless of whether a price is charged” (IASB). The purpose of this paper is to consider the interest of the business group and the directing activity of the parent company for the interpretation of the RPT. Considering the interest of the group means to interpret the intra-group transactions not as isolated transactions, as usually done by the empirical studies, but in a wider perspective, that of the group.Design/methodology/approach–This paper builds on explanatory multiple case studies in order to answer the following research questions: why the interest of the business group and the directing activity of the subsidiaries by the parent company are important in the interpretation of RPTs. How RPTs can be interpreted in the light of the directing activity of the holding company.Findings–Dominant shareholder tends to demonstrate that the group it is not managed as a single economic entity and sometimes that subsidiaries are not really controlled. The case studies show that a regulation that imposes the transparency of the directing activity has at least two effects: the controlling shareholder finds it convenient to delegate the decision-making power and to not carry out RPTs among firms that do not present clear economic links. Thus, the transparency of the directing activity seems to be a disincentive to the establishment of a pyramidal group with expropriation purposes.Research limitations/implications–It is appropriate that the interpretation of the RPT take into account not only the disclosure of the RPT (e.g. type and nature), but also the following disclosure: the reason and the business purpose that lead to RPT; the interest of the company in engaging such transactions; and the procedures for their approval. The independence of subsidiaries directors is necessary to ensure the management autonomy of the boards, and in the case of directing activity they have to protect outsiders in the case of detrimental transactions ordered by the controlling and directing company that are not carried out in the interest of the group.Originality/value–Unlike what has been done so far by the literature on RPT, this paper considers the interest of the group to interpret the intra-group transactions and the separation between control and direction. It means do not interpret RPT as isolated transactions, as usually done by the empirical studies, but in a wider perspective, that of the group.

Banks in Crisis: Rethinking the Role of Intra-Group Transactions

Despite segregation in numerous legal entities (subsidiaries and branches), groups often manage their liquidity centrally and provide support to troubled group entities. This raises important questions, which this paper attempts to answer. Can intra-group support be beneficial for crisis management? How is the provision of group support treated by EU and national law, and what are the legal barriers? What are the policy implications for banking regulation and supervision?