Lower Effective Tax Rates Research Articles

THE INFLUENCE OF CORPORATE SUSTAINABILITY ON TAX DISTRIBUTION AND DIVIDEND DISTRIBUTION

This study investigates the impact of corporate sustainability on effective tax rates and dividend payout ratios among companies listed in the LQ45 index over the period from 2018 to 2022. Corporate sustainability is increasingly recognized as a crucial aspect of business strategy, influencing financial structures and shareholder value distribution. Utilizing a panel data analysis taken from Bloomberg, we explore how sustainability growth rate affect their tax strategies and dividend policies. Our findings reveal a nuanced interaction between corporate sustainability and fiscal obligations. Specifically, the study indicates that higher levels of corporate sustainability correlate with a lower effective tax rate; however, this relationship is statistically insignificant. This suggests that while sustainable practices may influence tax-related decisions, other factors such as changes in tax legislation, profitability, and tax planning strategies might play more pivotal roles in determining the effective tax rate. Conversely, the impact of corporate sustainability on dividend payout ratios is both negative and statistically significant. Companies with robust sustainability practices tend to reinvest a greater portion of their earnings back into the business to support sustainable growth and long-term value creation, leading to lower dividend distributions. This finding highlights the prioritization of capital retention over immediate shareholder returns among sustainably focused firms in the LQ45 index. This research contributes to the understanding of how sustainability initiatives intersect with financial policies within Indonesian listed companies. The insights provided could help investors and policymakers better understand the financial implications of sustainability growth rate, particularly in emerging markets where such practices are gaining momentum. The results also suggest areas for further research, particularly in exploring the indirect pathways through which sustainability might influence corporate financial policies.

The Influence of Social Responsibility Practices on Tax Planning: An Empirical Study for Companies Listed on Euronext Lisbon

This paper analyzes the influence of social responsibility practices on the development of tax planning activities in companies listed on Euronext Lisbon. Although scientific research into social responsibility and tax planning is not new, scientific studies into the relationship between these two themes is a developing area of research that still raises many questions. This study was carried out on a sample of 30 companies listed on Euronext Lisbon, using data for the 2018 and 2019 periods. The hypotheses were formulated based on a literature review on this subject. A multiple linear regression model was developed to validate the hypotheses. The results show that the social, corporate governance, environmental, or economic components of corporate social responsibility do not influence tax planning. However, the results show that company size negatively impacts tax planning, i.e., larger companies have lower effective tax rates. In the sample studied, larger companies implemented more tax planning strategies. In this way, this study can complement the understanding of the relationship between social responsibility practices and tax planning activities in Portugal and internationally.

Tax Policy and Abnormal Investment Behavior

Abstract This paper studies tax-minimizing investment, whereby firms tilt capital purchases toward year-end to reduce taxes. We use this pattern to characterize how taxes affect investment behavior. We exploit variation in firm tax positions from administrative data to confirm that tax minimization causes spikes. Spikes increase when firms face financial constraints or higher option values of waiting. Cumulative investment does not completely reverse after spikes. We develop an investment model with tax asymmetries to rationalize these patterns. Both depreciation motives (later investments face lower effective tax rates) and option value motives (tax asymmetry implies time-varying opportunities to minimize taxes) are necessary to fit the data. (JEL G31, G38, H25)

Public sector and human capital: on the mechanics of economic development

This paper proposes a theory about the allocation of human capital along the development process that helps to understand the controversial impact of this variable in growth regressions. We build a model in which human capital is allocated to three activities: production, tax collection (bureaucracy), and public education. At the first stage of development, countries have low effective tax rates because tax collection requires human capital, which is scarce. As countries accumulate human capital throughout the transition, the effective tax rate rises, diverting human capital from production to bureaucracy and public education. Consequently, at this stage, human capital has a weak impact on production, even when the human capital allocation is efficient. Furthermore, disparities in institutional quality may diminish the correlation between human capital and GDP.

The Influence of Capital Structure on Corporate Effective Tax Rates of Listed Firms in Tanzania

This study examines the relationship between capital structure and corporate effective tax rates using data from 25 randomly selected listed firms on the Dar es Salaam Stock Exchange over a ten-year span (2013–2022). We employed a random fixed effect panel regression model while controlling for firm-specific variables such as size, profitability, age, and growth. The study reveals a significant and negative relationship between capital structure and effective tax rates, implying that firms utilising higher debt financing tend to experience lower effective tax rates. Additionally, firm size and profitability exhibit a significant relationship with capital structure. These findings hold significant implications for Tanzanian businesses, suggesting that they may enhance tax efficiency through strategic capital structure decisions. For policymakers, the results provide empirical insights on potential tax policy reforms, potentially fostering a more favourable business environment in Tanzania. This research contributes empirical evidence on the financial and tax dynamics of listed firms in Tanzania.

Multinationals' profits in China: Impact of tax avoidance

Based on proprietary and hand-collected source country information on foreign-owned firms in China, this paper empirically explores the effect of the tax avoidance of multinational firms on the profit rate of foreign-owned firms. Foreign firms in China previously benefited from various preferential tax policies and had a lower effective tax rate compared to domestic firms. The results show that the increase in the difference between the statutory maximum tax rate in the parent country and the domestic tax rate will increase foreign firms' pretax profit margin. This effect is more pronounced for younger firms and wholly foreign-owned firms. Further tests indicate that the transfer pricing in export and import activity of foreign firms is an important channel for multinational firms to shift profits. In year 2008, the implementation of the new Enterprise Income Tax Law has unified the corporate tax rate for both domestic and foreign firms at 25 percent. The tax reform reduces the profit margin of foreign firms, especially those with larger tax rate differentials. This paper explains multinational firms' profit performance from the novel perspective of tax avoidance.

A Comprehensive Analysis of the Drivers Behind the Effective Tax Rate of Financial Times Stock Exchange (FTSE) in Malaysia

This study examines corporate effective tax rates (ETR) of Malaysian multinational corporations (MNC) listed in the Financial Times Stock Exchange (FTSE) Bursa Malaysia Kuala Lumpur Composite Index (KLCI) and FTSE Bursa Malaysia Mid 70 Index. The main objective of this study is to examine the relationship between the ETR of MNCs with subsidiaries in tax haven countries, and selected corporate characteristics such as firm size, leverage, capital intensity, return on assets, inventory intensity, profit margin, and foreign directors. Using a multiple linear regression approach on a balanced panel sample of 68 companies (321 firm-years) spanning 2017 to 2021, the study provides evidence for the variability of corporate ETRs in which the average corporate ETRs falls below the STR for the financial year 2021 of 24%. The statistical results also reveal that lower ETRs are associated with highly leveraged companies, and greater investments in fixed assets. Further, a negative coefficient for return on assets and profit margin suggests that companies have benefited from tax incentives provided by the government. Hence, this study contributes to tax literature and policymakers on factors that influence the corporate ETR, especially MNC with subsidiaries in tax haven countries. Tax authorities should implement tight monitoring to avoid these MNCs extensively engaging in tax planning which will result in revenue loss to the Malaysian income tax collection.

The Effect of Intellectual Property Boxes on Innovative Activity and Tax Benefits

ABSTRACT We exploit a quasi-experimental setting with high internal validity to measure the effect of adopting an intellectual property (IP) box on innovative activity and tax benefits. We document innovative activity increases, including patent applications, grants, and highly skilled employment, at the expense of patent quality. Domestic firms drive this effect. We also provide evidence that firms with patents, on average, enjoy up to 7.0 percent lower effective tax rates, with the most significant tax benefits accruing to multinational firms compared to domestic firms. We use the Belgium IP box that limits tax benefits to patent income. Prior IP box literature analyzes heterogeneous IP boxes and provides evidence of substantial increases in patent applications in response to IP box adoption. Our results suggest the patent-income only IP box leads to a modest increase in innovative activity by a maximum of 5.1 percent, with multinationals benefitting relatively more from a financial perspective. Data Availability: The data supporting this study’s findings are publicly available from Bureau van Dijk Orbis, EPO PATSTAT, and the Belgian National Bank. JEL Classifications: H21; H25.

Tax Knowledge Diffusion Through Shared Audit Partners: Evidence From China

This study investigates how tax knowledge is diffused through auditors at the individual partner level. We find that firms sharing the same audit partner with low-tax firms exhibit lower effective tax rates ( ETRs) but not for firms that share the same audit office but with different partners. Using a difference-in-difference (DID) research design, we show that firms’ ETRs decline significantly after their existing audit partners start auditing a low-tax firm. Our findings suggest that the transfer of tax planning knowledge from low-tax firms to focal firms occurs mainly through common individual partners. Moreover, benefits to focal firms are stronger when their top executives have a social connection to the shared partners. Further analysis shows that audit partners are more likely to retain existing clients and charge higher audit fees for tax planning diffusion, indicating how audit partners benefit from sharing tax planning knowledge with their clients.

Accounting and Non-accounting Concepts of Effective Tax Rates and their Effects on Tax Planning in State-owned Companies

The study examines the link between different modalities of effective tax rates in state-owned entities in Serbia and how those rates can be used to distinguish between SOEs using tax planning and those not inclined to tax planning techniques. Results show that state-owned companies in Serbia owned by local municipalities and cities are using tax planning to obtain lower effective tax rates than the statutory rate, therefore, using their preferential tax status from size and ownership. The study shows that cash flow-based effective tax rates and combined tax rates are better predictors of tax planning than accounting-based effective tax rates for state-owned firms.

Examining Tax Strategy Choice

ABSTRACTMost recent tax research examines the level of firms’ effective tax rates (ETRs), focusing on tax avoidance. However, theoretical work and research on book-tax tradeoffs and reputational costs indicate that some firms have other tax planning goals. Moreover, anecdotal evidence suggests that consistent tax outcomes are important; therefore, the volatility of ETRs may be an alternative aspect of firms’ tax planning. In this study, I find that some firms utilize a second, distinct approach to tax strategy—maintaining low ETR volatility—by documenting systematic differences in firm characteristics associated with each tax strategy approach and a predictable shift in characteristics when firms change tax strategies. In combination, these results identify at least two distinct approaches to tax strategy. I also find that firms exhibiting low ETR volatility earn significantly higher median buy-and-hold returns than firms exhibiting low ETR levels, consistent with benefits to alternative tax strategies.Data Availability: Data used in this study are available from public sources identified in the paper.JEL Classifications: M40; M41; M49.

How to Prevent Time Preference Risk: Evidence from Tax Avoidance

ABSTRACT This paper investigates whether future time reference in languages affects corporate tax avoidance. Consisting of 265,652 firm-year observations, we cover 42 countries during the 1989 to 2020 periods. The results show that those firms have relatively low cash effective tax rates when their country’s language does not distinguish grammatically between future and present events. Thus, adopting IFRS accounting and the local legal environment could moderate this condition. Our findings remain after considering endogeneity problems and implementing a series of robustness tests. Moreover, we provide additional evidence regarding the effects of formal institutions on tax avoidance and a new approach for regulators to encourage tax compliance and evaluate their local legal environments to more effectively reducing financial risk.

Offshore tax evasion and wealth inequality: Evidence from a tax amnesty in the Netherlands

Exploiting unique datasets covering over 29,000 tax evaders in the Netherlands, we investigate the distribution of tax evasion and its implications for the measurement of wealth inequality. Tax evasion is concentrated at the top of the wealth distribution with over 10% of the wealthiest 0.01% of households – the “super rich” – evading taxes. At the top, households evade around 8% of their true tax liability. The “merely rich” (P90-P99.9) own 67% of hidden wealth, while the “super rich” account for only 7%. Consequently, the correction for offshore wealth has a modest effect on top wealth shares. We describe a number of explanations for the distribution of tax evasion by Dutch households: low-cost tax evasion opportunities in neighbouring countries for the “merely rich”, sophisticated forms of tax evasion for, low effective tax rates on and migration to low tax jurisdictions by the “super rich”. Taken together, these explanations suggest that the distribution of tax evasion strongly depends on a country’s geographical and institutional settings.

Nationality Diversity in Corporate Boards and Tax Avoidance: Evidence from Oman

We examine the impact of nationality diversity in corporate boards on tax avoidance by assessing whether foreign directors play monitoring or advisory roles. We use a sample of 1049 firm-year observations from companies listed on the Muscat Stock Exchange between 2009 and 2019. We find that board nationality and audit committee nationality are associated with lower effective tax rates, which equated to more tax avoidance (an advisory role). Our findings offer an important implication for policymakers who are interested in determinants of and mechanisms to prevent tax avoidance. The implication is that caution should be exercised when appointing foreign directors to the board of directors in Oman.

Did large Algerian enterprises pay an equitable tax contribution? Evidence from Longitudinal Data

This research paper used financial statements information to measure Effective Tax Rates (ETRs) , which represent the proportion of profits incurred by large Algerian enterprises as a tax burden during a given financial year, and compared them with the Statutory Tax Rates (STRs) imposed by Algerian law. The purpose of the study was to determine whether, in the context of a political economy, that tax contribution respects the principle of Tax Equity. It employed a sample of 114 enterprises for the 2012 to 2018 financial year. The variability between ETRs and STR indicates the intervention of elements that cause differences between the accounting result and the taxable base. Higher ETRs mean that these enterprises are under fiscal pressure and lower ETRs mean that the tax burden effectively supported is inconsistent with these enterprises' profits level. The findings indicate that there are considerable differences in the tax burden borne by these enterprises and that most ETRs were lower than STRs. According to the results of this study, we conclude that large Algerian enterprises have not paid an equitable tax contribution.

Real Earnings Management And Firm Value: Examination Of Costs Of Real Earnings Management

The objective of this research is to find the evidence of (1) REM towards firm value and (2) the moderating role of costs of REM which are market share, financial health, and effective tax rate between REM and firm value. Research samples are manufacturing firms listed on the Indonesian Stock Exchange 2018-2020. REM includes abnormal CFO, abnormal production, and abnormal discretionary expenses. Data analysis uses a white regression test. Based on data analysis, REM has a negative effect on firm value which indicates that REM reduces economic value. Market share and financial health weaken the negative effect of REM on firm value, indicating that REM is a signal where the firm has strong industry and financial advantages to increase firm value. The effective tax rate has no moderating effect between REM and firm value, indicating that low effective tax rate can be both efficient tax planning such as tax avoidance and aggressive tax planning such as tax evasion. Research contribution gives academics, financial statement users, and regulatory bodies an additional literature of REM as a signaling tool of industry and financial health advantages.

CAPITAL STRUCTURE AND TAXATION OF COMPANIES OPERATING WITHIN NATIONAL AND MULTINATIONAL CORPORATE GROUPS: EVIDENCE FROM THE VISEGRAD GROUP OF COUNTRIES

The aim of this study is to review the level of debt and the impact of taxation on the capital structure of companies operating within national and multinational corporate groups in the countries of the Visegrad Group. In the research, financial data was used from 2012–2018 regarding entities forming part of corporate groups, and panel regression models with fixed effects were applied. According to the results of the research, domestic corporations are generally more leveraged and have a lower effective tax rate than multinational corporations. At the same time, the effective tax rate was significant only in six models out of sixteen, and mostly in the case of multinational corporations. The direction of impact was inhomogeneous. Other determinants of the financing structure which most often appeared as significant, in the case of companies operating both within domestic and international capital groups, include sales profitability as well as the tangibility and the age of the company. An additional analysis made for Poland and Slovakia determined that a change in the law on thin capitalization influenced entities’ capital structure determinants, but had no significant impact on the companies’ level of debt.

The Nonlinear Relation between Effective Tax Rates and Tax-Related Restatements

SYNOPSIS We examine the association between firms' tax planning behavior, as measured by their effective tax rates (ETRs), and financial restatements. We find that both low and high ETRs are positively related to subsequent tax-related restatements, indicating a nonlinear relation between ETRs and tax-related financial reporting quality. We also find evidence that tax-related restatements for low ETR firms reflect increased operational complexity that pervades the firm and results in an increased likelihood of tax and non-tax restatements. High ETR firms, in contrast, appear to suffer from inadequate controls and expertise surrounding the reporting for income taxes. We do not find evidence that this extends outside the tax function to other types of restatements. All results hold after controlling for internal control weaknesses and other characteristics known to affect ETRs and the likelihood of restatements. Data Availability: Data are available from public sources identified in the text.

The nexus between aggressive tax planning and earnings management in different political systems and the moderating role of corporate governance

This paper explores first the relationship between aggressive tax planning (TP) and earnings management (EM) in European listed companies and then compares this relationship between different political systems. It also examines the moderating role of board governance on aggressive TP and EM relationship. Using panel data of 105 companies listed on the EURONEXT 100 and NEXT 150 for the period 2011 to 2018 and alleviating endogeneity concern, the results show a significant positive relationship between aggressive TP and EM, where firms that tend to use EM practices have lower effective tax rate (ETR). Such relationship is more pronounced in countries with a Presidential system compared to parliamentary/quasi-parliamentary system. Again, board governance variables (i.e. board size and independence) show significantly negative moderating effect, suggesting that board plays an effective role in deterring EM practices by weakening the relationship between ETR and EM. These findings have important policy implications for respective stakeholders.

Agressividade tributária como fator determinante do conservadorismo condicional no Brasil,

ABSTRACT This paper investigates whether the degree of tax aggressiveness is associated with conditional conservatism in Brazil. After a thorough literature review on accounting conservatism by Brazilian academia and a discussion about tax aggressiveness and accounting conservatism, a literature gap was found because the relationship between a firm's degree of tax aggressiveness and its conditional conservatism had not been investigated previously. Taxable income has a relationship with accounting income in the Brazilian corporate income tax system. Hence, tax planning can affect financial information properties. This study offers a partial explanation of accounting conservatism based on tax issues that contribute to the conservatism and taxation literature. The results suggest that tax strategies that aim to avoid tax burden are related to conditional conservative accounting. Hence, the practice of conditional conservatism in Brazil appears to be linked with tax-deductible alternatives of reducing earnings, which would explain tax planning’s association with the degree of conditional conservatism in financial reporting. This finding is relevant to financial reporting users that can consider our results in their analysis and to management that seeks to understand their decisions about tax planning better. For this research purpose, two Basu models (Basu, 1997) were adopted, adapted with tax-aggressiveness controls. The effective tax rate (ETR) was used as a tax-aggressiveness metric, controlling firms with both high and low ETR. The study period was from 2010 to 2019 for Brazilian firms from B3 S.A. - Brasil, Bolsa, Balcão (B3). The findings demonstrate a significant relationship between tax avoidance and conditional conservatism, that is, more tax-aggressive firms tend to use more conservative accounting.