Lower Effective Tax Rates Research Articles

The Burden of Attention: The Impact of CEO Publicity on Tax Avoidance

We use Google search volume index for a CEO’s name and stock ticker to measure CEO publicity, and examine the competing hypotheses on its effect on the tax behavior: On the one hand, CEOs who receive higher attention from the retail investors are motivated to engage in tax avoidance activities to inflate earning to meet investors’ performance expectation; on the other hand, they concern more about public image and therefore avoid to be labeled as tax avoiders. Based on the analysis of the CEOs of S&P500 firms between 2004 and 2011, the finding supports the former and shows that the CEOs with higher publicity manage to enjoy lower effective tax rate and cash effective tax rate. In addition, such effect is moderated by board independence. Finally, we find that firms with higher CEO publicity pay auditors more tax fees, suggesting that these CEOs tend to purchase more tax planning service from external auditors. Our findings are robust to alternative measures of tax avoidance, and have important implications on both tax authority and investors.

Financial conservatism of private firms

The aim of this paper is to analyze the factors that motivate private firms to follow a conservative financial policy. Using a new definition of financial conservatism, we investigate a sample of 21,959 Italian private firms for the 1998–2006 period and look for the determinants of financial conservatism according to the main theories of capital structure and financing policy. Our findings show that financially conservative firms are smaller, with more intangible and less tangible assets, lower effective tax rates and follow a pecking order style financial policy. As has been found for their public counterparts, financially conservative private firms seem to pile up cash and their leverage potential before undertaking future investments.

Financial Conservatism of Private Firms

The aim of this paper is to analyze the factors that motivate private firms to follow a conservative financial policy. Using a new definition of financial conservatism, we investigate a sample of 21,959 Italian private firms for the 1998-2006 period and look for the determinants of financial conservatism according to the main theories of capital structure and financing policy. Our findings show that financially conservative firms are smaller, with more intangible and less tangible assets, lower effective tax rates and follow a pecking order style financial policy. As has been found for their public counterparts, financially conservative private firms seem to pile up cash and their leverage potential before undertaking future investments.

Tax Policy Uncertainty and Stock Return Volatility

We investigate whether uncertainty surrounding tax policy is associated with investors’ perceptions about the riskiness of firms’ tax avoidance strategies, controlling for other sources of general macroeconomic uncertainty. To test our prediction, we rely on long-run cash effective tax rates (ETRs) to identify firms that have maintained relatively low cash ETRs over the prior five years. We then examine how tax policy uncertainty (TPU) and tax avoidance interact in a model of firm risk. Consistent with our prediction, our results indicate that macro-level TPU is positively associated with investors’ perceptions about the riskiness of cash flows stemming from tax planning activities. We perform analyses to evaluate our measure of TPU based on how it correlates with actual tax-related legislative activity, individually and relative to other policy uncertainty indices (debt, spending, entitlements, etc.). The results of these tests provide assurance that our primary measure of interest captures tax-related policy uncertainty. Second, consistent with economic theory which suggests that macro-level policy uncertainty is a source of systematic risk to investors, we predict and find that the interaction between TPU and tax avoidance activity is concentrated primarily in systematic volatility. We further condition our interaction of interest on a proxy for low tax-related information quality (i.e., highly volatile ETRs). Consistent with Rajgopal and Venkatachalam (2011) who argue that idiosyncratic firm risk is, at some level, a function of the firm’s information environment, we find that our interaction of interest is associated with idiosyncratic volatility for firms with lower tax-related information quality.

Initiatives for Information Technology (IT) Sector Development and the Location of Data Centers

We examine a variety of steps that governments might take to encourage foreign investment in a particular country’s information technology (IT) sector. The Information Age is a global phenomenon that is reshaping economies and blurring geographic borders. IT significantly increases the range of potential activities for businesses, enabling entrepreneurs to become actors in the global economy. Many countries have also experienced substantial growth in Internet penetration rates in the last decade, bringing many new opportunities for citizens to expand their knowledge of the world outside a country’s borders. However, many other countries have not experienced as much growth in Internet penetration and the IT sector, prompting national governments to weigh available options for attracting IT investment. Regulatory approaches can focus on either “carrots” or “sticks.” A “carrot” approach would make doing business in a country desirable based on incentives, like low effective tax rates. A “stick” approach would impose requirements as a condition of doing business in the country, such as requiring a company to operate a data center within a country in order to provide services to the country’s citizens. Some research raises doubts about the effectiveness of financial incentives, but a purely “stick”-based approach is not likely to be successful on its own either. Thus, governments must continue to carefully examine the options for attracting foreign investment.

The Governance of Accounting Rules and Tax Rules: Analysis of SMEs' Tax Avoidance Strategies

Objective- This study examined the governance of accounting rules and tax rules on the level of tax burdens paid by SMEs in Malaysia. According to the tax gap theory, taxpayers utilize the different rules between accounting and tax which is known as the dual reporting system in their tax avoidance strategies in order to pay lower taxes. The tax gap is the difference between the statutory tax rate (STR) and effective tax rates (ETRs). Methodology/Technique - This study analysed financial statements of 148 SMEs (740 firm-years) prepared for the years 2008 to 2012. Findings The statistical results revealed that the dual reporting system had caused a significant gap between the STR (the tax rate that SMEs supposed to pay) and ETRs (the actual tax rates paid by SMEs) in the Malaysia tax system. In addition, the findings provided evidence of the tax avoidance strategies utilised by SMEs which cause lower ETRs as follows: exempt income and tax incentives, disallowable expenses, absorbed losses and capital allowances, deferred tax expenses, size and leverage. Thus, the findings confirmed the tax gap theory in the SMEs tax system which implied a loss of tax revenue to the government due to tax avoidance activities. Findings The findings had provided useful feedbacks to the policymakers such as accounting bodies and the relevant tax authorities to address the issue and realign the two systems which are accounting standards and tax system to minimize the gap. Type of Paper Empirical paper Keywords: , Dual Reporting System; ETRs; SMEs; STR; Tax Gap

The tax burden of listed companies in China

This study examines factors affecting effective tax rates (ETRs) in China, using firms trading in the Shanghai and Shenzhen stock exchange markets from 1999 to 2008, and documents four key determinants, including (i) firm-specific attributes, (ii) ownership structure, (iii) industry upgrading and (iv) tax reforms in the form of cutting tax incentives. Consistent with prior findings, ETRs are positively related to firm size, as suggested by the political cost theory. Moreover, the relation between ETRs and financial leverage is nonlinear. ETRs are negatively related to financial leverage, but this relation becomes less negative as leverage keeps increasing. ETRs are also positively related to inventory intensity. On the other hand, ETRs are negatively related to the percentage of shares held by foreign stockholders. In addition, lower ETRs are found in high-tech industries which have been deemed more valuable by the government, and therefore receive more tax incentives. Finally, ETRs have increased followi...

What Really Affects German Firms' ETR?

This paper investigates the determinants of the effective tax rate (ETR) of German firms spanning the Germany’s Corporate Tax Reform 2008 (GTR08). This paper is the first to analyze the drivers of ETR using German longitudinal data. The results show that larger companies, growth firms, and firms with higher free cash flow (FCF) appear to have higher ETR. Leverage and operating lease expenses tend to be negatively associated with ETR. The findings show that more profitable firms appear to engage more in tax strategies that result in lower ETRs. Moreover, they indicate that multinational firms have more possibilities to reduce the tax burden, resulting in a negative association with ETR. Germany’s tax reform of 2008 has a negative effect on ETR and impacts some firm-specific factors. For more levered firms, the association between leverage and ETR is positive affected by the ETR.

The effectiveness and valuation of political tax minimization

We find evidence suggesting that corporate lobbying for tax purposes over the period 1999–2009 is one method by which firms managed corporate taxes. Furthermore, tax management strategies employed by these politically active firms were valued by shareholders. Firms lobbying on tax issues have lower book effective taxes and greater discretionary permanent differences in GAAP and IRS taxable income. Investors place a premium on lobbying activities for tax purposes unless the firm already has a low effective tax rate or very high book-tax differences. We conclude that lobbying political officials is one method by which firms manage risks attendant an aggressive tax strategy.

The Importance of the Internal Information Environment for Tax Avoidance

We show that firms’ ability to avoid taxes is affected by the quality of their internal information environment, with lower effective tax rates (ETRs) for firms that have high internal information quality. The effect of internal information quality on tax avoidance is stronger for firms in which information is likely to play a more important role. For example, firms with greater coordination needs because of a dispersed geographical presence benefit more from high internal information quality. Similarly, firms operating in a more uncertain environment benefit more from the quality of their internal information in helping them to reduce ETRs. In addition, we provide evidence that high internal information quality allows firms to achieve lower ETRs without increasing the risk of their tax strategies (as measured by ETR volatility). Overall, our study contributes to the literature on tax avoidance by providing evidence that the internal information environment of the firm is important for understanding its tax avoidance outcomes.

Institutional environment, ownership and firm taxation

AbstractThis paper examines how ownership type and institutional environment affect firm taxation. Using a sample of Chinese‐listed firms from 1999 to 2006, we find that private firms enjoy a lower effective tax rate than local state‐owned enterprises. In addition, the preferential taxation of private firms is associated with local government incentives to promote local economic growth. We find that private firms located in regions with a lower level of privatization receive preferential tax treatment. Our results also suggest that decentralization and interjurisdictional competition lead to financial interdependence between local governments and private firms.

Summaries of Papers in This Issue

Summaries of Papers in This Issue

Audit Fees and Book-Tax Differences

ABSTRACTWe investigate whether book-tax differences are associated with higher audit fees, a proxy for auditor risk assessments and auditor effort. Our evidence suggests that there is a significantly positive relation. Further, this association is larger for firms that appear to have managed earnings (i.e., have high accruals) relative to those that are tax avoiders (i.e., have low cash effective tax rates). Our evidence is consistent with large book-tax differences representing an observable proxy for earnings management that is associated with auditor decisions. Our study contributes to capital market research that examines audit fees, as well as other research that examines the usefulness of book-tax differences for market participants.

Institutional environment, inside ownership and effective tax rate

PurposeThe purpose of this paper is to examine the effect of institutional environment and inside ownership on the tax reporting practices of Chinese listed firms.Design/methodology/approachIt is an empirical study using a sample of Chinese listed firms for eight years of time periods between 1998 and 2005.FindingsThis study finds that in Chinese provinces with more developed institutions, firms have higher effective tax rates; however, firms with inside ownership in these regions have lower effective tax rates. Further analysis shows that the above results hold only for non‐state‐owned firms.Originality/valueThe paper presents the first study of the impact of inside ownership and institutional environment on corporate effective tax rate in China.

Tax Fairness And Effective Tax Rates: A Tale Of Two Industries

<span>Industries with low effective tax rates could reasonably expect to suffer as a result of legislation designed to increase tax fairness. We analyzed ETRs in two such industries, banking and oil and gas, over a period of time that included two major tax law shifts. Our results suggest that legislation designed to promote tax fairness affects industries in an idiosyncratic manner.</span>

Capital Structures in an Emerging Market: A Duration Analysis of the Time Interval between IPO and SEO in China

We model the durations between firms' Initial Public Offerings (IPOs) and their subsequent Seasoned Equity Offerings (SEOs) in China during the period from 1 January 2001 to 1 July 2006. Duration analysis is applied by using the nonparametric Kaplan-Meier estimator of the hazard function, and parametric accelerated failure time models with time-varying covariates. The results of this analysis have important implications for the capital structure in emerging markets. Our evidence on financing decisions in China contradicts the predictions of both the trade-off theory and the pecking order theory. Firms do not issue equity after debt financing to offset the deviation from the target leverage ratio. Profitability is negatively related to debt ratios. Limited access to the corporate bond market and the privilege of the low effective tax rate that local governments give to firms have increased the cost of debt and decreased the benefit of debt, and make firms in China under-utilize the tax shield of debt. The most surprising finding is that profitability is positively related to the conditional probability of equity financing. Firms may intentionally manipulate the earnings to minimize the adverse section costs associated with equity financing and to meet the earnings requirement of China Securities Regulatory Commission set for SEO qualifications. Market timing is an important consideration when firms in China undertake equity financing.

Cash holdings in private firms

Evidence from a wide sample of Italian private firms shows that cash holdings are significantly related with smaller size, higher risk and lower effective tax rates, therefore supporting predictions from the trade-off model. More cash is also held by firms with longer cash conversion cycles and lower financing deficits, as predicted by the financing hierarchy theory. Reported evidence also shows that dividend payments are associated with more cash holdings, and both bank debt and net working capital represent good cash-substitutes. When controlling for macroeconomic and industry factors, some variables lose their significance, but the general findings are confirmed. Finally, cash-rich companies are found to be more profitable, to pay more dividends and to invest more in a medium-term future horizon.

Influence of Ownership Structure, Corporate Governance, and Culture on Tax Policy: Evidence from Malaysia

This study examines whether the tax avoidance strategies that reflect special tax provisions provided to industries is determined by the ownership structure and the firm’s corporate governance mechanisms including incentives given to executives. The study is conducted in Malaysia because it implemented a tax policy to gradually reduce the corporate tax rate from 40% to 25% over a period of ten years. The sample consists of 397 Malaysian public listed companies for whom data is available for 2007-2008. The study finds that government ownership, management power, and agency issue proxies’ the free cash flows and total accruals are determinants of companies using effective tax rates (ETR) as a conduit to affect their market values. Additionally, the results show that companies that mitigate the agency conflicts with lower free cash flows and total accruals are more likely to have lower ETR, and these are also good predictors of long-term tax planning. These findings are explained in the context of making Malaysia an attractive destination for investments as well corporate taxes being a reliable source of government revenue.

Ownership Concentration, State Ownership, and Effective Tax Rates: Evidence from China’s Listed Firms*

AbstractThis paper examines the effect of ownership concentration and state ownership on the tax reporting practices of China’s publicly listed firms. I argue that ownership concentration and state ownership are important for tax reporting practices in China because listed firms have high ownership concentrations and high levels of state ownership. Using a sample of 758 listed Chinese firms over the 1998–2008 time period, I find that firms with concentrated share ownership have lower effective tax rates. I also find that firms whose largest shareholders are government‐related have higher effective tax rates compared to firms whose largest shareholders are nongovernment related. In other words, the nature of the largest shareholder (government vs. nongovernment) matters. I also show that ownership‐concentrated firms are able to achieve preferential statutory tax rates compared to firms with low ownership concentration regardless of the identity of the largest shareholder.

Potential impacts of federal regulation of greenhouse gas emissions on Wyoming's energy-derived tax revenue

The implementation of federal climate change legislation would alter the relative price advantages of fossil fuels produced in Wyoming and resultant tax revenue. Our policy model demonstrates changes in the prices and quantities produced of coal, natural gas, oil, and wind energy—including electrical generation and multiplier effects—resulting from federal action. With carbon dioxide equivalent (CO 2 -e) prices ranging from $0–$70/ton, Wyoming tax revenue would increase due to tremendous growth in price and production of natural gas, which substitutes for declines in coal revenue. Wind energy contributions to tax revenue would remain limited due to a low effective tax rate relative to fossil fuels.