Lower Tax Research Articles

Problems of legal regulation of thin capitalization in Ukraine

The proliferation of multinational companies is lengthening global value chains, and the development of the digital economy is giving them even more opportunities to shift profits. Intra-group loans are often used to shift profits to a jurisdiction with low tax rates to minimize overall tax liability. In order to combat the illegal transfer of profits, most countries introduce thin capitalization rules. Ukraine joined the BEPS plan, action 4 of which summarized the best practices for regulating debt obligations to non-residents. Most countries limit the total amount of loans, interest payments on which are deducted from the corporate tax base. The Tax Code of Ukraine establishes a double tax barrier - it limits both the amount of debt and the share of profit before deduction. However, the established barriers not only do not prevent profit shifting, but encourage the widespread use of this method to reduce tax liabilities due to profit shifting. The main drawback of thin capitalization rules is that allowed excessive amounts of loans from non-residents do not oblige the borrower to improve the financial results of the enterprise. Instead, they provide an opportunity to reduce the corporate tax base by 30% indefinitely and move them to jurisdictions with low tax rates. The method of regulation provided for by the Tax Code of Ukraine can be considered as an incentive for the misuse of State budget funds. In order to eliminate these shortcomings, it is proposed to significantly reduce both barriers and to oblige the borrower to ensure the effective use of loans to stimulate the socio-economic development of the country, i.e. to deduct interest from taxable profit only if there is an actual increase in the produced added value, the introduction of new products and/or processes. Existing shortcomings in the legal regulation of debt obligations prevent legal resolution of the case in court. New criteria for identification of the resident with regard to individuals and legal entities and the beneficial owner of income have been proposed.

Regional differentiation of the tax burden on personal income in Canada

The income of citizens reflects the degree of economic development of the country, and in the regional aspect – the degree of economic development of each region. Canada is very similar to Russia in its geographical location, nature and climate, so the standard of living of the population in this country is of interest. One of its indicators is the income of citizens. The state’s approach to personal income taxation reflects the general socio-economic policy in the country. The study analysed the tax burden on personal income in the provinces of Canada in 2000–2022, determined the dynamics of this indicator for the period under review, and identified the existence of correlation between the amount of income and the tax burden on it in the regional aspect. The results obtained found that in Canada, there is a conditional division into eastern provinces with a traditionally high tax burden, western provinces with a national average tax burden, and northern territories with a relatively low tax burden. A certain inverse relationship between the amount of citizens’ income and the tax burden on it has been established. In regions with high incomes, the tax burden is usually lower, and in regions with low incomes, it is generally higher. However, there are regions that are exceptions, which shows the relative financial independence of regional authorities in Canada. The dynamics of the tax burden on personal income in the analysed period reflected the impact of the crises of 2008 and 2020 when it decreased. This fact demonstrates the sensitive response of regional governments to the changing economic situation.

Relationship Between Product Features and the Prices of e-Cigarette Devices Sold in Web-Based Vape Shops: Comparison Study Using a Linear Regression Model.

Open-system electronic cigarette (EC) product features, such as battery capacity, maximum output wattage, and so forth, are major components that drive product costs and may influence use patterns. Moreover, continued innovation and monitoring of product features and prices will provide critical information for designing appropriate taxation policies and product regulations. This study will examine how product features are associated with the prices of devices sold in web-based vape shops. We draw samples from 5 popular, US-based, web-based vape shops from April to August 2022 to examine starter kits, device-only products, and e-liquid container-only products. We implemented a linear regression model with a store-fixed effect to examine the association between device attributes and prices. EC starter kits or devices vary significantly by type, with mod prices being much higher than pod and vape pen prices. The prices of mod starter kits were even lower than those of mod devices, suggesting that mod starter kits are discounted in web-based vape shops. The price of mod kits, mod device-only products, and pod kits increased as the battery capacity and output wattage increased. For vape pens, the price was positively associated with the volume size of the e-liquid container. On the other hand, the price of pod kits was positively associated with the number of containers. A unit-based specific tax, therefore, will impose a higher tax burden on lower-priced devices such as vape pens or pod systems and a lower tax burden on mod devices. A volume- or capacity-based specific tax on devices will impose a higher tax burden on vape pens with a larger container size. Meanwhile, ad valorem taxes pegged to wholesale or retail prices would apply evenly across device types, meaning those with advanced features such as higher battery capacities and output wattage would face higher rates. Therefore, policy makers could manipulate tax rates by device type to discourage the use of certain device products.

Does Independent Commissioner Decrease The Positive Association Between Transfer Pricing And Tax Avoidance?

Indonesia's tax ratio has not increased proportionally to projected tax revenues. A low tax ratio indicates tax avoidance. One type of tax avoidance strategy is transfer pricing. The presence of independent commissioners is expected to suppress transfer pricing practices as a forum for tax avoidance by management. This research examines the contribution of transfer pricing to tax avoidance practices. The study also investigates the moderation role of independent commissioners on managers' tax avoidance actions. The sample selection was carried out purposely on multinational manufacturing companies listed from 2019 to 2022 on the Indonesia Stock Exchange, resulting in 12 multinational manufacturing companies as samples. This research utilizes quantitative methods through panel data regression analysis. The test result finds that transfer pricing positively influences tax avoidance. However, the independent commissioner succeeds in weakening the positive influence of transfer pricing on tax avoidance. This indicates that independent commissioners have difficulty influencing management or operational-related decisions. This research implies that the Directorate General should focus on companies with high related party transactions to indicate that the company is likely to commit tax avoidance. This focus on supervision is considered to be able to increase Indonesia's tax revenue and ratio.

Personal income tax and corporate innovation: The key role of inventors’ financial incentives

Despite the importance of the personal income tax around the world, little is known about its impact on innovation. We construct a large database of inventors who patented at publicly listed companies during the 2008–2016 period and exploit the revised Personal Income Tax (PIT) Law of 2011 in China as a quasi-natural experiment to establish the causal effect of the personal income tax on corporate innovation. Using a difference-in-differences identification strategy, we show that a lower personal income tax rate has a significantly positive impact on patent quantity and quality. Further, the revised PIT Law raises the efficiency of R&D activities, induces more explorative innovation, and improves the success rate of patent applications, providing consistent evidence for the intentional effort channel. Moreover, this positive innovation effect is more pronounced in firms with an R&D team that is more sensitive to the salary incentive system, greater innovation dependence, better governance, and firms located in regions with better innovation environments. Taken together, our findings shed light on how inventors and firms respond to decreasing personal income tax rates and confirm that the net return to innovation can be vital to the innovation capacity of firms.

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

AbstractThis 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.

Techno-economics of multi-stage reverse electrodialysis for blue energy harvesting

Multi-stage reverse electrodialysis (MSRED) offers a promising way for efficient salinity gradient energy harvesting. Here, an improved model of the MSRED system under serial control strategy is proposed. The technical–economic analysis is conducted with considering discount, depreciation and different regional tax and electricity price levels under the maximum net power output conditions. Results reveal that net power output and energy efficiency both increase first with increasing stage numbers, reach their maximum values, and then decrease. For 5 M/0.05 M solutions, the optimal net power output of 4.98 kW is obtained at the stage number n = 12. The optimal stage number corresponding to the maximum net power increases with increasing feed solution concentrations. Due to the compromise between net power generation and capital cost, there exist optimal stage numbers leading to the lowest LCOE and largest NPV, respectively. Higher feed solution concentration can significantly decrease the system LCOE and increase the NPV. The optimal stage number corresponding to the maximum NPV increases with increasing feed solution concentrations. In Germany, for 5 M/0.05 M solutions, the lowest LCOE of 0.061 €·kWh−1 is achieved at n = 3 while the highest NPV over the system lifecycle of 52,005 € is obtained at n = 8. Lower tax, higher electricity price, appropriate membrane price and stage numbers, and high salinity gradient sources can significantly accelerate the commercial completeness of the MSRED systems.

Fixed and Variable Tax Expense and the Cost of Equity Capital

ABSTRACT Prior studies provide mixed evidence on the relation between tax avoidance and cost of equity capital. To understand how this relation varies across firms, we model income tax as containing both a fixed component (like a tax credit or deduction) and a variable component (a tax rate) and investigate how each type of tax expense affects the cost of equity capital. Unlike other fixed costs, the fixed tax component may be negative (a tax benefit). A lower fixed tax component always reduces cost of capital. The effect of a lower tax rate depends on the sign of the fixed tax component. With a negative fixed tax component, a lower tax rate increases cost of capital. Results of empirical tests are generally consistent with our predictions. Our results suggest the relation between cost of equity capital and tax avoidance is ambiguous when tax avoidance is accomplished through a lower tax rate. JEL Classifications: G12.

Enterprise risk management and corporate tax planning

AbstractThis study examines the impact of enterprise risk management (ERM) programs on corporate tax planning. ERM is a holistic approach to managing an enterprise's entire portfolio of risks. We hand‐collect data on ERM adoption for a sample of Standard & Poor's 500 firms from 1993 to 2016. We empirically document that firms with ERM programs have lower cash effective tax rates than firms without ERM. Additionally, we find that the relation between ERM and tax avoidance is stronger among firms with more business segments. Finally, our results suggest ERM adoption offsets an increase in opacity and tax uncertainty typically associated with tax avoidance strategies. Overall, we provide evidence that ERM allows firms to exploit tax avoidance opportunities through enhanced coordination and communication.

Impact of carbon fiscal policy on Zhejiang Economy—Evidence from E-DSGE

This paper studies the impact of carbon fiscal policy on the Zhejiang economy through the lens of a DSGE model with an environmental sector. The model was estimated via Bayesian estimation using data from Zhejiang Province for the period from 2005Q1 to 2021Q4. We found that both carbon tax and carbon emission subsidy can improve environmental quality and reduce carbon emissions. However, the subsidy tends to stimulate output and employment more, while both policies have a negative impact on consumption and investment. We suggest that the government should exercise caution in implementing these policies, as their scale of impact is relatively small. The combination of the two policies could neutralize their impact on output but may enhance their impact on other sectors in Zhejiang. However, the structure and timing of these policies matter; implementing a low carbon tax first followed by a high carbon subsidy would be preferable. Furthermore, we examined and concluded that emission technology, particularly at the firm level, can play a significant role in mitigating the negative impact.

Corporate inversion, cost of equity and ineffective tax reform

AbstractUS multinational firms typically invert either through a pure form or by merging with foreign entities. Our research documents that pure inversions increase inverting firms' cost of equity, while merger inversions decrease it. These results remain robust across different measures of the cost of equity. We also demonstrate that the 2004 tax reform is ineffective in reducing US multinational firms' tendency to invert. Instead, it prompts firms to shift from pure inversions to merger inversions, which are less value‐enhancing due to their lower tax benefits. It is unlikely that the legislators had foreseen these outcomes.

Determinants of Low Tax Revenuein Pakistan

Low tax-to-GDP ratio has always been a problem for economic development and a major explanation for high budget deficits in Pakistan. In the present study, we attempt to empirically analyze the determinants of low tax revenue in Pakistan by employing time series econometric techniques during the period 1973-2009. This study investigates whether economic policies, external variables and social indicators together with elements of the tax base can explain some of the variations in tax revenue trends in Pakistan. The empirical findings suggest that openness, ample money, external debt, foreign aid and political stability are the significant determinants of fiscal efforts in Pakistan with expected signals. The findings also indicate that the determinants of low tax revenue in Pakistan are a narrow tax base, greater dependence on the agricultural sector, foreign aid and low level of literacy. Finally, it is concluded that Pakistan's economy can generate a high tax-to-GDP ratio by increasing openness, literacy level, political stability, broadening the tax base and controlling income inequality, tax evasion and exemptions tax.

Dividend Taxation and Financial Business Cycles

We examine the interactions between different dividend tax systems and financial shocks in a dynamic stochastic general equilibrium (DSGE) model with an occasionally-binding investment credit limit. We show that dividend taxes largely determine the collateral value of assets, thereby occasionally distorting investment decisions and altering the propagation of financial shocks. Permanently lower dividend taxes dampen financially-driven business cycles in a state-contingent fashion. They also help explain substantial macroeconomic asymmetries following equally-sized expansionary and contractionary financial shocks.

Evaluating and enhancing natural resource asset management efficiency in China: A data envelopment analysis study

The efficiency of China's natural resource asset management system significantly influences the sustainable utilization of resources and the promotion of an environmentally sustainable economy. In this research, we employ a Data Envelopment Analysis (DEA) model to assess and analyze the efficiency and dynamic changes within China's natural resource asset management system. Our analysis is based on panel data collected from 30 provinces spanning the years 2007–2019. Our findings reveal that only three provinces demonstrated DEA effectiveness in managing natural resource assets, highlighting substantial regional disparities in efficiency. The presence of multiple institutions operating independently has led to a situation of overlapping responsibilities, resulting in critical issues related to redundant management. Inadequate resource tax collection intensity and a low tax utilization rate have contributed to the insufficiency in resource tax utilization. Local industrial structures and government priorities have hindered the active involvement of industrial enterprises in natural resource asset management in certain regions. We categorize changes in the efficiency of system operations in non-DEA-effective regions into three types: a temporary increase followed by a continuous decline, a gradual increase with overall low efficiency, and a rapid increase with relatively high overall efficiency. Consequently, this study offers policy recommendations aimed at enhancing the efficiency of natural resource asset management: (1) Clarify the ownership of natural resource assets and establish a well-defined hierarchical proxy system along with an integrated supervision framework. (2) Allocate resource tax revenue reasonably and promote collaborative coordination between resource taxes and other policy measures. (3) Strengthen the government's commitment to natural resource asset management, draw insights from advanced regions' experiences, and tailor policy approaches to the specific conditions of different regions to effectively balance economic development and environmental protection.

Do foreign direct investment inflows affect tax revenue in developed and developing countries?

PurposeThis study aims to examine the effect of foreign direct investment (FDI) inflows on tax revenue in 34 developed and developing countries from 2006 to 2020.Design/methodology/approachFeasible generalised least squares (FGLS), a dynamic panel of a two-step system generalised method of moments (GMM) system and a pool mean group (PMG) panel autoregressive distributed lag (ARDL) approach were used to compare the developed and developing countries. Basic estimators were used as pre-estimators and diagnostic tests were used to increase robustness.FindingsThe FGLS, a two-step system of GMM, PMG–ARDL estimator’s results showed that there was a significant negative long and positive short-term in most countries relationship between FDI inflows and tax revenue in developed countries. This study concluded that attracting investments can improve the quality of institutions despite high tax rates, leading to low tax revenue. Meanwhile, there was a significant positive long and negative short-term relationship between FDI inflows and tax revenue in the developing countries. The developing countries sought to attract FDI that could be used to create job opportunities and transfer technology to simultaneously develop infrastructure and impose a tax policy that would achieve high tax revenue.Originality/valueThe present study sheds light on the effect of FDI on tax revenue and compares developed and developing countries through the design and implementation of policies to create jobs, transfer technology and attain economic growth in order to assure foreign investors that they would gain continuous high profits from their investments.

Determining the Future Direction and Amount of Tax Revenue in Indonesia Using an <i>Error Correction Model </i>(ECM)

The characteristics of how tax revenues, as well as the macroeconomic factors that are expected to influence and determine tax revenues, develop have become the basic macroeconomic assumptions by the government in compiling various components of the posture of the state revenue and expenditure budget to maintain and increase the expected economic growth. To understand the evolution of tax revenues and the impacts of these variables, it is important to investigate the relationship between tax revenues and specific macroeconomic variables. This study aims to identify the effect of macroeconomic variables on Indonesian tax revenues in the long and short term using multiple regression analysis in an error correction model (ECM). The macroeconomic conditions and variables used in this study are gross domestic product (GDP), inflation, interest rates, and exchange rates. This study employed the time-series data from 2000–2019. The ECM method was conducted in the following stages: stationarity test, cointegration test, and ECM regression test. The ECM model is declared valid, if the cointegrated variables are supported by a significant and negative ECT coefficient value. The statistical analysis, i.e. t-statistic, the F-statistic, and the coefficient of determination, were used to evaluate the significance of the ECM model. The results showed that among the four of macroeconomic variables used in this study, GDP has the highest significant effect on the tax revenue. GDP has a highly positive and considerable impact on tax revenue. The increasing of GDP growth is in line with the realization of tax revenue. A strong positive long-term (t-statistic = 13.94075*, P-value = 0.0000) and short-term (t-statistic = 5.515026*, P-value = 0.0001) association is also observed between inflation and tax revenue. Inflation has a favorable and considerable impact on tax income either in long (t-statistic = 2.298586**, P-value= 0.0363) or short term (t-statistic = 2.515695**, P-value = 0.0258). On the other hand, Bank Indonesia interest rate has a negative insignificant effect (t-statistic = −1.542970ᵈ, P-value = 0.1437) in the long run on tax revenue. However, it has a negative significant effect (t-statistic = −2.699231**, P-value = 0.0182) in short-term tax revenue. A rise in interest rates results in the lowered tax revenues due to the reduction of public consumption patterns, and a decrease in public consumption. The exchange rate has a negative negligible connection in long term (t-statistic = −1.045768ᵈ, P-value = 0.3122), as well as in short term (t-statistic = 1.250076ᵈ, P-value = 0.2333) with tax revenue, meaning that tax revenue is not significantly affected by changes in exchange rate. In conclusion, total tax revenues and the four macroeconomic variables have a significant long- and short-term association according to the ECM analysis with an adjusted R² value of 0.985866 and 0.792880, respectively. Changes in future tax revenues are largely determined by the stability of macroeconomic variables. Therefore, it is highly recommended that the government maintain the stability of macroeconomic variables, especially GDP, because GDP has a dominant influence on tax revenues in the long and short term so that the target of tax revenues can be achieved. The ECM analysis applied in this study can explain the effect of changes in macroeconomic variables on the tax revenue in the short and long term; so that the future direction and amount of tax revenue can be determined in preparing the State Budget and projecting the expected level of economic activity growth in a nation.

Effective Tax Rates and Firm Size under Turnover Tax: Evidence from a Natural Experiment on SMEs

Abstract Taking advantage of Romania’s compulsory and unique presumptive tax system (turnover tax) for the smallest of the small- and medium-sized enterprises (SMEs), which unequivocally allows grouping the companies into two subsamples according to their tax status (the smallest of the SMEs, i.e. micro-companies for tax purposes, subject to alternative turnover tax vs larger SMEs subject to regular profit tax), the papers compute and compare three versions of firm-specific effective tax rates and brings first-time empirical evidence on the effects of turnover taxation on corporate tax burden. The results show not only that in Romania, the turnover tax is now the prevailing tax system, massively displacing the profit tax, but also it is more burdensome in terms of taxes actually paid relative to the firm size. Moreover, turnover taxation means that taxes are due irrespective of the profitability of a company, making the share of companies who paid taxes despite having losses much higher for micro-companies than for larger SMEs, which translates into higher public finance receipts, at the cost of lower tax equity. Since the corporate tax burden triggered by turnover taxation remains under the radar of even the most qualified policy reports, the results offer relevant lessons for other jurisdictions and have valuable policy implications.

Tax Certification and Tax Compliance in the South West, Nigeria

Purpose: Despite the efforts of Federal and State governments in Nigeria to employ administrative tools to improve tax compliance, the nation is still being bedeviled with the issue of low tax compliance, leading to the inability of the government to finance their statutory responsibilities due to the paucity of funds. Therefore, this study investigated the effects of tax certification on tax compliance in South-west Nigeria. Design/methodology/approach: A survey research design was opted for to obtain primary data from a sample size of 400 participants drawn from a population of 1,194 using Slovin’s formula and purposive sampling technique. Both descriptive and influential statistics were performed. Partial Least Square (PLS) regression was used to analyze the data. Findings: The results show that tax certification (β = 0.261; p-value = 0.044) has a positive effect on tax compliance in South-West Nigeria, which is statistically significant at 0.05 level. Based on these findings, the study concluded that tax certification is an essential tax compliance tool in South West, Nigeria. Research limitations/implications: The results imply that improved efforts in issuing tax certificates tied to public services will enhance taxpayers’ compliance with tax regulations. However, the study is not exhaustive as it specifically focused on a tax enforcement tool in a developing economy. Practical implications: It is therefore recommended that all obstacles around issuance of tax certificates, especially in developing economies, should be surmounted by the government through its tax authority. Originality/value: The study is unique in its approach and population by considering tax officers within South West states in Nigeria.

Shareholder perceptions of external tax advisors in corporate tax planning

AbstractWe examine shareholders' perceptions about how external tax advisors contribute to corporate tax planning. As residual claimants of corporate tax planning, shareholders benefit from lower corporate taxes, but also bear the financial and reputational costs of subsequent tax enforcement. Despite the influential advisory role of external tax advisors in corporate tax planning, existing research on how shareholders perceive this role is limited. Using event study methods and exploiting the heightened regulation of tax advice through the covered opinion rules as a setting, we observe average and cross‐sectional stock returns consistent with shareholders perceiving external tax advisors as contributing unfavorably to tax planning by promoting excessively risky strategies. We further find that risky and overall tax planning declined across firms after the enactment of the rules, consistent with shareholders' perceptions about tax advisors' contributions to firms' tax planning. Overall, our findings contribute to research on shareholder perceptions and valuation of tax planning, and have important implications for practice, where regulatory oversight of external tax advisors remains a significant concern.

Lower taxes at all costs? Evidence from a survey experiment in four European countries

ABSTRACT It is commonly argued that citizens favour lower taxes, thereby exerting pressure for tax reductions that undermine the ability of governments to raise revenues. We argue that the ostensibly strong support for lower taxes is the result of survey measures that fail to account for fiscal trade-offs. An original survey experiment conducted in Germany, Italy, Spain, and the United Kingdom reveals that support for lower taxes declines significantly when this comes into conflict with other fiscal policy objectives, such as government spending, public debt, or other taxes. Overall, regressive changes receive less support than progressive reforms. At the individual level, preferences are shaped by self-interest and ideology, with ideology exerting a predominant influence. Notably, left-leaning, high-income voters exhibit an even stronger inclination to resist tax reductions compared to their low-income counterparts. Our findings challenge the assumption that tax cuts enjoy widespread popularity and suggest the potential for a progressive coalition against tax cuts, encompassing both low-income and affluent left-wing individuals.