Pre-tax Profit Research Articles

中東欧のEU新規加盟国とユーロ

First, this paper considers the impact of the global financial crisis on new EU Member States (NMS) from Central and Eastern Europe. In the case of Slovenia, the best performer among the NMS, the situation has been very serious. Second, the mechanism of the crisis in Slovenia is examined in detail. Since the EU accession in May 2004, especially the adoption of the ERM II in June in the same year, in the financial area barriers between the Eurozone economy and the Slovenian economy practically disappeared. The sovereign risk premium decreased. Domestic banks borrowed a huge amount of funds at international wholesale financial markets and actively financed companies’ ambitious investments. Financial authorities in the country were not alert to cross-border movement of a huge amount of capital. Due to the Lehman shock, however, international financial markets became tight suddenly and demands in the Western markets sharply decreased. The direction of international financial flows reversed. The banking sector was obliged to dispose a huge amount of non-performing loans and recorded negative pre-tax profit for consecutive three years since 2010. One of the reasons why the Slovenian economy fell into such a serious crisis is that domestic banks increased their borrowings abroad too quickly within a short time from 2005 through 2008. In addition, there were the following circumstances: 1) the second wave of privatization of state-owned companies was implemented on the method of Management Buyout from 2006 and domestic banks gave loans to managers. Unfortunately, this was done immediately before the Lehman shock; 2) the weight of foreign-owned banks has been smaller in this country. In other NMS foreign-owned banks have been predominant in the banking sector, and their parent banks managed to support their affiliates in the global financial crisis. In contrast, in the case of Slovenia, the government has been required to inject fresh capitals into domestic banks to protect the banking system. The type of Slovenian crisis is different from that of the Greek crisis and the Cypriot crisis. Finally, the paper considers the significance of euro for NMS from Central and Eastern Europe. The NMS, which have not adopted euro yet, will sooner or later advance toward the adoption of euro. After joining the Eurozone, these countries will be required to steer their economic policies cautiously on the basis of lessons from Slovenia’s failure.

Why are Banks Paying so Little UK Corporation Tax?

This note explores the dramatic fall in receipts of UK Corporation Tax (UKCT) from banks, and the wide gap between the corporation tax accruals recorded in banks’ financial statements, and the UKCT receipts recorded by the tax authorities. It reviews changes in tax rates, in operating profits, in pre-tax profits (allowing for tax-deductible asset impairments), and in the share of profit originating in, or recorded in, overseas jurisdictions. It assigns significant roles to impairments and to overseas profits, and suggests that the recovery in banks’ global operating profits will not be accompanied by an early sharp recovery in UKCT receipts.

EXPLORING CORPORATE PROFITABILITY AND CORPORATE INCOME TAX SUBSIDIES: AN INVESTIGATION OF PUBLICLY-TRADED COMPANIES

ABSTRACT The purpose of this paper is to describe the findings from a large financial study of publicly-traded companies listed on the NASDAQ, NYSE, and the AMEX exchanges. Key financial data for all of the publicly-traded companies listed on these exchanges on April 25, 2011 was collected via the Securities and Exchange Commission’s 10-K filings through the EDGAR system. Data collected included revenue, pretax profit, and net profit for fiscal years 2006 through 2010. Industry and business sector classifications were also collected, allowing for the data to be examined in light of meaningful business groupings. The study revealed interesting results concerning the relationship between profitability and corporate income tax subsidies; the rate of income tax subsidization for companies that earn predatory profits as compared to companies that earn normal or supranormal profits is of particular interest. Public policy implications of the findings are considered. Keywords Corporate Profitability, Income Tax Subsidies, Publicly Traded Companies

Data Truncation Bias and the Mismeasurement of Corporate Tax Avoidance

This study examines the use of the cash effective tax rate (Cash ETR) as a measure of corporate tax avoidance. The Cash ETR normalizes cash taxes paid by pre-tax book income. Empirical studies of the Cash ETR delete or winsorize many observations for which the measure is not meaningful. In addition, high pre-tax book income in the denominator biases the Cash ETR towards the statutory rate. We propose an alternative measure that is meaningful for all observations. Whereas Cash ETR studies suggest that the average corporation is tax-favored, our measure indicates that the opposite is true. In addition, our study suggests an explanation for inconsistencies in the extant literature regarding the relation between pre-tax profitability and tax avoidance. Our measure shows that that more profitable firms engage in greater levels of tax avoidance.

Taxation and Bank Efficiency: Cross-Country Evidence

This paper investigates the relationship between the effective tax rate on bank income and bank profit efficiency. Our sample consists of 3,472 observations from 533 publicly quoted commercial banks operating in 46 countries between 2001 and 2009. We estimate a global frontier while controlling for various country-specific characteristics such as regulations, macroeconomic conditions, market concentration, and financial and overall development. The results indicate that a higher tax rate results in higher pre-tax profit efficiency. However, the relationship is non-linear, indicating that there is a point after which a further increase in taxation reduces bank profit efficiency. We also find that concentration in the banking sector enhances the effect of taxation on profit efficiency. Overall, the results provide some support to the tax-shifting hypothesis. However, there is no robust evidence that the impact of taxation on profit efficiency is influenced by the extent of private monitoring.

Compaq Redux: Implicit Taxes and the Question of Pre-Tax Profit

This paper takes a new look at the cross-border dividend-stripping transactions that gave rise to the Fifth Circuit's opinion in Compaq v. Commissioner and the Eighth Circuit's opinion in IES Industries v. Commissioner. In both cases, the circuit courts held for the taxpayers and rejected the Commissioner's claim that the transactions lacked economic substance because the taxpayers were sure to lose money on the transactions before taxes. These cases generated extensive commentary that was split into two diametrically opposed camps. One group argued that the decisions were correct because the transactions were economically profitable business transactions. The other group argued that the transactions were blatant, abusive tax shelters; and that the courts should have struck them down. Because the commentators in the second group conceded that the transactions generated a pre-tax profit, these commentators also offered a range of proposals to modify or replace the pre-tax profit test. Although the tax benefit of crossborder dividend-stripping was sharply reduced by subsequent Congressional enactments, that action hid rather than resolved the issue whether the tax shelter jurisprudence is fundamentally flawed because there is a class of abusive transactions that produce a guaranteed profit before tax, but do not run afoul of the anti-abuse provisions in the tax law.This paper argues that the Compaq and IES Industries transactions do not reveal any fundamental failings with either anti-abuse jurisprudence generally or the pre-tax profit test in particular. This paper demonstrates that the circuit courts reached the wrong conclusions in those cases because the parties, the courts, and the commentators all ignored implicit taxes. That is not surprising because the implicit taxes in these cases were difficult to see. These taxes were negative implicit taxes, which drove down the cum dividend price of the stripped stock, and therefore made the transactions appear profitable before taxes. However, once implicit taxes are taken into account, the transactions in those cases are properly understood to be unprofitable before taxes.Finally, nearly ten years ago, Charlotte Crane observed that tax doctrine has all but ignored implicit taxes and she challenged commentators, lawyers and judges to think carefully about how implicit taxes can be incorporated into tax doctrine. My proposal to calculate pre-tax profit for the purpose of anti-abuse jurisprudence before both implicit and explicit taxes is, I believe, the first proposal to explicitly recognize implicit taxes in tax doctrine.

German Growth: Bayer and BASF secure record 2012 sales, but net earnings dip

Bayer and BASF, Germany’s two largest chemical companies, reported record sales for 2012 last week, with the strongest growth coming from developing countries. But earnings at both firms were below the levels recorded in 2011. Bayer’s net earnings for 2012 were down 1.0% to $3.2 billion, based on an 8.8% sales increase to $52.4 billion. Bayer’s life sciences businesses recorded the strongest growth in earnings and sales. “We continued to grow dynamically, with all the subgroups posting gains in sales and earnings before special items,” said Chairman Marijn E. Dekkers, speaking last Thursday at the firm’s annual financial briefing in Leverkusen, Germany. Bayer’s 2012 earnings were hampered by one-time items totaling $2.3 billion. Dekkers forecasts that the company will increase sales in 2013 by 4–5% and pretax profits by a single-digit percentage. The firm plans to spend $4.2 billion on R&D in 2013, a hike of about 7%. BASF reported ...

Earnings shocks and tax-motivated income-shifting: Evidence from European multinationals

This paper presents a new approach to estimating the existence and magnitude of tax-motivated income shifting within multinational corporations. Existing studies of income shifting use changes in corporate tax rates as a source of identification. In contrast, this paper exploits exogenous earnings shocks at the parent firm and investigates how these shocks propagate across low-tax and high-tax multinational subsidiaries. This approach is implemented using a large panel of European multinational affiliates over the period 1995–2005. The central result is that parents' positive earnings shocks are associated with a significantly positive increase in pretax profits at low-tax affiliates, relative to the effect on the pretax profits of high-tax affiliates. The result is robust to controlling for various other differences between low-tax and high-tax affiliates and for country-pair-year fixed effects. Additional tests suggest that the estimated effect is attributable primarily to the strategic use of debt across affiliates. The magnitude of income shifting estimated using this approach is substantial, but somewhat smaller than that found in the previous literature.

FOREIGN TAXES AND THE GROWING SHARE OF U.S. MULTINATIONAL COMPANY INCOME ABROAD: PROFITS, NOT SALES, ARE BEING GLOBALIZED

The foreign share of the worldwide income of U.S. multinational corporations (MNCs) has risen sharply in recent years. Data from a panel of 754 large MNCs indicate that the MNforeign income share increased by 14 percentage points from 1996 to 2004. The differential between a company's U.S. and foreign effective tax rates exerts a significant effect on the share of its income abroad, largely through changes in foreign and domestic profit margins rather than a shift in sales. U.S.-foreign tax differentials are estimated to have raised the foreign share of MNC worldwide income by about 12 percentage points by 2004. Lower foreign effective tax rates had no significant effect on a company s domestic sales or on the growth of its worldwide pre-tax profits. Lower taxes on foreign income do not seem to promote "competitiveness. "

Earnings Shocks and Tax-Motivated Income-Shifting: Evidence from European Multinationals

This paper presents a new approach to estimating the existence and magnitude of taxmotivated income shifting within multinational corporations. Existing studies of income shifting use changes in corporate tax rates as a source of identification. In contrast, this paper exploits exogenous earnings shocks at the parent firm and investigates how these shocks propagate across low-tax and high-tax multinational subsidiaries. This approach is implemented using a large panel of European multinational affiliates over the period 1995-2005. The central result is that parents' positive earnings shocks are associated with a significantly positive increase in pretax profits at low-tax affiliates, relative to the effect on the pretax profits of high-tax affiliates. The result is robust to controlling for various other differences between low-tax and high-tax affiliates and for country-pair-year fixed effects. Additional tests suggest that the estimated effect is attributable primarily to the strategic use of debt across affiliates. The magnitude of income shifting estimated using this approach is substantial, but somewhat smaller than that found in the previous literature.

Taxation and Bank Efficiency: Cross-Country Evidence

This paper investigates the relationship between the effective tax rate on bank income and bank profit efficiency. Our sample consists of 3,472 observations from 533 publicly quoted commercial banks operating in 46 countries between 2001 and 2009. We estimate a global frontier while controlling for various country-specific characteristics such as regulations, macroeconomic conditions, market concentration, financial and overall development. The results indicate that higher tax rate results in higher pre-tax profit efficiency. However, the relationship is non-linear indicating that there is a point after which a further increase in taxation reduces bank profit efficiency. We also find that concentration in the banking sector enhances the effect of taxation on profit efficiency. Overall, the results provide some support to the tax-shifting hypothesis; however, there is no robust evidence that the impact of taxation on profit efficiency is influenced by the extent of private monitoring.

Comme il faut – where ethics is not just a brand image but a brand essence. Reflections of the CEO

Comme il faut is an Israeli high-end fashion house of women's fashion that was established in 1987 by Carole Godin and Sybil Goldfiner. It has developed a business model that combines traditional business management, the purpose of which is to generate revenue and continuous growth, with management on the basis of feminist values and a responsibility to contribute to the creation of a better world, a more just world, for women and for all. This mission runs through all aspects of the company's operation: in terms of production it consists of designing clothes that respect women's bodies and that fit a wide range of bodies, producing high-quality clothes to last with the finest quality materials, and of paying living wages to workers who make them locally. In terms of the company's relationships with its stakeholders, it is run as a flat shared (and non-hierarchical) structure. Its management assures that suppliers are not squeezed to subsistence level, that employees receive a share of the company's profits, and that the premises are run in an environmentally friendly way. In terms of retail – the company's discourse is anti-hegemonic in that it produces images and messages that subvert the industry's standard that builds on a seduction model that is tailored to the patriarchal gaze. This is complemented by social activism initiatives that are regularly pursued and that reflect the company's commitment to an ethical feminist outlook. 'The Giving List' in the UK newspaper The Guardian, which orders FTSE 100 companies by the percentage of pre-tax profits contributed to charitable causes, showed in 2004 and 2006 that the charitable contributions of FTSE's 100 companies (including gifts in kind, staff time devoted to charitable causes and related management costs) averaged around 1% of pre-tax profits, with the highest spenders (e.g. GlaxoSmithKline and the Cooperative group) spending 2.41% and 5% of pre-tax profit, respectively. In contrast, comme il faut, a household name in Israeli fashion but not a global player, invests 10% of its profits. Finally, the collective spirit of the fashion house is reinforced by the design model that employs house designers, but does not build a personality cult of the celebrity designer. As the CEO of the company – I explain how the company developed and raise important ethical issues about the possibility of having a fashion business with a committed feminist agenda.

Pension Accounting: Funding Costs And Liabilities Of Corporate Pension Plans

Overall, pension plan assets analyzed in this study appear strong. They have excellent overall funding and unfunded vested liabilities would require less time to fund currently than in 1978. Pension expense per employee have been increasing, but at very nominal rates. And although the companies with the highest profits may not be the companies with the highest pension expenses, average pension expenses for most categories decreased. Currently unfunded vested liabilities are low relative to both pre-tax profits and net worth. Again, a number of points should be kept in mind when looking at these analysis and trends. Industry categories had small sample sizes. The sample sizes increase when companies are lumped into ranking categories making the data more representative. The overall trends include sample sizes of approximately 90, an acceptable number for statistical analysis. Also, some of the trends could be clouded by definitions of assets, liabilities, and income which differ from the 1978 study. However, after examining basic similarities between the studies and noting the strength of certain trends, the above mentioned conclusions appear warranted.

The impact of taxation on bank profits: Evidence from EU banks

Using bank-level data for the period 1990–2005, we investigate to what extent European banks are able to shift their tax-burden forward. We examine the effects of corporate income tax (CIT) and value added tax (VAT) on pre-tax profits and their components, and find that both are shifted forward. The pass-through mainly involves total operating income, but as far as CIT is concerned it also affects loss provisions, with negative implications on stability of the banking systems.

Ageing and COPD affect different domains of nutritional status: the ECCE study

Chronic obstructive pulmonary disease (COPD) and ageing may contribute to malnutrition. We aimed to explore whether COPD and ageing determine malnutrition in different manners. 460 stable COPD outpatients (376 males and 84 females) from the Extrapulmonary Consequences of COPD in the Elderly (ECCE) study database were investigated (age 75.0±5.9 yrs; forced expiratory volume in 1 s 54.7±18.3% predicted). Nutritional status was evaluated using the Mini Nutritional Assessment® (MNA) questionnaire. From the MNA, three scores exploring the domains of the nutritional status were calculated: body composition, energy intake and body functionality scores. Global Initiative for Chronic Obstructive Lung Disease (GOLD) stages were negatively correlated with five MNA items exploring mobility, patient's perception of own nutrition and health status, and arm and calf circumferences (lowest Spearman's rho (rs)=-0.011; highest p=0.039). GOLD stages were independently correlated with body composition and body functionality scores (model r2=0.073). Age was negatively correlated with four MNA items exploring loss of appetite, fluid intake, mobility and autonomy in daily life (lowest rs=-0.013; highest p=0.030). Age was independently correlated with body functionality score (model r2=0.037). Severe COPD and ageing are independent and probably concurrent conditions leading to malnutrition. The MNA questionnaire allows a valuable insight into the complexity of components of nutritional status and may provide useful clues for treatment strategies.

Earnings Shocks and Tax-Motivated Income-Shifting: Evidence from European Multinationals

This paper presents a new approach to estimating the existence and magnitude of tax-motivated income shifting within multinational corporations. Existing studies of income shifting use changes in corporate tax rates as a source of identification. In contrast, this paper exploits exogenous earnings shocks at the parent firm and investigates how these shocks propagate across low-tax and high-tax multinational subsidiaries. This approach is implemented using a large panel of European multinational affiliates over the period 1995-2005. The central result is that parents’ positive earnings shocks are associated with a significantly positive increase in pretax profits at low-tax affiliates, relative to the effect on the pretax profits of high-tax affiliates. The result is robust to controlling for various other differences between low-tax and high-tax affiliates and for country-pair-year fixed effects. Additional tests suggest that the estimated effect is attributable primarily to the strategic use of debt across affiliates. The magnitude of income shifting estimated using this approach is substantial, but somewhat smaller than that found in the previous literature.

The firm-level determinants underlying the profitability in brokerage institutions: Some evidence from Turkey

Sampling the period of 2005-2007 on a quarter basis, this paper made a comprehensive empirical investigation on identifying the firm-level determinants underlying the profitability in brokerage institutions operating in Turkey. We performed multiple regression and panel data analyses for a large array of brokerage institutions and observations. Two sets of dependent variables were built to control for profitability. The first regressed variable was the operating profitability of total assets and the second one was the pre-tax profitability of total assets. We found that, the balance sheet-based factors such as current trade receivables to total assets, financial assets to total assets and short-term liabilities to total assets significantly, robustly and commonly account for the brokerage houses’ profitability. We also found that, the firm-level factors do better explain the changes in the profitability should the former ratio be proxied as a profitability indicator. Paper concludes with some concrete policy recommendations. Key words: Brokerage institutions (investment houses), profitability, firm-level factors, ACMIIT (the association of capital market A±ntermediary Institutions of Turkey).

Relationship of Cost of Governance and Firm’s Profitability

Corporate Governance is considered as the basic pillar for the long term existence and stability of the firms. Recent falls of one of the biggest corporations in world like Enron and World Call sparked the debate on the importance and practical application of better governance mechanisms in the corporations. The literature has been comprehensively added with the experiences of different industrial countries and the recent collapse of subprime mortgage and subsequent bankruptcies of numerous banks and corporations including Lehman Brothers and mortgage giants like Fannie Mae in USA. In Pakistan, Code of Corporate Governance 2002 was a major milestone and different studies have been conducted. This research covers 9 industries and 22 firms including banks, insurance, engineering, cement, fertilizers and chemicals. The focus on the research is to establish a significant relationship between the compensation paid for the mechanisms of Corporate Governance i.e. Directors, CEO and Senior Executives. The compensation data is tested for 6significant relationship with company’s' performance variables including Sales, Assets, Pre Tax Profit, Operating Cash Flows, Selling and Administrative Expenses, Profit as percentage of Sales and Return on Assets. The relationships signify the fact that companies pay the governance bodies in the firm based upon the firms' performance. Different variables are used as indicator of performance in different companies and industries and differences also exists within industries. This study is statistically significant for the time period of 2003-2007. These results can be used to improve the corporate governance compensation paid and profitability generated by the firms. The research confirms the significant relationships between different stakeholders compensation in the organization and performance indicators. Different industries pay according to their own business cycles and also different companies compensate respectively in the same industry as well. Thus compensation management is the solution to Principle Agent Problem in the Corporate Governance framework and understanding it will help companies solve it.

Multinationals' income shifting decisions, taxes and intra-company transfers: empirically testing market valuation

This paper tests whether intra-company transfers, viewed as distinct from ordinary sales transactions by policy makers and tax regulators, are associated with share price. When a multinational firm (MNC) transfers its intermediate goods between the parent company and its foreign subsidiary, its discretion over the price of goods can result in shifting income from a high tax to a low tax regime, reducing its overall tax liabilities. Intuitively, these tax savings represent an incremental value to the firm's shareholders. Thus, employing a variant of Ohlson's (1995) equity-valuation model, we test and document that firms that engage in intra-company transfers are rewarded with higher equity value. This is consistent with intra-company transaction choices significantly influencing firm value and opportunistic transfer pricing having market benefits. We also examine whether international transfers are connected to foreign pretax profit margins and foreign tax costs. Consistent with prior works (Klassen et al., 1993; Pak and Zdanowicz, 1994; Gramlich and Wheeler, 2003), we document that foreign pretax income and tax costs are positively related to intra-firm transfers, indicating that US multinationals shifted income away from the USA from 1998 to 2002.

Paying the price at the end of life: a consideration of factors that affect the profitability of hospice.

To evaluate factors that affect the financial performance of hospice. Using the California Office of Statewide Health Planning and Development 2003 survey, we evaluated the organizational attributes, clinical care, and financial performance of 185 operational hospices. As outcomes, we evaluated revenues, costs, and profits per patient and per patient-day, the intensity and skill mix of care, and the provision of charitable and special palliative services. We evaluated regression-adjusted differences by profit status controlling for other organizational features and aggregate patient characteristics. Hospices reported median revenue of $6865 per patient and $138 per patient-day (for-profit-not-for profit [FP-NFP] difference -$20, p = 0.045), median cost of $6737 per patient, and $135 per patient-day (FP-NFP difference -$55, p = 0.002), and median pretax profit of $334 per patient and $6 per patient-day (FP-NFP difference $34, p = 0.026). Patients received a median of 29.9 total visits by all providers per patient (FP-NFP difference 8.8 visits, p = 0.010), but there was no difference in total visits per patient-day. A median of 50.8% of all nursing visits were registered nurse (RN) visits (FP-NFP difference -14.1%, p < 0.001). Few hospices provided charity care, and only 4% of hospices reported expenditures on chemotherapy and only 9% on radiation therapy. Overall hospice profitability is low. Length of stay is strongly associated with financial performance, and greater FP profitability is related to lower costs. FP hospices also provide less RN care as a proportion of nursing care. Few hospices provide charitable care or special costly services. The relationship of service patterns to patient quality needs to be examined.