Profit Tax Research Articles

Impact of windfall tax on market dynamics: A Cournot oligopoly model with exogenous shocks

This study explores the nuanced impact of windfall taxes on market equilibrium, introducing an innovative approach within the Cournot oligopoly framework. The paper uses the 0–1 test for chaos to dissect how profit taxation can stabilize market behaviors under bounded rationality. It suggests that higher taxes may prevent collusion, thereby promoting a more competitive environment. The paper demonstrates that while windfall taxes leave regular markets almost unaffected, they can protect firms in chaotic states from adverse outcomes. This research underscores the necessity for policymakers to tailor windfall tax strategies to specific market conditions, potentially driving enhanced market efficiency. Our insights advocate for the judicious application of windfall taxes, which could significantly shape future economic policies.

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.

Effectiveness of Tax Benefits for Information Technology Organizations in Russia

The subject of the study is a set of measures of tax incentives for the information technology industry in the Russian Federation — “tax maneuver in IT”, launched from the beginning of 2021. The purpose of the study is to identify and qualitatively assess the stimulating effect of the tax maneuver in IT, which is expressed in changes in key financial and natural performance indicators of IT industry organizations, and to develop proposals on ways of tax incentives for the development of the industry. The article describes the distortion of the aggregate tax reporting characterizing the IT industry, which takes into account not only recently established IT organizations, but also “nominal” separates from large organizations IT subdivisions or technically clarified classification code, making it inappropriate to use such reporting as a basis for analysis and reliable conclusions. Based on the data of the public financial statements of selected sample from the top-100 Russian IT organizations, the article analyzes the dynamics of financial indicators of their activities, among which are the profiles of profiles, operating profit, net profit, investment in basic assets, the number of staff, the amount of products supplied for export, the capitalization of the company. The observation was conducted for 2017– 2022 and covers the periods both before and during the engagement of tax benefits. A comparative study was carried out with similar indicators of the organizations of the “control group”, which included IT companies operating in other countries that were not affected by such tax benefits. According to the results of the study, small or no extra growth was observed in key financial indicators of IT organizations due to the tax maneuver compared with the “pre-maneuver” period and compared with the indicators of the control group. It is concluded that there is no evidence of a significant impact of the tax maneuver on the development of the IT industry in Russia. We proposed dismantling of the “maneuver” and transition, based on the Chinese and some EU countries approaches, to taxation of the qualified profit. The latter is the profit of Russian and foreign IT developers from the localization of IT development and value creation in Russia. The achievable effective rate is 2.5%.

IMPROVEMENT OF LEGAL ASPECTS OF REGULATION INCOME TAX

The article highlights the importance of taxation of enterprise profits, features of the formation of the tax base, the relationship between regulating the profit tax base in modern conditions, and directions for improving the legal regulation of income tax relations. It is also based on the need to assess the structure of legal documents regulating the profit of an enterprise, the nature of the income tax, not only from the point of view of periods, but also from a legal point of view.

Adjustments of VAT and income tax of banks

Subject. The article discusses excess profits of Russian banks in the amount of the planned Federal budget deficit in 2023, and financial relationships between banks and the budget as causes of excess profits. Objectives. The focus is on fairer taxation of commercial banks, using the case of the largest of them, and based on the latest experience of other countries. Methods. The study employs the comparative analysis of other countries’ practice on modifying the taxation of super profits of banks, financial analysis of reports of the largest banks regarding the specifics of the main taxes. Results. The article shows a zero net impact on the budget from bank operations. Budget payments by banks include income tax, tax on dividends, dividends to the State owned shares. Indirectly banks pay VAT on interest on corporate loans, interest on treasury funds in banks. Payments from the budget to banks include OFZ coupons and interest rate subsidies, banks earn margin on the treasury funds, zero VAT tax expenses on bank transactions with individuals. The international experience shows that other countries actively modify taxes on banks’ super profits. Italy and Spain introduced special taxes on banks, Brazil – a tax on financial transactions, Germany and Britain raised income tax rates, the U.S. regularly collect multi-billion dollar fines, France levies VAT on banks and encourages the European Union to do so. Conclusion. The fiscal effect of my proposals is about 1 trillion rubles, or one-third of the budget deficit. I offer to abolish zero VAT on bank operations with individuals, based on excess profits of banks, social inequality, and digitalization of tax control. Income tax for banks should be a minimum of 1% of risky assets, and it can be used to directly subsidize interest rates at the level of specific banks.

Corporate Social Responsibility and Financial Performance of First Bank Limited in Nigeria

The study focused on the nexus between corporate social responsibility and financial performance of First Bank Limited in Nigeria. The financial performance of commercial banks in Nigeria pertains to the detailed analysis and disclosure of specific factors influencing the after tax profit, the effectiveness of credit risk management practices, and the impact of macroeconomic variables on asset quality, which are crucial for assessing the overall health and stability of the banking sector. The specific objectives were to: ascertain the effect of social expenditure on profit after tax; and determine the effect of environmental expenditure on profit after tax of First Bank Limited. Ex-post facto “design was adopted for this study. Ex-post facto design was used since the researcher relied on historic or secondary accounting data obtained from published annual financial statements of the bank for a period of ten years covering 2013 to 2022. The finding of the study indicates that: there is a positive and significant effect of social expenditure on profit after tax; and there is a positive and significant effect of environmental expenditure on profit after tax of First Bank Limited. The study concluded that there is significant effect of corporate social responsibility and financial performance of First Bank. It was recommended that the bank continues to prioritize and potentially increase investments in social initiatives, ensuring alignment with its corporate objectives, and also expand its environmental sustainability initiatives, leveraging opportunities to invest in eco-friendly technologies and green infrastructure.

Public Sector Capital Expenditure and Tax Revenue Generation in Nigeria

Public sector capital expenditure is an important issue that cannot be ignored due to how it relates to tax revenue generation in Nigeria. This study examined the impact of public sector capital expenditure on tax revenue generation proxy by petroleum profit tax (PPT) in Nigeria. The baseline theory of this study is the Keynesian theory. The research design adopted in this study is the quasi-experimental research design. Secondary data was collected from the National Bureau of Statistics and CBN statistical bulletin. The multiple regression analysis based on the OLS method aided by E-view version 12 computer software was used to analyse the data, and the results were used to test the hypotheses. The findings showed positive significant relationship between the capital expenditure on road construction and PPT in Nigeria. It also revealed a significant positive relationship between capital expenditure on power, light and that PPT in Nigeria. The study revealed significant positive relationship between capital expenditure on security and PPT in Nigeria. Therefore, the study concluded that public sector capital expenditure played a vital role in improving tax revenue generation in Nigeria. The study recommends that since there is a positive relationship between capital expenditure on security, road construction and power with that of PPT, the variables should be sustained in this study. Government should look for means to solve the security challenges in the country, construct more roads, revolutionize electricity and power generation so as to enhance tax revenue generation in Nigeria.

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.

ЕНДОГЕННІ ПЕРЕШКОДИ РИНКОВОЇ ЕКОНОМІКИ ТА МОНЕТАРНО-ФІСКАЛЬНІ ЗАХОДИ ЇХ ПОДОЛАННЯ

The author's vision of endogenous obstacles to the development of the modern market economy and the ways to overcome them in the direction of macroeconomic policy on the labor-value basis of classical political economy are revealed. Three obstacles to economic growth in the course of its selfflowing (without state intervention) processes have been identified, namely: a) violation of valuemoney parity – loss of value adequacy of money; b) the lagging of solvent demand from the volume of product supply, which with a certain cyclicality blocks the reproductive process of production; c)"overproduction" of fictitious capital, which bleeds the real sector of the economy. Regarding the support of value-monetary parity in the economy, the expediency of applying the "monetary rule" of monetarism has been confirmed: the emission of the money supply to the beat with the increase in real GDP. Cyclical crises of commodity overproduction are caused by the lagging of solvent demand from supply by the amount of capital accumulation, and therefore have no rational options for overcoming them, except for damping sharp changes in cyclicality. The main novelty of the author's proposals is directed against the parasitic essence of the "financial economy", which sprouts in the course of the "overproduction" of fictitious capital. Since the root cause of such a harmful phenomenon is the overprofitability of the financial sector of the economy as a result of the value-speculative revaluation of inflated assets, the essence of the author's innovation comes down to a radical reform of the tax system in order to prevent their speculative revaluation: the transition from income taxation to taxation of the market capitalization (market valuation) of large businesses based on stock price. According to the author's assumption, the tax on the market value of assets should lead to the depreciation of the inflated capitalization of financial pyramids and bubbles, that will direct investments flows to the commodity-producing sector of the economy, exempted from taxation of business profits. As a result the tax reform will deconserve the production capacities of the real economy, will lead to the industrial revival of the countries of the world democracy in the face of authoritarian revenge. Especially if these countries are consolidated on the basis of a coordinated monetary and fiscal policy: a single currency and a unified tax system. Opposing the axis of autocratic evil requires it.

Rules for the Transition from the Income Taxation System of Micro-Enterprises to the Profit Tax

Rules for the Transition from the Income Taxation System of Micro-Enterprises to the Profit Tax

Transfer pricing reforms in the context of BEPS: challenges remain

The presence of affiliated entities in different countries and the independence of tax systems make it easy to shift profits from jurisdictions with high corporate tax rates to jurisdictions with low rates. Transfer prices and the arm's length principle are used to prevent profit shifting. The article identifies the peculiarities of transfer pricing reform in the context of the BEPS plan, analyses changes to Ukrainian legislation and opportunities for its improvement.
 The article analyses the amendments to the Tax Code of Ukraine aimed at ensuring the implementation of the BEPS plan. The shortcomings of these amendments are outlined and amendments are proposed to improve the legislation. The author also examines the compliance with the BEPS guiding principle, which provides for the taxation of profits where profit-generating economic activities are carried out and where value is created. It is established that the amendments to the Tax Code of Ukraine do not ensure the implementation of this principle.
 In addition to the problems of practical implementation of the provisions of legislation, the article identifies conceptual shortcomings of the proposed improvements to the transfer pricing methods, which practically do not ensure the achievement of the set goals. An alternative method of pricing based on the market assessment of value added, which is determined by the sum of the firm’s factor income, wages and profits, is substantiated. Instead of the concept of “transfer price”, the concept of “fair market price” is introduced, which is determined by the sum of value added, depreciation and expenses, representing the added value of all previous stages of the production and/or distribution cycles. The proposed approach excludes the concepts of “affiliated entities”, “transfer prices” and “arm’s length principle”. The existence of a unified system of value added tax in the European Union allows for the unification of the tax system in terms of direct and indirect taxes as a result of the introduction of fair market prices.
 Amendments to the legislation have been proposed to allow for automatic solution of the following tasks.

Ways to optimize income tax and their impact on income budgets of the constituent entities of the Russian Federation

The relevance of the study is conditioned by the role and place of profit tax in the regional budgets revenues. Unlike other taxes, the profit tax provides for many methods of tax optimization, the use of which will reduce the tax burden on a taxpayer and at the same time reduce regional budgets tax revenues. The state recognizes and accepts tax optimization if it is based on the current tax legislation provisions. Tax optimization means a taxpayer’s activity aimed at reducing tax payments and leading to an increase in the financial result, including the use of all tax benefits, tax exemptions, and other legal advantages provided by the current legislation. The application of some optimization methods depends on a taxpayer themselves, and some other ones depend on the regional authorities, for example, investment tax deduction. The purpose of the study is to analyze the practice of profit tax optimization methods application and their impact on budget revenues and organizations income. Common research methods have been applied such as analysis and synthesis, generalization, grouping, tabular method, etc. The article is based on the official data of the Federal State Statistics Service of the Russian Federation, the Ministry of Finance of the Russian Federation, and the Federal Tax Service of the Russian Federation, which ensures the reliability of the data used in the study.

Transfer pricing: A European perspective for Ukrainian legislation and practice

The transfer pricing issue is urgent for Ukraine considering the extreme need to attract funds (including from foreign partners) for the reconstruction of the state in the conditions of martial law and post- war times. Given the above, the purpose of this study was to cover the specific features of the implementation practice and court resolutions regarding the transfer pricing disputes in Ukraine, as well as the prospects for implementing the relevant provisions of supranational directives of the European Union. The formal- logical and concrete-legal tools, including the abstraction, formal legal and comparative legal methods, helped to cover the legal status of participants in legal relations, application of the “arm’s length” principle, corresponding and compensating adjustments, procedure and functional characteristics of transfer pricing, evaluating the documentation, guaranteeing access to information sources of the appropriate quantity and quality, considering the practice of the Supreme Court of Ukraine regarding transfer pricing and the regulations of the European Union Transfer Pricing Directive. The study proved that confirming the amounts of expenses is to be implemented following the legally defined procedure for transfer pricing regarding the obligations to increase the financial result of the tax (reporting) period, proper tax reporting and control, responsibility for non-submission/overdue submission of a report on controlled transactions. The application of the “arm’s length” principle was established considering such imperative criteria as determining the taxable profit and checking the factual price in the relations with non-residents, comparability of economic transactions in the context of assessing the factual controlled transaction. Criteria for the comparability of economic transactions were summarised related to assessing the essential properties of the transaction itself, the nature of assets and risks, goods transferred and/or the services rendered, fundamental and dynamic strategies of behaviour, economic status, performed functions of associated participants in legal relations. The practical value of this study for researchers, law enforcement bodies, and stakeholders lies in the coverage of the European perspective on transfer pricing implementation for Ukraine

Keeping Mobile Firms at Home: The Role of Public Enterprise

Abstract We show that the presence of a public firm can deter private firms from relocating to foreign countries in response to high domestic taxation. We also examine partially privatized public firms showing that the higher the exogenous domestic profit tax, the larger the public ownership share needs to be to deter private firm mobility. We illustrate that deterring mobility increases domestic welfare.

Federal Court Hands Down First Decision on Embedded Royalties and Diverted Profits Tax

In PepsiCo, Inc v. Commissioner of Taxation, Moshinsky J has held that a portion of the payments made to PepsiCo by an unrelated bottler and distributor – for syrup concentrate for manufacturing a range of popular soft drinks – were “royalties” for Australian royalty withholding tax (RWHT) purposes. Moshinsky J also held that if the RWHT provisions did not apply, PepsiCo nevertheless obtained a “tax benefit” by not paying RWHT and was therefore liable to pay diverted profits tax (DPT). The decision is the first in Australia to consider the tax treatment of “embedded royalties” and the DPT rules (which were introduced in 2017).

Corporate taxes, leverage, and investment: Evidence from Nazi‐occupied Netherlands

AbstractWe examine the Netherlands around the Second World War, where the occupying Nazi regime overhauled the country's corporate tax regime and introduced a profit tax of 55 per cent. We estimate that the new tax regime cost investors at least 300 million guilders, an amount equivalent to 5 per cent of Dutch GDP in 1940. We demonstrate that the tax introduction changed the financing of Dutch businesses. In particular, we find strong evidence that debt financing increased because it provides a tax shelter. The changes in taxation also led to an after‐tax reduction in the cost of debt, which had large real effects on firm investment. After the end of the war, firms with more leverage had higher capital expenditures.

Tax System and Equity Investment in a Growing Economy

The purpose of the study is to identify the impact of the tax system on investment in equity capital by analyzing the six types of taxes that affect the activities of firms. The data for the independent variables (tax classes in Nigeria) are obtained from the Federal Internal Revenue Service, while the data for the dependent variable (equity investment) are obtained from the Statistical Bulletin of the Central Bank of Nigeria. The necessary statistical methodologies are used to examine the impact of various tax classes on equity investment from 2011 to 2020. According to the research, capital gains tax and gas income tax have little effect on equity investment. The petroleum profit tax and corporate income tax have a considerable detrimental impact on equity investment. On the plus side, value added tax and education tax have a significant favorable impact on equity investment. These results are one-of-akind and precisely depict the genuine nature of the country’s tax system and its impact on investment. As a result, the research proposes a tax shift to lessen the tax burden on enterprises in order to stimulate equity investment, which will increase firms’ capital base for the purpose of business expansion and growth of the nation’s economic structure.

Специфика налога на сверхприбыль

The article discusses the specifics and legal nature of the excess profit tax. The legal construction of the excess profit tax as a one-time direct tax is analyzed. The place of the tax on excess profits in the system of taxation of organizations is considered. Conclusions are drawn about the significance of the excess profit tax for the mobilization of financial resources. Using the example of the excess profit tax, it is shown that the tax system is developing dynamically, responding to modern challenges, and ensures the functioning of the country's financial system.

Analysis of the Effect of Tax Planning, Deferred Tax Burden, and Company Size on Profit Management

Researchers want to re-evaluate data on different units and also the Covid-19 pandemic which has caused several sectors to experience a significant increase in the company's profits. To analyze the effect of tax planning, deferred tax expense, and company size on earnings management. In the basic perspective to understand the concept of earnings management, the organization has several agreements, for example an employment contract between the organization and its directors and an advance agreement between the organization and its bank. Where between the head and management need to expand the utility of each with the data they have. However, again Management has more data than heads, causing data to be unbalanced. In this study using purposive sampling technique, the number of sample data used in this study were 24 companies from the Indonesia Stock Exchange in the goods and consumption sub-sector. does not affect earnings management, Deferred tax burden has an effect on earnings management. With the conclusion that the greater the profit earned, the greater the tax to be imposed on the company, and vice versa. So the company should continue to do tax planning as an effort to minimize the company's taxable profit, because this is legal in the eyes of the State.

Depreciation Policy of Enterprises in Optimization of Profit Taxation

In conditions of insufficient own funds, the absence of external sources of investment financing, and a significant proportion of unprofitable enterprises, the role and importance of depreciation charges as the most sustainable source of financial resources of the organization increases. The importance of profit increases not only for enterprises, but also for regional budgets, since income tax is one of the important sources of their income. The article examines depreciation policy as an integral part of business financial planning and management. The study showed that in the regions a small number of enterprises use the opportunities provided by Chapter 25 of the Tax Code of the Russian Federation to optimize income taxes through an active depreciation policy, the relevance of which increases due to the obsolescence of the equipment fleet at enterprises and the low level of its renewal. The purpose of the article is to study depreciation policy and the extent to which optimization methods are used in the regions. The study used methods generally accepted in economics: analysis and synthesis, grouping, generalization, dynamics, tabular, etc. The study is based on official data from Rosstat, the Ministry of Finance, etc. The results of the study can be used in developing depreciation policy at the enterprise as part of the accounting policy for the purposes taxation. The study established: depreciation policy has not yet become an effective tool for stimulating investment activity in the activities of business entities.