Cash Flow Tax Research Articles

Petroleum development projects. Concept selection, taxation and recovery rate

The paper models and discusses important dimensions when choosing development concept for petroleum projects, and the consequences it has for recovery rate and project economics. By means of case analysis, optimal concept selection is analysed from the perspective of oil companies and government, accounting for the difference in evaluation metrics. While government has emphasis on net present value, a key decision criterion for oil companies is breakeven price. There are two reasons why oil companies select development concepts that are suboptimal from a government perspective: 1) to attain a low breakeven price (capital rationing), a cheaper development concept is often chosen; and 2) conservative resource estimation is often applied. Underinvestment leads to low recovery rate. When oil companies are inclined to select suboptimal development concepts, it is optimal for government to combine cash flow tax and uplift. An uplift enhances marginal investment incentives and could also remedy the incentive for postponement inherent in the breakeven price decision criteria. Our topic, the effect of tax design on development concept and thus extraction ratio is generic, it applies also to the mining sector.

Breaking the Double Tax Paradigm

The success story of economic globalization is often linked to an increased freedom of capital movement, facilitated by the existence of more than 3,000 bilateral tax treaties, the primary purpose of which is to prevent double taxation. Even the most outspoken critics of the international tax regime subscribe to the notion that double taxation is detrimental to global growth, development and welfare. Yet, they argue that, all things considered, tax treaties might not be worth signing. Based on an extensive review of the available tax policy and economics literature, this article shows that there is not enough of a normative or empirical basis for thinking that double taxation will necessarily restrict capital flows, provided that the combined effective tax burden is kept at a reasonable level. At the same time, treaties seem to provide investors with a legal certainty that is key to cross-border business activity. This article posits that there should be more emphasis on the legal certainty aspect of tax treaties and less on their limited capacity to prevent double taxation. In fact, relaxing the double tax paradigm could help to significantly improve tax treaties, with a view to preserving their role in fostering international commerce and investment. In this respect, the authors propose a simplified tax treaty model that, by allowing an agreed overlap between home-state and host-state taxes, would diminish overall implementation costs while increasing legal certainty and reducing the risk of lengthy tax disputes, thus benefiting both taxpayers and tax administrations. The article further demonstrates that this approach is superior to the current Pillar One proposal and other popular systemic reform suggestions in the literature, specifically the destination-based cashflow tax (DBCFT) and global formulary apportionment.

The correlation between deferred taxes, tax accruals and cash fl ows of Russian companies

This paper confirms the informational value of deferred taxes for assessing tax accruals and their corresponding cash flows. Currently, many experts point out that recording tax effects distorts the perception of financial reality and does not lead to optimal business decisions, and modern research denies the connection of balance sheet deferred taxes with future cash flows at all. The above aspects are considered and tested for Russian organizations for the period of 2012–2018 using standard econometric analysis techniques. The inclusion of deferred tax factors leads to significant volatility in both tax accruals and tax cash flows, depending on which net deferred tax position is held by the economic entity. The findings show that with active positions, national organizations accrue almost 7.8–10.0% more and at the same time pay 8.1–8.7% less tax to the budget relative to other situations. Based on the confirmed hypotheses, the study develops a conceptual scheme to link tax accruals with deferred tax positions, which allows us to analyze the current corporate tax behavior of a company and its potential tax opportunities. The results show that the change in tax accruals in the structure of financial profit before tax on average increase tax cash flows 1.28–1.41 times, while tax accruals increase 0.46–0.54 times with a 1% increase in tax cash flows. The statistical significance of dividend (income payments to business owners) and investment policy (acquisition of non-current assets) factors for the evaluation of tax accruals and cash flows is also established. The findings provide a wide range of tools for further research in profit stability analysis, bankruptcy signs, and solvency of Russian organizations.

Инвестиционный налоговый вычет (кредит): бухгалтерский учет и идентификация отложенных налогов

The article considers the features of investment tax deduction (credit) from the economic and accounting points of view. The research is based on the analysis of the US practice from 1962. The methodological approaches to accounting of investment tax credit developed by the Accounting Principles Board in 1962–1964 are analysed. Two forms of influence of investment tax credit on the financial position of the organisation are distinguished: (1) the tax credit is a supplement to the mechanism of depreciation deductions; (2) its application reduces the tax base of the asset by the amount of the investment tax credit or to zero. It is determined that investment tax credit is a special form of financial subsidy, the economic benefits of which lie in the part of the tax flow, as the state waives the taxes due to it for the sake of stimulating investments. Three approaches of investment tax credit accounting are characterised: (1) contribution to capital; (2) cost reduction; (3) tax reduction. The author’s approach to the recognition of investment tax credits is proposed for two situations: (1) the application of the tax benefit does not affect the tax base of the asset; (2) the tax base of the asset is reduced to zero or by the amount of the investment tax credit. It is determined that the investment tax credit is not a deferred tax; however, the realisation of the investment tax credit may affect the tax base of the asset, resulting in the need for interperiod allocation of tax effects at the initial recognition of the asset. It is concluded that a deferred credit account should be used to record a “liability” to the government until the full benefit of the investment tax credit has been realised by the entity; therefore, the deferred credit account should be amortised as the rights to the tax benefit become fixed. It is also emphasised that the specific nature of the investment tax credit does not allow the deferred credit account to be related to the deferred income account, as the deferred income account follows the principle of matching income and expenses, while the deferred credit account is used to reconcile the tax cash flow with the financial cash flow; therefore, the deferred credit is treated primarily as an accounting liability and not as deferred income.

The quality of tax accounting for financial reporting purposes: International evidence from the United Kingdom

The quality of tax accounting can be defined as the relationship between the annual tax expense reported in firms’ financial statements and future tax cashflows. As corporate income taxes have a material proportion of earnings, assessing the tax accounting quality can help financial statement users in evaluating future commitment to internal funds. While there is an emerging US-based literature on tax accounting quality, to the authors’ knowledge this is the first study to examine tax accounting quality outside of the US and the first under a regime governed by International Financial Reporting Standards. The results indicate that tax accounting quality is significantly lower for firms that engage in higher levels of tax management or have stronger earnings management pressure. While corporate governance mechanisms do not moderate the relationship between tax management and tax accounting quality, there is some evidence of a moderating effect in the relationship between earnings management pressure and tax accounting quality. In addition, we observe variations in tax accounting quality associated with a change in tax-related financial reporting standards.

A method for measuring rents

Abstract A method for measuring rents has practical relevance for society in terms of improving competition, regulation, and taxation. This paper proposes a new way to measure rents for business corporations and at country-level: a method related to a cash flow tax (CFT). Theory, method and a proof of concept are presented and discussed. Publicly available data is used to validate the method, revealing that it yields a better indication of rents and rent-seeking compared to markup, profit, and free cash flow (FCF).

Some Thoughts on the Relationship between the Destination-Based Cash Flow Tax and VAT

Some Thoughts on the Relationship between the Destination-Based Cash Flow Tax and VAT

Accommodating the "Low-Income" in a Cash-Flow or Consumed Income Tax World

I presented an outline of this paper to a meeting of the Tax Structure and Simplification Committee of the Tax Section of the American Bar Association in August, 1993, and a draft of the paper to a University of Virginia law school workshop.Copyright © 1995 by George K. Yin. All rights reserved.This article concerns a tax policy issue of keen current interest: the possible replacement of the income tax with a broad-based tax on consumption. The leadership of the new 104th Congress has promised early scrutiny of consumption tax proposals.The weak link of most consumption tax plans relates to how they would distribute the tax burden across income classes. Critics charge that consumption taxes are regressive or at least not as progressive as the existing income tax. Many theorists believe, however, that one form of broad-based consumption tax, a cash-flow or consumed income tax, is immune to such criticism because it is an individualized consumption tax and could be implemented in a manner very similar to the income tax. Supporters of the cash-flow tax assert that it is flexible enough to attain any desired degree of progressivity.In this article, I examine that proposition. Focusing on the impact of the cash-flow tax on low-income taxpayers, I conclude that it would be surprisingly difficult to fashion a cash-flow tax as redistributive at the lower end of the income scale as the current income tax system while still preserving the asserted advantages of the cash-flow tax. Although it may still be advisable to move towards a cash-flow tax system, it is important for policymakers to recognize the inherent limitations of such a system for achieving progressivity at the lower end of the income spectrum.

The Deceptively Disparate Treatment of Business and Investment Interest Expense Under a Cash-Flow Consumption Tax and a Schanz-Haig-Simons Income Tax

A cash-flow consumption tax is assessed annually on individuals. In simplified terms, the base is calculated for each taxpayer by combining the year's gross receipts and savings withdrawals and then subtracting the year's business and investment expenses and the year's additions to savings. Progressive rates are applied to the resulting sum. These computations are intended to confine the cash-flow tax burden to an individual's annual consumption and to remove nonconsumption expenses and current savings from the tax base.By contrast, the base for a theoretically correct Schanz-Haig-Simons (SHS) income tax is each individual's annual consumption plus current additions to savings. Thus current receipts which are otherwise taxable remain in the tax base, even if they are saved, and withdrawals from earlier savings are not currently taxed since they were assessed in a prior year. Stated differently, the SHS tax base has two components-current consumption and current savings (including current appreciation accruing to earlier investments)-whereas a cash-flow consumption tax has only a single component-current consumption

Tax induced transfer pricing under universal adoption of the destination-based cash-flow tax

Tax induced transfer pricing under universal adoption of the destination-based cash-flow tax

The Impact of Avoiding Tax on Accounting and Economic Firm Performance Criteria: Evidence from Tehran Stock Exchange

Tax avoidance is one of the most important decisions managers, which can have a positive or adverse effect on a company's performance by preventing the transfer of the firm's resources to the government. The purpose of this study is to investigate the effect of tax avoidance on accounting and economic performance criteria of listed companies in Tehran Stock Exchange with a sample size of 180 companies for the years 2009-2018. To test the hypotheses, multivariate linear regression got used, and to measure the performance of the firm, one accounting criterion free cash flow, and two economic criteria of economic value-added and market value-added have been used. The effective operating cash flow tax rates have also been used to measure avoiding tax. The research findings showed that there is an impact negative and significant tax avoidance on accounting and economic performance criteria of the firm, which means that with increasing tax avoidance, the company's performance has decreased. Therefore, it can be concluded that the choice of tax avoidance strategy as a way to prevent the outflow of resources harms the company's performance, which can be due to undesirable use of the resulting resources.

Tax Induced Transfer Pricing Under Universal Adoption of the Destination-Based Cash-Flow Tax

Tax Induced Transfer Pricing Under Universal Adoption of the Destination-Based Cash-Flow Tax

Replacing Corporate Income Tax with a Cash Flow Tax

AbstractWe design a parsimonious cash flow tax for Australia and estimate revenue effects. It allows immediate deduction of all capital expenditures, denies deductions of interest payments, and compensates negative cash flows at the same rate and time as it taxes positive cash flows. It allows taxpayer timing choice on implementation over 10 years. It has incentive effects comparable to lowering the corporate income tax rate to zero. It removes distortions that artificially favour debt over equity, short‐ over long‐term investments, rents over competitive returns, large, established over small and new businesses, and conventional over innovative investments. It closes international tax evasion loopholes. Its spur to investment and timing of revenue impacts favours implementation in recession.

Revenue Implications of Destination-Based Cash-Flow Taxation

We estimate the revenue implications of a destination-based cash-flow tax (DBCFT) for 80 countries. On a global average, DBCFT revenues under unchanged tax rates would remain similar to the existing corporate income tax (CIT) revenue, but with sizable redistribution of revenue across countries. Countries are more likely to gain revenue if they have trade deficits, are not reliant on the resource sector, and/or—perhaps surprisingly—are developing economies. DBCFT revenues tend to be more volatile than CIT revenues. Moreover, we consider the revenue losses resulting from spillovers in case of unilateral implementation of a DBCFT. Results suggest that these spillover effects are sizeable if the adopting country is large and globally integrated. These spillovers generate strong revenue-based incentives for many—but not all—other countries to follow the DBCFT adoption.

Efficiency and the taxation of bank profits

We explore the effect of profit taxation and regulation of banks and other financial intermediaries in a setting in which intermediation is inefficient. The inefficiencies arise from imperfect screening of lenders, which tends to limit lending, and government provision of deposit insurance, which encourages excessive lending. An R+F cash-flow tax with and without full refundability of tax losses is applied to financial sector profits. As well, the government regulates the amount of lending financial intermediaries can do relative to their equity. With full refundability, the cash-flow tax is neutral and has no effect on existing distortions. The tax transfers rents to the government. If tax losses are not refunded in the event of bank insolvency, the tax discourages loans and the optimal tax rate is reduced. The optimal regulation of the loan–equity ratio of banks as a complementary policy instrument is characterized.

Is VAT Also a Corporate Tax? Untangling Tax Burdens and Benefits for Companies

The Great Financial Crisis has increased concerns about whether corporations are paying a ‘fair’ amount of tax in different countries. This begs the question of what a ‘fair’ amount of tax is. The question is complicated by the continuing lack of clarity about the economic incidence of corporate income tax. Recently, it has been argued that the location of the sales revenue (turnover) of a corporation is relevant in determining the fair allocation. Of course, in many countries there is already a tax based on sales, value-added tax (VAT), also called goods and services tax (GST). This paper explores an illustration, arising from a series of cases before the European Court of Justice, of how VAT can impose a burden on corporations. The illustration raises issues of principle for VAT, but also offers lessons about how we tax corporations, particularly given proposals such as for digital sales taxes in the EU and the idea of a destination-based cash-flow tax included in legislative proposals in the US in 2016. This article explores the puzzles raised by the illustration and shows how it can throw light not only on the nature of VAT but also on the incidence of corporate income tax.

Don't Blame It on WTO Law: An Analysis of the Alleged WTO Law Incompatibility of Destination-Based Taxes

The idea that corporations should be taxed in the jurisdiction where they make their sales or provide their services is getting more and more attention in the policy debate on international taxation. In 2016, U.S. House Speaker Paul Ryan proposed to introduce a destination-based cash flow tax (DBCFT) in order to reform the United States’ corporate income tax (CIT). Moreover, in the last few years, more and more countries have considered the adoption of new rules to tax the digital economy in the country where the users and/or the consumers are located.These proposals differ from traditional direct taxes imposed on corporations. They borrow from the tax design of indirect taxes, such as sales taxes or value added taxes. Consequently, it is difficult to predict whether these sui generis destination-basedtaxes will fit in with superior legal provisions, in particular international tax and trade law. One recurring legal argument against destination-based taxes is that they are likely to violate the law of the World Trade Organization (WTO).Using the DBCFT as a case study, this Article will assess the different conflicts that could arise between new types of destination-based taxes and international trade law. Based on a critical approach informed by the analysis of the history and case law surroundingdestination-based taxes, this Article concludes that the likelihood that a DBCFT would be found incompatible with international trade law is much lower than past legal scholars have concluded. WTO law does not in itself prevent countries from adopting such taxes. Since this conclusion could be extended by analogy to other, new types of destination-basedtaxes, this Article could have important implications for policymakers who are willing to move towards taxation in the country of destination.

Unilateral tax reform: Border adjusted taxes, cash flow taxes, and transfer pricing

We study the economic effects of unilateral adoption of corporate tax policies that include the choice between destination-based and source-based taxation and between cash flow and income taxes. We utilize a heterogeneous firm model in which monopolistically competitive North firms choose whether to outsource an intermediate good to an unrelated South firm or to produce in a subsidiary in the South. Standard pass through arguments no longer apply because of the income shifting behavior of multinationals and endogenous choice of organizational form. The high tax North country will prefer a destination-based tax over a source-based tax if it adopts a cash flow tax, but whether the cash flow tax is preferred to an income tax will depend on the volume of trade in the differentiated products sector. If the high tax country adopts a destination-based cash flow tax, the low tax country will prefer a destination-based income tax to capture rents from the foreign subsidiaries.

Does Capital Bear the U.S. Corporate Tax After All? New Evidence from Corporate Tax Returns

This article uses U.S. corporate tax return data to assess how government revenue would have changed if, over the period 1957–2013, corporations had been subject to a hypothetical corporate cash flow tax—that is, a tax allowing for the immediate deduction of investments in long‐lived assets like equipment and structures—rather than the corporate tax regime actually in effect. Holding taxpayer behavior fixed, the data indicate actual corporate tax revenue over the most recent period (1995–2013) differed little from that under the hypothetical cash flow tax. This result has three important implications. First, capital owners appear to bear a large fraction of the corporate tax today. This is because economic theory holds that corporate cash flow taxes are largely borne by capital owners and my result implies that the actual tax behaves in practice much like a cash flow tax. This theory is embodied in the Treasury's most recent model of corporate tax incidence. Applying the model to my results implies that only a small portion (2–10 percent) of the U.S. corporate tax was borne by labor in the years before the 2017 Act and thus capital providers are the primary beneficiaries of the Act's large corporate rate cut. Second, the results suggest that the United States could switch fully over to a cash flow tax, which is likely to be administratively simpler for both the government and corporations, at relatively low revenue cost. Third, the impact of fully switching to a cash flow tax on the operations of the real economy and its efficiency are likely to be fairly small. This is precisely because the corporate tax has already evolved to largely mimic a cash flow tax, and the article explores the reasons underlying this evolution using a novel dataset.

Faktor-Faktor Yang Mempengaruhi Penghindaran Pajak Pada Perusahaan Manufaktur

This study aims to examine the effect of cash flow volatility, geographic dispersion, and tax amnesty on tax avoidance of manufacturing industry firms listed on the Indonesian Stock Exchange period of 2010-2016. Using path analysis model with Statistical Product and Service Solution (SPSS) version 22and SmartPLS 3.0. This study examined the secondary data from financial statement for tax avoidance. There are sixindicators of tax avoidance used as proxy. This studt gives result that cash flow volatility, geographic dispersion, and tax amnesty have an insignificant effect on tax avoidance.