Tax Planning Activities Research Articles

External Auditor Responses to Tax Risk

Both practitioners and academics are increasingly focusing their attention on the riskiness of firms’ tax planning activities. In this study, we examine how external auditors respond to tax risk, measured using the volatility of firms’ annual cash and GAAP (Generally Accepted Accounting Principles) effective tax rates. Consistent with the notion that tax risk represents a source of engagement risk that is priced by external auditors, we first document a positive association between audit fees and tax risk incremental to fee premiums arising from tax aggressiveness. We also find that knowledge spillover benefits related to the provision of tax nonaudit services moderate this positive association. In supplemental tests, we provide evidence on additional auditor responses to tax risk. In particular, we document that tax risk is positively associated with both audit report lag and the likelihood of the auditor reporting a tax-related material weakness in the client’s internal controls. Our findings add to the growing literature at the intersection of corporate taxation and auditing, and to the literature distinguishing between the level and riskiness of firms’ tax avoidance strategies.

The Cadbury Schweppes judgment and its implications on profit shifting activities within Europe

In 2006, the European Court of Justice (ECJ) decided with the Cadbury Schweppes judgment that European Controlled-Foreign-Company (CFC) rules infringe the principle of freedom of establishment and restricted the applicability thereof. This paper analyzes the impact of mandatory amendments to European CFC rules on tax planning activities within Europe. Using a difference-in-differences approach, my results provide robust evidence that pre-tax earnings of subsidiaries located in European low-tax jurisdictions have increased by around 10% after the Cadbury Schweppes judgment. My analysis shows further that the increase in pre-tax earnings is related to facilitated profit shifting activities. Multinational corporations with high incentives or enhanced profit shifting opportunities react more to the Cadbury Schweppes judgment. The findings point out that CFC rules became less effective, and thus, profit shifting activities within Europe are less restricted after the ECJ judgment. Additional tests suggest further that on average 85% of the increase in pre-tax earnings is attributable to strategic transfer pricing determination, while less than 15% is attributable to debt shifting activities.

The Effect of Voluntary Clawback Adoptions on Corporate Tax Policy

ABSTRACTCompanies are adopting executive compensation recoupment (“clawback”) policies to discourage aggressive financial reporting choices. Recent research suggests clawback policies encourage other means of meeting earnings expectations. We suggest that reducing income tax expense is a means of meeting earnings expectations. We find that effective tax rates are lower after clawback adoption due to increased investments in tax planning. We identify three tax planning activities that clawback companies invest in to lower effective tax rates: purchases of auditor-provided tax services, increased connections to other low-tax companies, and use of tax havens. We provide evidence that effective tax rate decreases do not result from use of opportunistic income tax accruals, and that decreases are stronger among companies that adopt robust clawback policies. Additional tests indicate lower tax outcome volatility and longer, more readable tax footnotes following clawback adoption. Our results suggest a positive spillover effect of clawback adoption on corporate tax policy.

How do small firms respond to tax schedule discontinuities? Evidence from South African tax registers

We study the responsiveness of small- and medium-sized firms to a small-business corporate income tax schedule using population-wide administrative data from South Africa. We find sizeable bunching of firms at the corporate income thresholds where the corporate tax rate increases, implying active responses to corporate income taxes. The observed bunching is very sharp and reacts immediately to changes in the location of the kink points. These observations suggest that a sizeable part of the response is driven by reporting responses rather than real economic behavior. We find indicative evidence that reporting behavior is linked to underreporting of sales and legal tax-planning activities.

What Happens to Tax Aggressiveness and Earnings Management when Workers Enter the Boardroom?

We examine whether worker representation on corporate boards results in improved monitoring or payroll maximization. Several economic theories predict that worker representatives would use control and voting rights in the boardroom to transform firm assets into private benefits and increased wages, but labor contract models suggest that workers’ inside information should permit improved monitoring. To investigate this conflict, we use mandatory worker representation on corporate boards in Germany. Using hand-collected data, our results suggest that the worker representatives’ payroll maximization incentives dominate their monitoring duties. Specifically, worker representatives reduce real earnings management when it results in wage cuts or job losses but not when it increases payroll or job security. Similarly, worker representatives are generally associated with improved monitoring of tax planning activities. However, when the risk of offshoring jobs is high, worker representatives do not promote tax planning for low-aggression firms and instead block aggressive tax planning for high-aggression firms. This evidence helps policymakers and researchers better understand the role of workers in corporate governance systems and contributes to the ongoing public debate about introducing worker representation in the United States and the United Kingdom.

Directors Remuneration and Tax Planning of Listed Companies

Remuneration may be given in the form of incentives for the directors to engage in tax planning activity. The purpose of this study is to examine the relationship between directors’ remuneration and book tax differences (BTDs) as a proxy for tax planning. A sample of 500 Malaysian listed companies for the period of 2014-2016 were obtained and examined. Several control variables such as company size, leverage, capital intensity, and board size that have an impact on tax planning are used in this study.The directors’ remuneration and board size data were collected from annual reports and all remaining financial data were collected from Eikon DataStream. The results show that there is a positive significant relationship on directors’ cash remuneration on tax planning activity. Based on the findings, it is proven that directors’ remuneration is an important factor in motivating directors to engage in tax planning activity in the company. However, directors’ non-cash remuneration showed a negative significant relationship with tax planning. Non-cash remuneration may reduce directors’ interest in engaging with tax planning because it exposes risk of stock fluctuation in price in the market and increase agency costs to minority shareholders. All control variables significantly impact company tax planning as well. Suggested future research include the use of other tax planning variables such as permanent and temporary BTDs, and deferred tax assets.

Components of book tax differences, corporate social responsibility and equity value

This study examines the relationship between components of book-tax differences (BTD), corporate social responsibility (CSR) and market value of equity in Malaysia. The sources that impact BTD are unclear as previous studies incline to focus on aggregated BTD. By analysing the data of 373 Malaysian non-financial public-listed companies from 2008 to 2015 using balanced-panel regression models, the findings provide evidence on shareholders’ valuation of permanent and temporary differences in the presence of CSR. Consistent with legitimacy theory, in which companies are theorised to conduct activities to appear legitimate in the eye of the shareholders, CSR is found to affect equity value positively. This suggests that the companies achieve their objectives to appear legitimate through CRS activities. As permanent differences and temporary differences imply the extent of companies’ tax planning activities through strategic and deferral tax planning, this study finds negative relationship between permanent differences and temporary differences, and equity value. This suggests that the shareholders are reluctant to incrementally value tax planning activities through permanent differences and temporary differences due to the activities’ inherent risk. In addition, this study finds shareholders simultaneously and positively value permanent and temporary differences, when CSR and the BTD components interact, suggesting that the strength of the initial relationships between permanent differences, temporary differences and equity value are depending on the company’s CSR engagement.

BEZPIECZEŃSTWO GOSPODARCZE UNII EUROPEJSKIEJ W ŚWIETLE CYFROWYCH MODELI BIZNESOWYCH UŻYWANYCH PRZEZ PRZEDSIĘBIORSTWA WIELONARODOWE

The issue of economic security and fiscal matters are closely connected to each other, especially taking into account the massive non-taxation of the digital business models, which can be observed in the present economic reality. The non-effective taxation of the digital business models together with fiscal losses caused by this phenomenon are nowadays as high on the international, political agenda as e.g. climate change. European Union has been even called as “vulnerable” to tax planning activities, made by digital enterprises. The essence of the discussed in the Article issue is that the fundamental rules of the international tax law were created in the late 19th century and well-established during the 20th century – in the reality, in which the digital business models could not have been even predicted. As a result of application of these outdated rules, the income generated in the source state cannot be there taxed. Furthermore, this activity does not constitute a breach of tax law and cannot be perceived as tax evasion or tax avoidance. The European Commission initiated the proceedings against Ireland for illegal state aid, received by Apple in the amount of 13 billion EUR (taxes unpaid in relation to transfer pricing rules, unlawfully approved by the Irish tax authorities). Almost at the same time, as a result of D. Trump’s tax reform, Apple agreed to pay voluntary in the U.S. 38 billion USD in taxes, invest350 billion USD and create there over 20.000 jobs. In Spring 2018, as a result of the demand requested by the Member States, the European Commission presented a project to overcome non-effective taxation of the digital business models in the European Union. However, the adoption of the project is unlikely to happen– for the reason of the requirement to reach unanimity between states (until now some states expressed objections or even rejected the project), as well as grounding the long-term solution on the idea, which has already been rejected by the Member States in 2011.In the article the Author describes the reasons for a lack of effective taxation of the digital business models in the source state, outlines the essence of the economic security and influence on it made by the tax planning schemes, applied by digital enterprises, as well as drafts the particular position of the Multi-National Enterprises in the post-globalised world. In the article are also presented means of reaction, coined on the international and European level to overcome that challenge, posed before the modern societies. The Author stresses also that having regard these particularities of the income taxation, in the international tax law doctrine more and more often the idea of abolishing income taxes is taken into consideration, especially in relation to the CIT (corporate income tax).

Tax Planning and Firm Value: Evidence from Malaysia

The main objective of this study is to determine the impact of tax planning on firm value of firms listed in Bursa Malaysia. Tax planning proxies in this study are the Effective Tax Rate (ETR) and Book Tax Differences (BTDs). The 387 samples data were collected from the DataStream from period of 2014 to 2016. After controlling the firm size, leverage, asset tangibility, firm age and dividend, the regression results show that ETR has a significant and positive relationship with firm value while BTDs has insignificant negative relationship with firm value. Firm with less tax planning activities may signal investors that the firm is more transparent in publishing their financial information. Most of our control variables such as leverage, asset tangibility, firm age and dividend have negative relationship with firm value. This study suggests that ETR proxy is suitable to determine firm value rather than BTDs. For future research, this study can be expanded by using more sample size from a longer time frame of research.

Financial Statement Readability and Tax Aggressiveness

This study investigates whether firms with aggressive tax planning strategies have less readable financial reports. In theory, tax-planning increases firm value through tax savings but can lead to a discount if applied too aggressively. Therefore, managers have an incentive to obfuscate their aggressive tax planning activities. One means of doing so is to make financial statements less readable and thus make aggressive tax planning activities more difficult to interpret for outsiders. Consistent with the information-based agency problem perspective of complex financial statements, we find a robust negative relation between financial statement readability and various proxies for tax aggressiveness. We further show that the negative association between financial statement readability and tax aggressiveness is weakened after the installation of Schedule M-3, a regulatory requirement for a detailed reconciliation of book income to tax income intended to make firms' aggressive tax planning activities more apparent to the Internal Revenue Service (IRS). Collectively, this evidence suggests that managers apply complex financial reporting strategies when the benefits of hiding tax aggressive policies exceed the costs, but rely less on obfuscation through such complexity when the benefits of obfuscation attempts are small.

The Cadbury Schweppes Judgment and Its Implications on Profit Shifting Activities within Europe

In 2006, the European Court of Justice (ECJ) decided with the Cadbury Schweppes judgment that European Controlled-Foreign-Company (CFC) rules infringe the principle of freedom of establishment and restricted the applicability thereof. This paper analyzes the impact of mandatory amendments to European CFC rules on tax planning activities within Europe. Using a difference-in-differences approach, my results provide robust evidence that pre-tax earnings of subsidiaries located in European low-tax jurisdictions have increased by around 10 % after the Cadbury Schweppes judgment. My analysis shows further that the increase of pre-tax earnings is related to facilitated profit shifting activities. Multinational corporations with high incentives or enhanced profit shifting opportunities react more pronounced to the Cadbury Schweppes judgment. The findings point out that CFC rules became less effective and thus, profit shifting activities within Europe are less restricted after the ECJ judgment. Additional tests suggest further that on average 90 % of the increase in pre-tax earnings is attributable to strategic transfer pricing determination, while less than 10 % is attributable to debt shifting activities.

International Tax Planning: Current State of Knowledge

Globalisation affects the behaviour of managers of companies and brings many new possibilities in management. These changes affect activities related to tax optimization and they can be collectively called as international tax planning. This paper monitors current situation of tax planning activities and its aim is to present a current state of knowledge. It contains data showing high frequency of tax planning activities. There are briefly outlined ways of international tax optimization and attitude of organisations to the tax planning of multinationals corporations. Significant part of this paper is devoted to the overview of literature, which deals with measuring international tax optimization. There are several attitudes in selected studies that can be also used (with adaptation to the different data) for monitoring of situation in the Czech Republic. Overall, the most attitudes use applications of effective tax rate and this rate, which is for every country and corporation different, is a key factor for tax planning decision-making.

Can formula apportionment really prevent multinational enterprises from profit shifting? The role of asset valuation, intragroup debt, and leases

The European Commission has been supporting a transition from a system of separate accounting to formula apportionment. After its 2011 draft directive was rejected by the Council, the Commission presented two new draft directives in October 2016, one stipulating rules for a common tax base and another the terms for consolidation and apportionment. The aspired system of unitary taxation is considered more resistant to profit shifting and assumed to reduce compliance costs. However, there are also doubts about the extent, to which such a system will eradicate tax-planning activities of MNEs. Other concerns have arisen about the practical issue of enforcing uniform rules for asset valuation throughout the member states. We use a dynamic model of tax accounting based on neoclassical investment theory and effective tax rates to determine to what extent formula apportionment mitigates the efficiency of typical profit-shifting strategies. We focus on the roles of transfer pricing and intragroup debt financing (through loans and leases) under both separate accounting and formula apportionment. We also take into account a possible leeway for inconsistent valuation. Our results show that instead of eliminating tax planning strategies, the proposed system might simply induce a shift from manipulating reported profits to influencing the apportionment key. Inside the European Union, the CCCTB may be able to render thin capitalisation rules and transfer pricing documentation redundant. However, formula apportionment invites for new forms of tax planning. It is therefore essential to give credit to these new kinds of tax incentives when implementing a system of unitary taxation.

Do Financing Constraints Lead to Incremental Tax Planning? Evidence from the Pension Protection Act of 2006

Over the last three decades, academic research has sought to understand how cash shortfalls impact a firm’s ability to take all available value-increasing investment projects. We investigate whether firms facing greater financing constraints turn to tax strategies that generate lower cash effective tax rates (ETRs) to mitigate the adverse effect of these financing constraints. We use the Pension Protection Act of 2006 (PPA 2006) as an exogenous shock to financing constraints for pension firms, but not for other firms. Using a difference-in-difference research design, we predict and find that pension firms experience a decrease in their cash effective tax rates by 1.8 to 2.4 percentage points after the PPA 2006, relative to other firms. These cash tax savings mitigate the investment shortfall brought about by financing constraints by 19 percent. We also predict and find that the decline in cash ETRs is greater among firms more adversely affected by the PPA 2006. Our paper sheds light on the direction, causality, and economic magnitude of the association between financing constraints and tax planning activities. We also provide insight into the role of tax planning activities within firms’ broader corporate business strategies in responding to financing constraints.

Tax Avoidance, Corporate Governance and Firm Value in The Digital Era

In this study, we examine the link between tax avoidance and firm value and identify the moderating effect of corporate governance in this digital era. Corporate tax avoidance activities have been considered as value-enhancement activities to the companies and better quality of corporate governance would positively related to firm value. This study uses a sample of Malaysian Public Listed Companies (PLCs) which ranked the top 100 companies of good disclosure in the Malaysia-ASEAN corporate governance report 2014. It was conducted using cross-sectional data by observing a final sample of 82 PLCs at one point in time. We provide evidence from Malaysia that corporate tax avoidance behaviour would actually reduce firm value and corporate governance has moderator effect on the relationship of tax avoidance and firm value. This study offers practical insights to the government and policymakers in understanding the tax avoidance behaviour of company and it helps in forming adequate and effective taxation system in Malaysia. We also give constructive apprehension to Malaysian companies to understand the negative consequences of corporate tax avoidance when engaging in tax planning activities aggressively. Most importantly, this study added more evidence to the stream of literature that investigates the role of tax avoidance strategies, as moderated by the level of corporate governance, in determining the firm value in this era of technology.

Roles of tax planning in market valuation of corporate social responsibility

This study aims to examine the roles of tax planning in market valuations of corporate social responsibility (CSR). Specifically, this study examines tax planning activities for their direct, media...

Effects of IFRS adoption on tax avoidance

ABSTRACT This study investigates the association between mandatory International Financial Reporting Standards (IFRS) adoption and corporate tax avoidance. In this study, tax avoidance is defined as a reduction in the effective corporate income tax rate through tax planning activities, whether these are legal, questionable, or even illegal. Three measures of tax avoidance are used and factors at the country and firm level (that have already been associated with tax avoidance in prior research) are controlled. Using samples that range from 9,389 to 15,423 publicly-traded companies from 35 countries, covering 1999 to 2014, it is found that IFRS adoption is associated with higher levels of corporate tax avoidance, even when the level of book-tax conformity required in the countries and the volume of accruals are controlled, both of which are considered potential determinants of this relationship. Furthermore, the results suggest that after IFRS adoption, firms in higher book-tax conformity environments engage more in tax avoidance than firms in lower book-tax conformity environments. It is also identified that engagement in tax avoidance after IFRS adoption derives not only from accruals management, but also from practices that do not involve accruals. The main conclusion is that companies engage more in tax avoidance after mandatory IFRS adoption.

Corporate Governance and Tax Planning Among Non-Financial Quoted Companies in Nigeria

The study examined the impact of corporate governance on tax planning of non-financial quoted companies in Nigeria between 2004 and 2014.A sample of fifty (50) companies out of 151 non-financial quoted companies that covers 10 sectors were purposively selected on stratified random sampling basis. The data used in the analysis were collected from the audited financial statement of the selected non-financial quoted companies in Nigeria and Nigeria Stock Exchange Fact books and analysed using generalizes method of moments (GMM). The result showed that there is positive and significantly relationship between Effective Tax Rates (ETR) and firm value (TobinQ). The positive relationship as shown in the result implies that tax planning activities has not be benefiting the increase in firm value.All the variables such as leverage (LEV), Liquidity (LIQ), Net Working Capital (NWC), Growth opportunities (MTB) and capital intensity (CIN) were found to have a positive and significant relationship with the firm value.The recommendation thus is that firms need to institute more healthy tax planning practices and engage the services of professional tax consultants for higher firm value. Key Words: Tax Planning, Effective Tax Rate, Firm Value, Nigeria

Information asymmetry and incentive contracting with the tax department

PurposeThis paper aims to examine the design of optimal incentives for a firm’s tax department in the presence of information asymmetry.Design/methodology/approachThis paper provides a theoretical model to examine the design of optimal incentives. The focus is on a situation in which a risk-averse tax department has private information about its efficiency type or effort to be exerted before the firm sets the incentive schemes.FindingsThis paper shows that a tax department’s risk aversion leads to a decline in the fraction of the cost borne by the tax department. It also shows that the optimal contract schemes should be designed to filter out as much uncontrollable risk as possible by using third-party information relevant to a tax department’s realized cost.Social implicationsIt contributes to a better understanding of the impact of corporate incentive plans on firms’ tax practices. This study, by designing a theoretical model, helps explain why there exist differences in tax planning across firms based on the finding that incentives for tax planning activities differ across firms.Originality/valueThis paper is the first study that considers the situation in which tax managers’ risk-averse and types, as well as relevant information collected by the firms, can be used to set up incentive schemes and investigates whether and how the incentive schemes will be affected when firms improve their prior information by acquiring relevant information before the tax department acts.

The Effect of Both Earnings Management and Tax Planning To The Value of The Company With Corporate Governance As Variable Moderating

The primary objective of this study is to determine the impact of both earnings management and tax planning towards the value of the firm, corporate governance is measured by using score CGPI as moderating variable. This study uses purposive sampling method that generates 40 samples of company listings on the Indonesia Stock Exchange (IDX) and registered in participation Corporate Governance Perception Index (CGPI) during 2012 until 2015. Based on the test result of regression analysis it showed that earnings management practices which is measured by using discretionary accrual shows regression coefficients of 2,557 with p-value of 0,015 or p-value is below 0,05, so it has negative impact to the value of the firm, then it can be concluded that the existence of earnings management can reduce the value of the firm. Tax planning activity is measured by using Cash_ETR which shows regression coefficients -0.956 with a p-value of 0,005 or p-value is below 0,05, which means it gives a negative impact to the value of the firm, so it can be concluded that the higher level of tax planning by management will have an impact on the declining value of the firm. Furthermore, corporate governance which is measured using the CGPI’s score is not a moderating variable between earnings management and value of the firm, showed by p-value of 0,090, whereas the relationships of tax planning and value of the firm can be moderated by corporate governance, showed by p-value of 0,024. Keywords: CGPI’s Score, Corporate Governance, Discretionary Accrual, Earnings Management, Tax Planning, Value of the Firm