Tax Planning Strategies Research Articles

Financial market development and firm investment in tax avoidance: Evidence from credit default swap market

Abstract Lenders reduce their monitoring efforts after hedging their credit risk exposure through credit default swap (CDS) contracts, which are akin to insurance against borrowers’ adverse credit events. In this study, we examine whether, upon observing the reduced lender monitoring following CDS trading, shareholders demand that borrowing firms invest in more aggressive tax planning strategies, which were previously constrained by risk-averse lenders. Using a difference-in-differences design that exploits the variation in timing of the inception of CDS trading, we document that borrowers exhibit greater tax avoidance after the inception of CDS trading. Consistent with shareholders stepping up their demands post-CDS, we find that the increase in tax avoidance is stronger for (i) firms with more powerful and influential shareholders, as measured by dedicated institutional investors, (ii) firms with stronger shareholder defenders, as measured by board independence and board size, and (iii) firms with more strategic default options. We also find that borrowers with higher levels of tax avoidance are less likely to file for bankruptcy in the future. Our findings are robust to a battery of sensitivity checks, including controlling for cost of debt and endogeneity, as well as using alternative measures of tax avoidance.

Trade‐offs between Tax and Financial Reporting Benefits: Evidence from Purchase Price Allocations in Taxable Acquisitions

ABSTRACTUnder U.S. GAAP, firms recognize assets acquired in business combinations at fair value. Similarly, in taxable asset acquisitions firms adjust the tax basis of assets to fair value. Managers can increase the present value of future tax savings by allocating a greater portion of the purchase price to shorter‐lived assets than to goodwill or indefinite‐lived intangibles. However, this tax planning strategy imposes a financial reporting cost because it reduces book income following the acquisition; all else equal, allocations to shorter‐lived depreciable assets increase book depreciation expense, whereas allocations to goodwill and indefinite‐lived intangibles do not increase book amortization expense. We exploit the features of taxable asset acquisitions to investigate trade‐offs between tax and financial reporting incentives. We predict and find greater allocations to depreciable versus intangible assets when managers have strong tax incentives and weak financial reporting incentives. However, we also find that strong financial reporting incentives moderate the effects of strong tax incentives. These findings contribute new evidence to the literature on the importance of nontax costs in tax planning decisions

'Will You Marry Me...In December?' -- Tax-Induced Wedding Date Shifting and Mismatching in Long-Term Relationships

We use administrative micro-level data of all 1,799,066 divorce cases in Germany over the 2006 to 2015 period to empirically show that marriages with weddings at year end last considerably shorter than does the average (median) marriage. Specifically the average (median) difference (conditional on divorce) between marriages with December weddings and marriages with weddings in all remaining months is 500.4 (654) days with overall length of marriage being 5223.6 (4498) days. We attribute this empirical observation to the German marriage tax benefit which is granted for the entire calendar year if the couple is married for at least one day therein. In response to this incentive, couples use forward shifting of the ’legal’ wedding date as a tax planning strategy to collect the marriage tax benefit for the year(s) prior to their ’real’ (i.e. in the absence of any tax benefit) date of the wedding. We theoretically model this decision and argue that, in essence, couples forego sufficient courtship time to collect the marriage tax benefit, and hence, mismatching in long-term relationships results.

The Tax Cuts and Jobs Act: Impact and Options for Extension Professionals

The Tax Cuts and Jobs Act (TCJA) will affect Cooperative Extension employees and their clientele starting with 2018 tax returns filed by mid April 2019. Some educators will teach or counsel their target audiences about income taxes, and all will either benefit overall from the TCJA or pay more federal income tax because of it. This article describes key features of the TCJA and the content and impact of a workplace seminar designed to help taxpayers take action in response to it. The article concludes with tax planning strategies to consider for adjusting personal finance decisions and work practices in response to the TCJA.

Germany’s Anti-Treaty-Shopping Rule under ECJ Pressure

This article describes recent events surrounding the German anti-treaty-shopping rule enshrined in section 50d(3) of the German Income Tax Act. Designed to counteract tax planning strategies aimed at benefiting from lower withholding taxes under tax treaties or European directives, its future has been cast into grave doubt. These doubts arise both from domestic developments around possible planning strategies not within the scope of the rule and pressure from ECJ decisions. It is doubtful whether or not the rule will survive in its current form.

Industry Tax Planning and Stock Returns

ABSTRACT We find evidence that equity returns increase with the propensity for tax planning in a firm's industry. This risk premium is imposed on all firms in the industry, even those that are less aggressive than their peers. The industry-based risk premium coexists with a firm-specific discount associated with active tax planning strategies that carry low systematic risk. The discount on tax planning at the firm level, however, is dwarfed by the premium on tax planning at the industry level, and is concentrated in industries that are less likely to attract scrutiny from the tax authority.

Financial Market Development and Firm Investment in Tax Avoidance: Evidence from Credit Default Swap Market

Lenders reduce their monitoring efforts after hedging their credit risk exposure through credit default swap (CDS) contracts, which are akin to insurance against borrowers’ adverse credit events. In this study, we examine whether, upon observing the reduced lender monitoring following CDS trading, shareholders demand that borrowing firms invest in more aggressive tax planning strategies, which were previously constrained by risk-averse lenders. Using a difference-in-differences design that exploits the variation in timing of the inception of CDS trading, we document that borrowers exhibit greater tax avoidance after the inception of CDS trading. Consistent with shareholders stepping up their demands post-CDS, we find that the increase in tax avoidance is stronger for (i) firms with more powerful and influential shareholders, as measured by dedicated institutional investors, (ii) firms with stronger shareholder defenders, as measured by board independence and board size, and (iii) firms with more strategic default options. We also find that borrowers with higher levels of tax avoidance are less likely to file for bankruptcy in the future. Our findings are robust to a battery of sensitivity checks, including controlling for cost of debt and endogeneity, as well as using alternative measures of tax avoidance.

Planiranje korporativnog poreza i finansijsko poslovanje sistemski važnih banaka u Nigeriji

Due to the multiplicity and overburdening of Nigeria's tax system, the economic units in which systemically important banks (SIBs) are included implement the corporate strategies that identify the loophole which minimizes, postpones, or entirely avoids tax payments so as to reduce its negative effect on financial performance. Therefore, this study examined the corporate tax planning and financial performance of systemically important banks in Nigeria. Ex-post facto was adopted as the research design in this study, while Pooled OLS was used to analyze the data. This study has shown that the effective tax rate has a negative and significant impact on financial performance. Thin capitalization has a positive significant impact on the financial performance of SIBs in Nigeria, whereas capital intensity and the lease option have demonstrated an insignificant impact on the financial performance of SIBs in the country. The study concluded that corporate tax planning affects financial performance depending on the adopted tax planning strategies. Likewise, the study recommended, among other things, that the tax authorities should engage in the tax reforms whereby the corporate tax rate is to be adjusted, and that banks should engage in the activities that can reduce the effective tax rate.

High-Tech Enterprise Tax Planning

Chinese economy is in transition with expanding domestic demand. The capacity is becoming a new economic normality. High-tech industry as a new force in promoting economic development plays an increasingly important role. Taxation is an important part of corporate financial management, the impact of the economic activity and tax interests of the company, so a reasonable tax planning is conducive to the company’s financial management objectives. Many high-tech industries enjoy preferential tax policies, while they are also high input and high output. So it is necessary for high-tech enterprises in tax planning. This paper introduces the theory of tax planning and high-tech industry, and then based on the latest legal summarizes the high-tech enterprises in the value-added tax, business tax, income tax of these three main tax incentives. Combining the features of tax planning concepts and high-tech industry, this paper presents the high-tech industry investment activities, operating activities, financing activities of the three aspects of tax planning strategies. Finally, the paper puts insufficient research from different angles such as policy risk and business risk. In the summary, I pointed out the lack of research presented in this paper and looked forward to the future tax planning.

ELSS Mutual Fund Preferences of Indian Tax Savers

Tax planning strategies are important for tax payers whose aim is to reduce their tax outgo on various types of income and capital gains. While there are several tax saving instruments that qualify under Section 80C of the Income Tax Act, 1961, Equity Linked Savings Scheme (ELSS) has a special importance. It provides the least possible lock-in period among all tax saving instruments besides providing equity asset investment exposure making it a good long-term tool for wealth creation. This paper studies the investment behaviour of a typical ELSS mutual fund investor. Primary data is used to identify preferences of tax saving instrument by Indians and to understand if diversification across multiple ELSS schemes is done. Understanding the mode of investing helps us get insight on investor behaviour. Finally, we get to know if ELSS is being used by other family members. Secondary data study allows us to understand the trends and dynamics of ELSS. Our study checks scheme Average Assets Under Management (AAUM) data to understand if investors delay and thereby hurry their investing just before closing of the financial year. These findings are of significance for Asset Management Companies (AMCs) in their product positioning and building promotional strategies. Market regulator SEBI and the Association of Mutual Fund Industry (AMFI) can use it to improve the product offering and expanding its reach. Government and Ministry of Finance can use these findings for tweaking tax laws so as to promote investment culture.

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.

Reflections on the Fight against Aggressive Tax Planning (When the Law Is Silent)

Multinational enterprises make use of aggressive tax planning strategies because they are able to operate in the legal vacuum that exists between nation states. The tax burden is not mitigated by falsifying the facts of tax-relevant events (as in the case of tax evasion) or through simulation of certain transactions (as in the case of sham), but through careful use of existing gaps between tax rates. The present article describes the current situation with normative gaps in global taxation and erosion of national governance due to the loss of sovereignty and the extraterritorial application of national law. It is argued that a legal vacuum represents a substantial cost for nation states. To reduce this cost, the current international proposals are considered. The article aims to clarify whether and to what extent the BEPS Project has contributed to redefining the concept of “legal vacuum” in the international tax system. In particular, the question is whether, in order to prevent aggressive tax planning schemes, OECD member states are required to avoid situations of double non-taxation and cases of no or low taxation associated with practices that artificially segregate taxable income from the generating activities.

What Drives the Tax Avoidance Strategies Adopted by US MNEs? Understanding the Heterogeneity of Approaches to Corporate Tax Planning in US Multinational Enterprises

This dissertation uses internalization theory to analyse the differences between MNEs approaches to their tax planning strategies. Little is known about the reasons for the differences in strategy between MNEs. Mixed methods of qualitative and quantitative research are used here to examine the MNE’s tax planning in a holistic and systematic manner. This includes in-depth and detailed analysis from the parent-firm level to the subsidiary-level. The study shows the importance of the people within the business in terms of setting the tone for tax planning and strategy and the risk that the organisation is prepared to take.

Aggressive Tax Planning and Corporate Social Irresponsibility: Managerial Discretion in the Light of Corporate Governance

The purpose of this contribution is to explore the possibility of integrating tax with corporate social responsibility (CSR). Some corporate directors seem to argue that they do not have a choice with regard to tax planning, implying that a responsible tax planning strategy is not an option. This contribution shows such argument to be wrong. First, the issue of management accountability and choice will be dealt with in the context of corporate governance systems in order to find out what kinds of obligations corporate governance entail for managers. It will be shown that corporate directors enjoy sufficient discretion for making socially responsible decisions. To this end, two existing theoretical frameworks will be analysed, according to which corporate decisions should prioritise either shareholders or stakeholders interests. Both theories allow managers a choice to act with a wider interest than purely shareholder value maximisation. Furthermore, it will be argued that managerial discretion to take CSR into account does not oblige managers to aspire to some kind of ideal social responsibility but rather to stay away from corporate social irresponsibility (CSI). Therefore, corporate managers in different corporate governance regimes have sufficient room for aligning their tax planning strategies with societal expectations and avoiding aggressive tax planning. Thus, this paper aims to make two contributions to academic theory. First, it is shown that both shareholder and stakeholder-oriented corporate governance regimes allow for managerial discretion to take CSR on board in tax matters. Secondly, the concept of corporate social irresponsibility is introduced to enhance a more balanced debate about multinationals’ tax planning practices.

Multinational Tax Avoidance: Is It All About Profit Shifting?

The international dimension of multinational corporations (MNCs) creates opportunities for pursuing both global as well as local (i.e., subsidiary-level) tax planning strategies. Until now, we have surprisingly little insights into the dynamics of these local versus global tax planning strategies. Using a group-level tax avoidance calculation technique and the staggered adoption of Transfer Pricing (TP) Documentation Requirements across European countries, we study the causal effect of increased shifting costs on changes in MNC tax strategies. We find that the relative importance of local tax planning increases by 50 percent in countries that introduced TP Documentation Requirements and remains stable in other countries. Importantly, we show that especially firms with higher internal agency conflicts, firms with greater target ETR pressure as well as firms with resource constraints are responsible for the results. Finally, we document that this substitution effect is strongest in subsidiaries where the MNC has the highest local knowledge.

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.

Industry Product Market Competition and Efficiency of Corporate Tax Management

Economic theory suggests that product market competition should enhance firm performance. However, relatively little empirical evidence supports this long-held belief. We use the U.S. corporate tax management setting to test the relationship between product market competition and firm performance. We find that firms in competitive industries manage their taxes more efficiently than their counterparts in non-competitive industries. Specifically, we document that firms in competitive industries exhibit lower effective tax rates than their noncompetitive counterparts. Furthermore, we find that the positive link between competition and tax management efficiency is much stronger for firms with lower cash flow volatility and for firms with fewer industry investment opportunities. Finally, we find that increased regulation and tax enforcement do not weaken the effect of competition on the efficiency of tax management. Further analysis reveals that firms in competitive industries resort mainly to tax planning strategies other than abusive tax sheltering to manage taxes.

Tax planning strategies for corporate inversion

This article investigates the problem of corporate inversion. It describes how international transactions are taxed in the United States and points out the possible tax loopholes. This paper shows that the tax rate in the United States is one of the highest in the industrialised countries and imposes tax on the basis of worldwide income, rather than domestic income only. This paper then explains how the corporate inversion was employed to take advantage of the pitfalls in the tax law. It uses four cases for demonstration - McDermott, Helen of Troy, Burger King, and Medtronic. This paper illustrates one example to determine the amount of tax savings using corporate inversion. It further looks into the anti-corporate inversion regulations under IRC §7874, the Internal Revenue Service (IRS) Notices 2014-52 and 2015-79, and the Treasury Regulations TD 9761. This paper also offers some strategies to maximise the benefits of corporate inversion.

Tax planning strategies for corporate inversion

This article investigates the problem of corporate inversion. It describes how international transactions are taxed in the United States and points out the possible tax loopholes. This paper shows that the tax rate in the United States is one of the highest in the industrialised countries and imposes tax on the basis of worldwide income, rather than domestic income only. This paper then explains how the corporate inversion was employed to take advantage of the pitfalls in the tax law. It uses four cases for demonstration - McDermott, Helen of Troy, Burger King, and Medtronic. This paper illustrates one example to determine the amount of tax savings using corporate inversion. It further looks into the anti-corporate inversion regulations under IRC §7874, the Internal Revenue Service (IRS) Notices 2014-52 and 2015-79, and the Treasury Regulations TD 9761. This paper also offers some strategies to maximise the benefits of corporate inversion.

Interest Limitation Rules in the Post-BEPS Era

The use of debt is, according to the OECD, one of the simplest profit-shifting techniques available in international tax planning, due to the mobility of money. A debt tax planning strategy can be applied without any people or machinery being moved or re-allocated; it can be done by advisors or in-house specialist sitting at their desks. These (lawful) tax planning strategies undermine the fairness and integrity of tax systems, because multinational entities can use Base Erosion and Profit Shifting (BEPS) strategies to gain a competitive advantage over domestic entities, as well as undermining voluntary compliance by all taxpayers, according to the OECD. The focus in the OECD BEPS project and the Anti-Tax Avoidance Directive (ATAD) is to counteract these tax planning strategies to ensure taxation where the value is created (economic activity). This article focuses on one anti-tax avoidance measure: interest limitation rules as addressed in BEPS action 4 and in ATAD Article 4. The aim of the article is to address the need for interest limitation rules, analyse the recommend approached in BEPS action 4, analyse the minimum interest limitation rule in the EU according to Article 4 in ATAD, and the implications of OECD action 4 and ATAD Article 4. Lastly, the article will discuss alternatives to these interest limitation rules as a way to address BEPS.