Tax Risk Research Articles

The Effects of ESG Performance on the Relationship between Tax Risk and Cost of Capital: An Empirical Analysis of Korean Multinational Corporations

Purpose - Using a sample of Korean multinational corporations, we examine whether the relationship between tax risk and the implied cost of capital discriminates between the environmental, social, and corporate governance (ESG) of highly rated firms.
 Design/methodology - Firms with high tax risks have an increased uncertainty of future cash flows. Therefore, as the volatility of future cash flow increases, information asymmetry and the required return increases. Highly rated ESG firms can reduce information asymmetry, thereby weakening the positive relationship between tax risk and cost of capital. We employ the standard deviation of the cash effective tax rate as proxy of tax risk. We utilize the ESG rating data of the Korea Corporate Governance Service (KCGS). We use a PEG model, MPEG model, and GM model to measure the implied cost of capital.
 Findings - We find a positive association between the implied cost of capital and tax risk. The positive relationship between tax risk and the implied cost of capital weakens in highly rated ESG firms. Highly rated ESG firms prefer a stable tax position to invest after-tax cash flows into sustainable management. Therefore, the negative effects of tax risk on cost of capital can be reduced.
 Originality/value - This study provides empirical evidence that ESG activities can mitigate the negative impact of tax risk on the cost of capital for Korean multinational corporations. In a business environment where ESG activities are more important, the empirical results that ESG activities can reduce the corporate risk of Korean FDI companies are expected to provide implications for the ESG activities of multinational corporations.

The impact of managerial ability on corporate tax risk and long-run tax avoidance: empirical evidence from a developing country

PurposeThe purpose of this study is to examine the impact of managerial ability on corporate tax risk and long-term tax avoidance using the upper echelons theory.Design/methodology/approachThis study uses a quantitative method with regression models, using a sample of listed firms on the Indonesia Stock Exchange from 2011 to 2018.FindingsThe regression results report that managerial ability negatively influences tax risk and positively impacts long-run tax avoidance. Companies with more able managers have a relatively lower tax risk and greater long-run tax avoidance. The results reveal that firms with managers that possess greater abilities are more committed to long-run tax avoidance while concurrently maintaining a lower level of their tax risk. The impacts the authors report are statistically significant and robust, as proved by a series of robustness checks and additional tests.Research limitations/implicationsThis study only includes firms from one developing country.Practical implicationsThe empirical results might be of interest to board members while envisaging the benefits and costs of appointing and hiring managers, as well as to the tax authority and the other stakeholders interested in apprehending how managerial ability influences corporate tax risk and long-run tax avoidance practices simultaneously.Originality/valueThis study proposes and tests an explanation for the impact of managerial ability on corporate tax risk and long-run avoidance simultaneously in the context of an emerging country.

Theoretical and organizational aspects of creating a system of internal tax control of small enterprises

The subject of the research presented in this article is the theoretical and organizational aspects of creating a system of internal tax control of small enterprises. The author proves that such a system is an effective tool for managing tax risks of organizations to reduce current and potential financial losses of economic entities. The significance and relevance of this issue has been confirmed empirically, including using the latest data from the statistical tax reporting of the Federal Tax Service of Russia. The approach used by the author to the organization of internal tax control is based on the provisions of the COSO methodology, regulatory requirements of domestic legislation and provides for consideration of the specific features of small business entities that affect the procedure for conducting internal control of small enterprises. The criteria of functionality and structural elements of the internal tax control system are defined, their content is described. The approaches proposed by the author to the construction of the internal tax control system are summarized in the form of schemes, algorithms and recommendations that can be taken as a basis for the organization of such work by the heads of small enterprises. The scientific novelty of the research consists in a comprehensive study of the theoretical and organizational aspects of internal control for the development of an internal tax control system and in the application of the conceptual provisions of the theory of internal control to the management of tax risks of organizations, taking into account the specifics of small businesses.

St. Kitts and Nevis

The Inland Revenue Department, St. Kitts and Nevis, benefited from a remote Capacity Development (CD) activity delivered by CARTAC over the period November 2021 – March 2022 on auditing of financial institutions. The main objective of this CD was to strengthen the capacity of the auditors to perform audits and verify the accuracy of reporting by taxpayers in the Financial Sector. The training included (i) an overview of the financial sector, financial products/instruments and business processes; (ii) guidance in auditing the banks and insurance companies; and (iii) awareness of the key tax risks within this sector. A total of 22 auditors from the large, medium and small taxpayers’ unit, participated in the training. The training was held over a fifteen (15) day period and concluded with the auditors developing an audit schedule and preparation of audit notification letters to taxpayers selected for audit.

Your Property Is Not Your Property: The Tax Risks of Disposing of Real Estate under Other Person's Name

Your Property Is Not Your Property: The Tax Risks of Disposing of Real Estate under Other Person's Name

Strategic reaction and tax avoidance: Evidence from the effect of large IPOs on peers

We examine whether and how industry peers use tax avoidance as a strategic mechanism to maintain their relative competitive positions. We exploit a unique setting where a relatively large private firm obtains capital, visibility, and creditability by going public (i.e., an IPO), imposing significant competitive pressure on its industry peers. We find that peer firms increase tax avoidance after large IPOs. Further analysis shows that the increase of tax avoidance is driven by firms with high growth needs and firms with high operating uncertainty, suggesting that tax aggressiveness is aligned with other strategic risk-taking changes to improve industry competitiveness. We rule out two alternative explanations: 1) existing peers use relative product market power to hedge against tax risk and engage in tax avoidance; 2) peers mimic the tax avoidance behavior of IPO firms. The main finding is supported by the difference-in-differences test with coarsened exact matching and a battery of robustness tests, including alternative measures and alternative large IPO selection criteria.

The interactive impact of tax avoidance and tax risk on the firm value: new evidence in the Tunisian context

PurposeThe purpose of this study is to examine the interactive impact of tax avoidance and tax risk on the firm value.Design/methodology/approachThis study covers 290 observations on non-financial corporations listed on the Tunisian Stock Exchange for the period ranging from 2008 to 2020, using the multiple linear regression technique.FindingsThe results show that tax avoidance positively affects the firm value while tax risk has a negative influence on the company value. More importantly, tax risk moderates the positive impact of tax avoidance on the firm value. Accordingly, tax avoidance must be considered in conjunction with tax risk when studying the effect on the firm value. The findings of additional analyses indicate that when tax avoidance is associated with a high level of tax risk, it negatively affects the firm value. Thus, investors negatively rate the high-risk tax avoidance.Research limitations/implicationsThe major limitation of this study is that it focuses only on Tunisian listed companies since their financial statements are publicly available. Although the sample is relatively small due to the problem of data availability, it is satisfactory owing to the twelve-year sampling period (from 2008 to 2020). Research implications- The results obtained are of great interest to researchers as they should be more careful in simply using effective tax rates as a measure of risky or aggressive tax avoidance.Practical implicationsThe findings may signal the need for Tunisian firm managers to consider spillovers when adopting risky tax avoidance strategies and to implement a tax risk management policy within the firm. They are also substantial for Tunisian regulators to create requirements for reporting risky tax avoidance practices in the company annual reports to protect the investors’ rights and the society interest in general. The results are also useful for the investors who would like to make good decisions with respect to tax planning strategies. It is not enough to rely on the Effective Tax Rate (ETR) to judge whether or not tax planning is risky. Volatile ETRs, as a proxy of the tax risk, can be useful for them in decision-making.Social implicationsThe results also highlight that risky tax avoidance decreases the firm value, and thus confirm the negative repercussions that such behavior can have not only on the firm, but also on the society in general, as the corporate tax contributes to covering the State public expenditure. Hence, it is considered a general concern.Originality/valueThe present study differs from others in the existing literature. In fact, it examines the joint effect of tax avoidance and tax risk on the firm value for Tunisian listed companies which are characterized by the predominance of agency conflicts between major shareholders and minor ones. Therefore, the authors seek to investigate if small shareholders can penalize risky tax avoidance practices by decreasing the firm value.

Tax risk management system based on optimal interaction between subjects and management objects

Tax risk management system based on optimal interaction between subjects and management objects

DIGITALIZATION OF TAX ADMINISTRATION IN UKRAINE: RISKS AND OPPORTUNITIES

The purpose of the article is to study the risks and opportunities of digitalization of tax administration in Ukraine. In the article, the authors used both special and general methods of scientific research, namely: analysis and synthesis, abstract-logical, graphic, bibliometric, dialectical, methods of collecting, processing and systematizing information. It has been proven that today the processes of digitization have covered all spheres of society in general and tax administration in particular. The expediency of digitalization of tax administration to increase the efficiency of the process of mobization of tax revenues is substantiated. The reasons for the inhibition of the drivers of digital trends in the domestic tax administration have been determined. The analysis of the identified trends of digitalization of tax administration in Ukraine was carried out, tax risks were determined and the author's vision of the implementation of modern imperatives of digital trends in the tax field was proposed.

Экономика управления финансовыми и налоговыми рисками

In conditions of macroeconomic instability and deterioration of the geopolitical situation in the world due to sanctions pressure on Russia from Western countries, forecasting and identification of risks are becoming important in the formation of strategies for financial and economic activities of business entities, which determines the relevance of the subject of this article - financial and tax risk management to avoid financial risks that they bear. The purpose of the work is to identify problems of financial and tax risk management on the example of an economic entity and to find ways to solve them. The article discusses the theoretical aspects of the concepts of "financial risk", "tax risk" in terms of their content, causes and impact on the financial and economic activities of business entities. The author's definitions of the concepts "financial risk" and "tax risk" are given in the article. In the course of the study, the analysis of the causes of risks was carried out using analytical, monographic, logical, comparative, generalizing approaches, coefficient analysis, etc. It is concluded that it is necessary to consider risks from the perspective of the complex nature of their occurrence and existence in the activities of economic entities. Possible interrelations of risks are identified and ways to reduce the severity of their consequences are proposed.

Upravljanje poreskim rizikom u multinacionalnim bankama - pogled iz Srbije

Considering the significant cross-national differences between tax systems, multinational banks are facing a challenge to secure compliance with the tax regulation of each country. In this regard, multinational banks tend to minimize tax risk exposure and the probability that national tax authorities will consider certain tax treatment as illegal. The paper studies the main sources of tax risk for subsidiaries of multinational banks in Serbia. It is pointed out that banks are facing important challenges to secure compliance with the tax regulation, particularly value-added tax and corporate income tax regulation. The paper also shows that subsidiaries of multinational banks in Serbia and neighboring countries disclose the information on the tax risk in notes to the financial statements only to a moderate extent. In addition, multinational banks disclose information on tax risk using different models in different countries, implying that they adapt the disclosure to the assessed level of the tax risk in each country.

ПОДАТКОВЕ ПЛАНУВАННЯ ТНК НА ЗАСАДАХ РИЗИКО-ОРІЄНТОВАНОГО ПІДХОДУ В УМОВАХ ПРОЕКТУ BEPS ТА ДІДЖИТАЛІЗАЦІЇ ЕКОНОМІКИ

The article investigates the peculiarities of the transnational corporations (TNC) tax planning in the context of the base erosion and profit shifting (BEPS) project and economic digitalization. The authors conducted an analysis of the rules that regulate the application of risk management in TNC activities, and they justified the feasibility of using SWIFT and matrix methods for assessing tax risks in the process of TNC tax planning. A model of TNC tax planning in the context of economy digitalization and BEPS project, which allowed for increased tax planning effectiveness by obtaining objective and sufficient information for the construction of possible scenarios of the companies' operations, is proposed in the article. The model includes stages of the tax planning process, namely: tax landscape analysis for countries of registration, countries of digital presence, and international taxation rules; constructing a tax risk trigger chain for the company; assessing the probability and impact of tax risks; identifying and selecting tax risk management options; integration of tax risk management in the business scenario. The conducted research allowed us to predict what would happen if tax rates, conditions for determining the object of taxation, or other taxation conditions in the TNC’s country of registration or presence changed. In the article, it was proposed to use the results of comparing corporate performance indicators (the rate of change in profit, return on assets, return on capital, return on sales) and indicators characterizing tax consequences (the rate of change in tax liabilities) as criteria for selecting tax risk management options for TNC. The authors defined the mechanism for choosing the tax risk management methods in the context of the economic digitalization and the particular BEPS project, which allowed conducting the real-time control not only by TNC, but also by tax control bodies, auditors, financial consultants, and representatives of international organizations, simplified communication between them, and reduced subjectivity when making any decisions.

A Composite Risk Indicator for Business Sectors Involving Excisable Goods: A Romanian Case Study

The main purpose of this article is to conduct a scientific statistical research on accounting, financial and tax risk assessment for economic activities involving excisable products by developing a composite risk indicator. The necessity of such an instrument resides in the void in the literature for this particular business sectors in what concerns the accounting, financial and tax risk mapping. As a research methodology, a cross-sectional analysis was performed for the time period 2017 – 2021 of variables consisting of financial ratios calculated on the basis of data and information from the annual financial statements submitted by a number of 309 economic operators operating in five economic business sectors, involving excisable products: alcoholic beverages, wine from grapes, beer and, petroleum products. The research’s results revealed that the areas of critical vulnerability in terms of general accounting, financial and tax risk are in the business sector: Manufacture of products from petroleum processing, followed by Distilling, refining and blending of alcoholic beverages. The composite risk indicator was used in order to elaborate a temporal profile for each analyzed business sector. These profiles showed that the highest risk levels were recorded in 2017 – 2018, years when individual consumption increased and the lowest levels in 2020, year characterized by the COVID pandemic, when a significant decrease in all economic activities at national level were recorded. Other findings were that the most significant and useful financial ratios for risk mapping for the analyzed business sectors are: Inventories in Turnover and Net Profit in Equity

Risk-Oriented Approach to State Control over the Taxation of Profit of Or-ganizations Based on the Delphi Method

The relevance of the article is due to the fact that the collection of corporate in-come tax is a source of tax risks, consisting in the failure to fill the revenue base of the budget, which threatens the real sovereignty of the state, expressed in independence in foreign affairs and the supremacy of state power in regulat-ing domestic policy, especially in the conditions of economic sanctions against the Russian Federation. The subject of the study is the mechanism for managing the tax risks of the state on corporate income tax through the use of the Delphi method. The objectives of the work are to develop and implement a risk—based approach to state con-trol over the collection of corporate income tax. The results of a study are pre-sented, during which experts in the field of taxation assessed in four rounds the most characteristic violations of the legislation of the Russian Federation on corporate income tax based on the probability of risk occurrence and the de-gree of its impact on the timely and full transfer of tax to the budget. Based on the data obtained, a "traffic light" of risks of typical violations of the legisla-tion of the Russian Federation on corporate income tax was developed for the first time, demonstrating the degree of their influence and the probability of occurrence. Proposals have been formed to improve the regulatory and legal regulation of corporate income tax and tax risk management in the Russian Federation. The conclusion is made about the need for the widespread introduc-tion of a risk-based approach to state control over the collection of corporate income tax based on the Delphi method.

Концепция рентного налогообложения добычи и извлечения твердых полезных ископаемых

The article considers the conceptual approaches to the taxation of natural resource use. The purpose of the article is to identify the governmental tax risks in the implementation of various scenarios of mining rent withdrawal and to substantiate the methodology of resource taxation in extraction and processing of solid minerals, based on the principle of tax justice. The authors reveal the factors of tax risks for the state in exercising its sovereign right to the mining rent. The article formulates the requirements to the tax system, the observance of which will allow to consider the factors of the state tax risks. Advantages and disadvantages of certain fiscal payments for extraction of mineral raw materials are determined. It is shown that the resource tax should be based on the present value, calculated as the net present value of the investor for the entire lifetime of the project. The authors propose a mining rent taxation mechanism, which would increase budget revenues while maintaining the incentives for mining companies to invest in exploration. The main forks in the design of such a rent income tax are shown

Учет и контроль операций по переработке давальческого сырья: экономическая эффективность и налоговые риски

Transformational processes in the global and Russian economy serve as a reason for business entities to search for new ways of producing goods allowing the most efficient use of available resources. Toll processing (in international practice – tolling operations) allows expanding the sphere of business of agricultural formations and, thus, increasing their effectiveness. The complexity of accounting and taxation of operations for toll processing increases the probability of occurrence of tax, accounting, and legal risks, which justifies the necessity to develop a methodology for internal control of these operations. The authors analyzed the results of the financial and economic activities of agricultural formations and made a conclusion about the economic expediency of toll processing operations, both for an organization-conversion material supplier and for a tolling party. The authors carried out the theoretical research and determined the features of accounting for a processor organization, as opposed to a supplier organization. In the process of testing the accounts, typical violations were identified, which are related to the correctness of accounting of tolling business processes, the formation of prime cost, and the taxable base for income tax, which causes tax risks. The authors developed a methodology for internal control of the “Toll processing” business process and the procedure for its reflection in business accounting and fiscal accounting. The following aspects formed the basis of the developed methodological toolkit for internal control of tolling operations: information support; control procedures; a step-by-step approach based on a preliminary risk analysis.

Development of a Model for Minimizing Tax Risk by Combining Behavioral Criteria of Management Accounting and Its Empirical Test Using Mikhailov's Fuzzy Hierarchical Method

Objective: The objective of this research is to develop a model for minimizing tax risk and to empirically test it. This paper presents the optimal combination of behavioral criteria of management accounting information using Mikhailov's fuzzy hierarchical method. Methodology: The research method is a mixed, qualitative, quantitative, and analytical explanatory type. The statistical population consists of tax experts from the staff of the Ministry of Economic Affairs and Finance and professors of accounting from public universities, who are experts in the field of taxation. The sample includes 14 experts mentioned above, selected using a systematic elimination method for the period 2011-2021. Findings: The research results showed that all five selected behavioral criteria of management accounting in this study's model—beliefs and thoughts, social activities, culture-building and regulation, personal characteristics, accountability and demand for answers—have a significant impact on reducing tax risk. The most important behavioral priorities of these criteria, in the order mentioned, are religious beliefs, enhancing public welfare, tax culture, personal characteristics, and attention to taxpayers' demands. Moreover, among these priorities, personal characteristics are the most significant and impactful behavioral criterion. Conclusion: These findings have a significant effect on the performance of companies, tax collectors, taxpayers, other stakeholders, and the community as a whole.

Predicting the enterprise tax risk using improved multilayer perceptive vector machine

Predicting the enterprise tax risk using improved multilayer perceptive vector machine

Экономико-аналитический подход к оценке налоговых рисков отсутствия фактического права на доход

The subject of the study is the identification by the tax authorities of the dependence of the jurisdiction of the location of the parent companies of Russian organizations on the amount of additional charges for corporate income tax withheld at source in Russia, while controlling the actual right to income (FPA) of a foreign organization. The purpose of the work is to develop proposals for tax risk management in determining the FPA. The article, in conjunction with the analysis of the dynamics of foreign direct investment from Russia, analyzes information on changes in the amounts of corporate income tax paid when paying passive income to foreign recipients, as well as data on the amount of additional tax when monitoring the status of the FPA. As a result of the analysis of court decisions on the basis of the "geography" of the beneficial owners of income from the Russian source, the relationship between the jurisdiction of registration of parent companies of taxpayers and the average amount of additional corporate income tax due to non-compliance with the status of the FPA was established. It is concluded that in the overwhelming majority of tax disputes on the status of the FPA, foreign companies – recipients of income were recognized by the courts as conduit companies created to take advantage of registration in low-tax jurisdictions and abuse the provisions of international tax treaties. It was revealed that over the past seven years, the reason for the outflow of capital from the country was the desire of taxpayers to reduce the effective tax rate by withdrawing profits to low-tax jurisdictions, in which large firms prefer Singapore for structuring cash flows in most cases.

ОБЛІК ВИТРАТ У РЕКЛАМНИХ КАМПАНІЯХ

The article examines the types of advertising, its importance in modern society and for the enterprise in particular. In modern conditions, any successful business needs advertising, because advertising is the driving force of trade and the main tool for promoting goods on the market. The procedure for documentary confirmation and disclosure of methodological principles of accounting and taxation of advertising costs in advertising campaigns is considered. It was determined that advertising expenses are necessary in the activities of enterprises. Advertising costs can reach significant levels. Correct advertising can make not only the company feel more confident, but also develop new promising markets. Considered how to account for and tax such expenses. The need to recognize intangible assets in the form of intellectual property objects arising in the course of the advertising process has been determined. In the accounting of sales costs, it is considered a mistake: to include advertising services in the cost of the product being produced (advertising can be a temporary phenomenon and it is not related to the production, namely to the sale of the product) and to recognize intangible assets (costs for advertising and promotion products on the market are not recognized as intangible assets). The components of advertising and marketing costs have been clarified. It should be noted that the terms defining advertising costs and sales costs are used interchangeably in economic literature and in business practice. The drafting of the contractual relationship between the supplier and the buyer and the formation of costs in terms of tax consequences and risks during taxation are analyzed. It was found that the cost accounting will differ depending on how the contract was concluded with one or another company. To reduce tax risks, you should take care of proper documentation of the result of providing advertising services. It should be a contract for the provision of advertising services and an act of provision of advertising services. The organizational and methodical aspects of accounting for advertising and marketing costs in modern conditions are substantiated.