Uncertain Tax Research Articles

Disclosure of tax‐related critical audit matters and tax‐related outcomes

AbstractGiven that tax‐related critical audit matters (tax CAMs) were prevalent among accelerated filers (18.5% of observations) during the initial year of CAM disclosures, we examine whether an auditor's disclosure of tax CAMs is associated with variation in tax‐related financial reporting quality, tax avoidance, and tax‐related earnings management. Finding an association between tax CAMs and one of these tax outcomes would indicate that the new auditor reporting standard has indirectly affected investors. Examining the first year of CAM disclosures, we do not find that tax CAMs are associated with broad proxies of tax‐related audit or financial reporting quality (e.g., restatements, internal control weaknesses, comment letters) or tax avoidance (e.g., effective tax rates or book‐to‐tax differences). We do find that tax CAMs are associated with a modest increase in tax accrual quality, an increase in the reserve for unrecognized tax benefits, and a reduction in the likelihood of tax‐related earnings management. However, we do not find these tax CAM effects persist into the second year of CAM reporting. Our evidence is consistent with tax CAM disclosures having a modest but short‐lived effect on companies' reporting of tax accounts. Our findings should inform the PCAOB as they conduct their post‐implementation review of the new audit reporting standard.

УПРАВЛІННЯ ПОДАТКОВИМИ РИЗИКАМИ ПІДПРИЄМСТВА ЧЕРЕЗ ІНСТРУМЕНТ СТРАХУВАННЯ

The introduction of the newest tax risk management approaches has become more and more critical for Ukrainian enterprises. This paper analyzes and summarizes international experience in tax risk management and defines trends in this area. The author presents several recommendations for improving fiscal relations using an insurance coverage mechanism. The article also emphasizes the changes in tax relations determined by the development of information technology, as well as new opportunities and challenges associated with these processes. The methods used worldwide to manage these processes are analyzed in order not only to mitigate tax risks but also to implement necessary changes required to make tax function more efficient in a company. Given the complexity of tax regulations and the development of new instruments for managing tax risks, the author proposes to consider and put into practice the US experience, where, as a way of providing transparency and consistency in accounting for income tax liabilities, Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48) was adopted in 2006 by the FASB. Practical foreign experience of insurance coverage for tax risks, uncertain tax positions, and the potential development of such insurance in Ukraine are outlined. It is noted that the essence of tax risk insurance is to cover possible financial losses incurred by a business entity as a result of changes in tax legislation or an unformed approach of court practice. It is determined that there are certain inconsistencies in the sectoral legislation regarding the absence of rules governing tax risk insurance. At present, the national legislation does not define tax risk insurance as an independent class of insurance (or its component), which reduces its effectiveness. The development of tax risk insurance in Ukraine could become an effective tool to help minimize business risks of monetary liabilities to the budget. The authors argue that there is a need for high-quality transformation in the transparency of business, accounting, financial, and tax reporting within relationships with tax authorities. In addition, it is determined how the implementation of the Standard Audit File (SAF-T) could affect the taxpayer's cooperation with the government and insurers in assessing tax risks.

An Examination of Uncertain Tax Position Reserves Around the Purchase of Auditor Provided Tax Services

An Examination of Uncertain Tax Position Reserves Around the Purchase of Auditor Provided Tax Services

Does mandatory tax disclosure mitigate tax expense anomaly? Evidence from FIN 48

Financial Interpretation No. 48 (FIN 48) mandates the disclosure of uncertain tax positions for U.S. public firms. Exploring its impact on market efficiency, we find a reduction in the tax expense anomaly as documented by Thomas and Zhang (2011) for affected firms. The effect is stronger for affected firms with higher disclosure quality, accuracy, and transient institutional shareholding, and it cannot be explained by increased analyst tax forecasts or decreased predictability of tax expenses for future profitability. Our findings suggest that the mandatory tax disclosure under FIN 48 encourages investors to assess the implications of tax information for stock prices.

The concerns of linking IRS tax disclosures to financial statements on analysts' effective tax rate forecasts

This study examines the effect of uncertain tax position (UTP) disclosures on analysts' effective tax rate (ETR) forecasts. The Internal Revenue Service (IRS) requires that firms provide detailed information about UTPs reported in their annual 10-K filings on their Schedule UTP form. Schedule UTP applies to federal tax positions for which a corresponding tax reserve has been created for financial reporting purposes. Academics and practitioners have deliberated whether Schedule UTP disclosures could lead to firms altering how they account for their unrecognized tax benefits (UTBs) in financial statements. Overall, we find that UTB additions were originally useful to analysts in forecasting ETRs but became less useful after the implementation of the Schedule UTP form, as it likely reduced the usefulness of information for financial statement users. Our findings contribute to the debate regarding the extent of tax policy overlapping with the generally accepted accounting principles of financial reporting. Following up on a 2018 Treasury Department study that recommended more disclosure on Schedule UTP, the IRS, in December of 2022, finalized additional disclosure requirements to Schedule UTP, These new requirements may further incentivize firms to alter UTB reporting in their financial statements.

Differential responses to tax regulation: The case of Schedule UTP

Schedule UTP was instituted by the Internal Revenue Service to obtain more detailed information about firms' uncertain tax benefits (UTBs) that are required to be reported on a firm's financial statements. We document that the reaction of firms was not uniform. We provide evidence that post Schedule UTP, firms with higher political costs lower their UTBs more than average firms but do not increase their cash taxes paid. In addition, we look at firms reporting zero or missing UTBs before Schedule UTP was implemented. We find that these firms paid more in cash taxes after the introduction of Schedule UTP. From a policy standpoint, schedule UTP affects significant subgroups of firms in different manners.

Corporate Tax Planning: ESG and Corporate Tax Planning

Environmental, social, and governance (ESG) is a framework for considering certain risks and opportunities applicable to a company. Investors, and increasingly regulators, are requiring disclosure of certain ESG-related metrics and data. Some of these data reflect the externalities that a company creates with respect to the environment and to society. Investors, and potentially regulators and governments, can use these data to evaluate the company and price negative externalities. Being prepared and proactive will allow a company to develop a tax strategy that is consistent with its larger ESG goals. Globally, there is an increasing obligation for companies to publish a tax strategy, as well as to disclose uncertain tax positions and aggressive tax planning to the tax authorities and the public. This trend is also making its way into Canada, albeit at a slower pace. As the Canadian government and investors move toward pricing negative externalities using ESG metrics, it is crucial that Canadian companies start to consider the role of ESG with regard to tax planning, if they have not done so already. Canadian companies should also consider how their tax strategy will be perceived by the company's stakeholders, including the public, clients, and employees.

The Benefits of Uncertainty: Uncertain Tax Strategies and Implicit Taxes

The Benefits of Uncertainty: Uncertain Tax Strategies and Implicit Taxes

НАЛОГОВЫЙ МОНИТОРИНГ НА ОПЫТЕ ЗАРУБЕЖНЫХ СТРАН

Tax monitoring is a young but promising form of tax control in the Russian Federation. It replaces traditional checks with online interaction based on remote access to the taxpayer’s information systems and his accounting and tax reporting. This method of providing data to the tax authority allows you to quickly coordinate with the tax authority the position on taxation of planned and completed transactions. Access to taxpayer data allows the tax authority to reduce the volume of required documents and focus resources on verifying those transactions that contain elements of risk. This form of tax control provides preventive identification of tax risks and rapid settlement of disputed uncertain tax positions and allows you to prevent the occurrence of tax risks and disputable situations already at the time of planning transactions and transactions.

НАЛОГОВЫЙ МОНИТОРИНГ КАК ФОРМА РЕАЛИЗАЦИИ НАЛОГОВОГО АДМИНИСТРИРОВАНИЯ В РОССИЙСКОЙ ФЕДЕРАЦИИ

The article is devoted to the implementation of tax administration in the Russian Federation in the form of tax monitoring. Tax monitoring is a young but promising form of tax control in the Russian Federation. It replaces traditional checks with online interaction based on remote access to the taxpayer’s information systems and his accounting and tax reporting. This method of providing data to the tax authority allows you to quickly coordinate with the tax authority the position on taxation of planned and completed transactions. Access to taxpayer data allows the tax authority to reduce the volume of required documents and focus resources on verifying those transactions that contain elements of risk. This form of tax control ensures the preventive identification of tax risks and the rapid settlement of disputed uncertain tax positions and allows you to prevent the occurrence of tax risks and disputable situations already at the time of planning transactions and transactions. The application of tax monitoring is considered on the example of PJSC Rostelecom, Russia’s largest integrated provider of digital services. The advantages and disadvantages of interaction between a taxpayer and a tax authority through a data showcase are analyzed.

The EU Cooperative Compliance Programme for Large Multinational Enterprises: A Promising Mechanism for Tax Certainty in the Uncertain Tax World Following the OECD/G20 Base Erosion and Profit Shifting Initiative?

This article examines the EU Cooperative Compliance Programme for Large Multinational Enterprises (European Trust and Cooperation Approach) and discusses its potential and that of the OECD’s International Compliance Assurance Programme as mechanisms that could provide (a minimum level of) tax certainty following the OECD/G20 Base Erosion and Profit Shifting initiative.

Does mandatory disclosure of firm’s tax avoidance position affect corporate investment efficiency?

This paper examines the effect of a firm’s tax avoidance position disclosure on corporate investment efficiency by utilising an exogenous shock to corporate tax reporting that mandates firms to disclose uncertain tax positions in their financial statements under Financial Interpretation No. 48 (FIN 48). We find that, after FIN 48, firms claiming uncertain tax benefits (i.e. affected firms) experience a significant decrease in investment efficiency relative to firms that do not have uncertain tax positions (i.e. non-affected firms). Our finding suggests that, despite promoting transparency, FIN 48 imposes an unfavourable information revelation effect that reduces investment efficiency for affected firms. In terms of the mechanism, we provide evidence that affected firms experience a larger increase (drop) in cost of capital (external financing) following FIN 48 and rule out an alternative explanation that the decreased investment efficiency may arise from internal liquidity constraints. In cross-sectional analyses, we find the adverse effect to be more pronounced for firms with higher disclosure quality, higher tax uncertainty, and more severe financial constraints. These findings provide insight into the debate on why firms sometimes forgo tax avoidance opportunities by pointing out a potential cost of tax avoidance.

Financial Statement Comparability and Corporate Tax Strategy

We investigate whether a firm’s financial statement comparability is associated with the firm’s tax strategy. We hypothesize that external observers (e.g. press, shareholders, analysts, and tax authorities) can better detect a firm’s atypical tax strategy when the firm has high financial statement comparability with its industry peers. Detection and its consequent penalties should restrain firm managers from choosing tax strategies that deviate significantly from those of industry peers. Using firms’ uncertain tax benefits (UTBs) as a proxy for tax avoidance, we find that the UTBs of firms with high financial statement comparability move toward their industry peers in subsequent periods. Results suggest that comparability reduces tax aggressiveness for high tax-avoidance firms and enhances tax aggressiveness for low tax-avoidance firms, in comparison with those of industry peers. Overall, these findings indicate a strong within-industry harmonization in tax avoidance for firms with high financial statement comparability.

Information Sharing in a Cross-Border E-Commerce Supply Chain Under Tax Uncertainty

ABSTRACT This study explores the optimal information-sharing strategy in a cross-border e-commerce supply chain with uncertain tax rates, in which an overseas manufacturer invests in product quality and a cross-border e-retailer holds private demand information. By establishing a game-theoretical model, we investigate the e-retailer’s motivation for sharing information with the overseas manufacturer and further explore the role of information sharing under tax uncertainty. Our results show that when quality elasticity is high, the e-retailer chooses to share its information voluntarily. However, under medium quality elasticity, the e-retailer shares information voluntarily only when the probability of the high tax rate is below a certain threshold. Moreover, the e-retailer could be more likely to share information under higher tax uncertainty. When quality elasticity is low, the e-retailer is unwilling to share information, but the overseas manufacturer can design a contract to incentivize the e-retailer to share information to realize a win–win outcome. Finally, we reveal that information sharing can mitigate the negative effect of tax fluctuation on the e-retailer’s profit. These findings provide useful implications for cross-border e-retailers on how to formulate information-sharing strategies under tax uncertainty arising from trade policy adjustment. Our study also supplements the information-sharing literature by discussing tax uncertainty, which is an important factor affecting the operation of cross-border e-commerce supply chain.

Stochastic Dominance of Renewables to Replace Hydropower Under Policy Uncertainty

Regional energy managers and decision-makers face a world where climate change is introducing uncertainty over future power generation, as well as financial impacts from potential carbon taxation. A unique opportunity to explore is the rising interest in hydropower substitution with renewable resources, either to promote ecosystem services such as increasing the survivability of migratory fish or mitigating future loss of generation due to severe drought conditions. To address these concerns, a case study of the Columbia River Basin was conducted to evaluate the substitution of four Lower Snake River dams. A multistage methodology was chosen to evaluate grid adequacy, climate change performance, and the implications of tax uncertainty on the substitution portfolios. A specialized energy model was used to provide the adequacy and input for a Monte Carlo simulation to test the impact of an uncertain tax. The outcome is a carbon tax strategy region that suggests preferences under different taxes for risk-averse decision makers, alongside adequacy and climate metrics. We conclude that policymakers should consider a carbon tax between <inline-formula xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink"> <tex-math notation="LaTeX">$\$ $ </tex-math></inline-formula> 86 and <inline-formula xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink"> <tex-math notation="LaTeX">$\$ $ </tex-math></inline-formula> 132 to incentivize a portfolio that marginally reduces emissions compared to the pre-dam removal baseline or a tax greater than <inline-formula xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink"> <tex-math notation="LaTeX">$\$ $ </tex-math></inline-formula> 135 to incentivize another portfolio that significantly reduces emissions. This study makes three important contributions: (1) it provides a methodology for evaluating electricity generating portfolios in the presence of a carbon tax, (2) it evaluates adequacy metrics for technology substitutions with intermittent alternatives and climate change impacts, and (3) it offers specific guidance for energy policy making.

What Will the UK Uncertain Tax Treatment Disclosure Rules Mean for Transfer Pricing?

New UK rules requiring disclosure of uncertain tax treatments are likely to have a significant impact on transfer pricing in the United Kingdom. Taxpayers within the scope of the rules will need to carry out careful review of their transfer pricing to determine whether there are uncertainties that must be notified. It is likely that HMRC’s internal guidance on transfer pricing will become far more important for taxpayers than has thus far generally been the case.

Summaries of Papers in This Issue

Summaries of Papers in This Issue

Unrecognized tax benefit and its impact on firms’ financial activities: A longitudinal analysis

AbstractOur study investigates the unrecognized tax benefit (UTB) across firms and its impact on the firm's financial activities using the generalized estimating equations (GEEs). We find the UTB variation across firms is largely related to the firms’ operation characteristics and firms with higher UTB balances are more likely to overstate their uncertain tax positions (UTPs). Also, we find that UTB balances are positively associated with firms’ cash holding and employee stock compensation expenses. Our results provide evidence that UTB has become an important financial disclosure and have affected firms’ financial operations.

Financial Statement Comparability and Corporate Tax Strategy

We investigate whether a firm’s financial statement comparability is associated with the firm’s tax strategy. We hypothesize that external observers (e.g., press, shareholders, analysts, and tax authorities) can better detect a firm’s atypical tax strategy when the firm has high financial statement comparability with its industry peers. Detection and its consequent penalties should restrain firm managers from choosing tax strategies that deviate significantly from those of industry peers. Using firms’ uncertain tax benefits (UTBs) as a proxy for tax avoidance, we find that the UTBs of firms with high financial statement comparability move toward their industry peers in subsequent periods. Results suggest that comparability reduces tax aggressiveness for high tax-avoidance firms and enhances tax aggressiveness for low tax-avoidance firms, in comparison with those of industry peers. Overall, these findings indicate a strong within-industry harmonization in tax avoidance for firms with high financial statement comparability.

Does the Disclosure of Unrecognized Tax Benefits Affect Investor Uncertainty?

We examine whether the disclosure of tax-related uncertainty through unrecognized tax benefits (UTBs) resolves or exacerbates investors’ uncertainty about firm value based on evidence from investor trading behavior and information asymmetry around the time of the disclosure. We find that current year UTB additions are associated with reduced trading activity around the release of the 10-K and wider bid-ask spreads in the days following the 10-K release. We find no evidence of an association between UTB additions and contemporaneous abnormal returns. Our results suggest that UTB additions increase investor uncertainty and investors impound the information contained in UTBs into prices with a delay. Moreover, we find that our results are concentrated in firms that engage in greater tax avoidance and in firms with poorer financial reporting quality. We also find that the association between UTB additions and information asymmetry is concentrated among firms with low institutional ownership. Taken together, our results suggest that UTB disclosures increase short-term investor uncertainty about future firm value, which undermines the FASB’s goal of increasing the relevance and transparency of accounting for uncertain tax positions.