Faculty perspectives on international taxation topics

This paper presents perspectives of accounting faculty members on the relative importance of topics that should be presented in a one-semester graduate level international taxation course. Understanding of international taxation has become an increasingly critical part of the tax and accounting practices of the big four and other major public accounting firms as well as to U.S. multinational business firms. Therefore, college and universities may find it useful to provide at least some coverage of international taxation topics in a separate course or as part of other courses in their tax and accounting programs. If a separate course is offered, an important consideration of which topics should be covered in the course, since there are more topics than can be reasonably covered in one course. This paper analyzes the responses of members of the American Accounting Association's International Accounting Section to a survey of which topics should be included in a one-semester international tax course. Results are compared with those of prior studies to determine whether and the extent to which perspectives have changed over time and based on the type of survey respondent. Findings of this paper will offer guidance regarding topic selection to the accounting faculty members who are charged with developing an international taxation course. The findings may also be of interest to anyone concerned with international business in general and taxation in particular.     

Analyst coverage and corporate tax aggressiveness

We examine the impact of analyst coverage on corporate tax aggressiveness. To address endogeneity concerns, we perform a difference-in-differences analysis using a setting which causes exogenous decreases in analyst coverage. Our tests identify a negative causal effect of analyst coverage on tax aggressiveness, suggesting that higher analyst coverage constrains corporate tax aggressiveness. Further cross-sectional variation tests find that this constraining effect on tax aggressiveness is more pronounced in firms with lower investor recognition and firms with more opaque information environments. Our results are consistent with the notion that higher analyst coverage increases the visibility of aggressive tax planning behavior as well as heightens analysts’ demand for more transparent information, which in turn reduces tax aggressiveness.     

Corporate tax avoidance and high-powered incentives

This paper analyzes the links between corporate tax avoidance and the growth of high-powered incentives for managers. A simple model demonstrates the role of feedback effects between tax sheltering and managerial diversion in determining how high-powered incentives influence tax sheltering decisions. A novel measure of corporate tax avoidance (the component of the book-tax gap not attributable to accounting accruals) allows for an investigation of the link between tax avoidance and incentive compensation. Increases in incentive compensation tend to reduce the level of tax sheltering, in a manner consistent with a complementary relationship between diversion and sheltering. In addition, this negative effect is driven primarily by firms with relatively weak governance arrangements, confirming a central prediction of the model. These results can help explain the growing cross-sectional variation among firms in their levels of tax avoidance, the undersheltering puzzle, and why large book-tax gaps are associated with subsequent negative abnormal returns.     

Corporate site visit and tax avoidance: The effects of monitoring and tax knowledge dissemination

This study examines how institutional investors' corporate site visits affect tax avoidance. Using quantile regressions, we find that corporate site visits decrease tax avoidance for firms at high levels of tax avoidance and increase tax avoidance for firms at low levels. The effect of corporate site visits on tax avoidance is stronger for firms subject to a weaker information environment, which suggests that institutional investors acquire additional firm-specific information via corporate site visits and play a more effective monitoring role. We also find that visitors who visited low-tax firms in prior years share tax-planning knowledge with high-tax firms which they visit in the current year. The effect of tax knowledge transfer is more pronounced when the visitors are from incumbent institutional shareholders. This study identifies corporate site visits as a channel via which institutional investors serve as monitors to managers and as facilitators of tax knowledge transfer.     

A review of tax avoidance in China

This paper synthesizes the major empirical findings of the burgeoning tax avoidance research in China from the accounting, finance, and economics literature over the last 13 years. It surveys the evidence in four main areas: (1) the mechanisms through which Chinese firms avoid income taxes; (2) the effects of government ownership and agency problem on tax avoidance; (3) tax avoidance and political connections; and (4) the roles of book-tax conformity, tax enforcement, and corporate governance. It also discusses the appropriateness of tax avoidance measures in the Chinese setting. Finally, it proposes important directions for future research.     

Do corporate tax cuts increase investments?

This paper studies the effect of corporate taxes on investment. Since firms with a foreign parent have more cross-country profit shifting opportunities than domestically owned firms do, their effective tax rate and, consequently, their tax-induced costs to investment are lower. We therefore expect capital investment responses to a corporate tax cut to be heterogeneous across firms. Using firm-level data on German corporations, we exploit the 2008 tax reform, which substantially cut corporate taxes as an exogenous policy shock and expect domestically owned firms' investments to be more responsive to the reform. We show exactly this in a difference-in-differences setting. We find that the reduction in corporate tax payments led to a one-to-one increase in the real investments of domestic firms. The effect is stronger for domestic firms relying more on internal funds. Correspondingly, labor investment increased more for domestic firms, ensuring a constant mix of input factors. In addition, we show that domestic firms' sales grew faster after the tax cut than the sales of foreign-owned firms. Our results imply that corporate tax changes can increase corporate investment but that domestic firms benefit more than foreign-owned firms from a tax cut through higher investment responses resulting in greater sales growth.     

Director and officer liability and corporate tax avoidance

We use the unique nature of the director and officer liability protection law applicable to Nevada incorporated firms to study how liability protection is related to corporate tax avoidance. We find that firms incorporated in Nevada avoid 32% more federal corporate tax as a fraction of total assets than firms incorporated in Delaware, and 40% more than firms incorporated in other states. Nevada-incorporated firms have a 15% lower cash effective tax rate and an 8% lower GAAP ETR. The results are robust to various specifications including instrumental variable and matching approaches. Greater tax avoidance is also associated with lower payouts to shareholders for Nevada-incorporated firms. The findings are consistent with theories about the complementarity of managerial diversion and tax avoidance for firms with poor monitoring, and they demonstrate how increases in liability protection lead to the unintended consequence of greater firm tax avoidance.     

Directors with foreign experience and corporate tax avoidance

Using a large sample of hand-collected directors' foreign experience data for Chinese listed companies from 2001 to 2016, we examine the impact of directors with foreign experience on corporate tax avoidance. We find a significantly negative association between directors with foreign experience and tax avoidance, suggesting that these directors can help constrain their firms' tax aggressiveness. The result is robust to Heckman two-stage analysis, instrumental variable approach, inclusion of potential omitted variables, change analysis, and alternative tax avoidance measures. Further analyses reveal that reputation concerns and CSR awareness are potential channels through which returnee directors affect corporate tax avoidance. The negative relation between directors with foreign experience and tax avoidance only holds when directors' foreign experiences are derived from countries or regions with higher investor protections. Non-independent directors with foreign experience have larger impacts on corporate tax avoidance than independent directors, and the effect is more pronounced when directors with foreign experience sit on audit committees. Directors' working and studying experiences both have important impacts on corporate tax avoidance. The result also suggests that the negative relation between directors with foreign experience and tax avoidance is more pronounced in non-state-owned firms. Overall, the findings suggest that directors' foreign experience matters for corporate tax behavior in emerging markets.     

A Corporate View of Research Needs in Corporate Finance

This paper reports the results of a survey of UK chief financial officers (CFOs) drawn from 72 large, 34 medium and 37 small companies on potentially important research topics in corporate finance. The paper suggests that there are gaps between extant academic research and the CFOs ‘needs for such research. The topics that the 143 CFOs would like to see on the research agenda include: the influence of tax laws on financial decision-making; investor reactions to companies concentrating on short-term gains to the almost total neglect of long-term benefits; effects of changes to the law on pension funds; cash flow planning and forecasting; regulators’ awareness of financial issues; and methods for determining the riskiness of a project. Of least importance to the CFOs are research on the significance of bankruptcy costs, influence of the City on corporate financial operations and impact of seasons on operational decisions. The degree of importance attributed to research topics seems to vary with firm size. In general, the findings of this study are similar to those from a survey of financial managers in the US.     

Valuation implications of socially responsible tax avoidance: Evidence from the electricity industry

Prior literature suggests that firms may bear reputational costs associated with corporate tax avoidance, which could in turn reduce the net present value of firms’ tax planning strategies. However, these studies do not consider the fact that firms may have opportunities to avoid tax in socially responsible ways. We investigate the equity valuation implications of one form of socially responsible tax avoidance: claiming the renewable electricity production tax credit (PTC). We predict and find that investors more positively value tax savings generated from PTCs compared to other forms of corporate tax avoidance, consistent with the notion that socially responsible tax avoidance should not subject firms to reputational costs. Additionally, consistent with the role that CSR can play in enhancing a firm’s reputational capital, we find evidence of a spillover effect in which investors more positively value other sources of tax avoidance to the extent the firm also reduces its taxes in a socially responsible way. Our results demonstrate the importance for managers to consider socially responsible tax avoidance as a component of a firm’s tax planning portfolio and for policymakers to recognize the appeal of socially responsible tax strategies as the reputational consequences of tax avoidance become more prominent.     

Financial leverage and corporate taxation: evidence from German corporate tax return data

To estimate the impact of profit taxation on the financial leverage of corporations, this study uses a pseudopanel constructed from comprehensive corporate tax return microdata for the period 1998–2001, which saw the introduction of major corporate tax reform in Germany. Financial leverage refers to the ratio of long-term debt to total capital. The endogeneity of the firm-specific marginal after-financing corporate income tax rate is controlled for by an instrumental variable approach. The instrument for the observed marginal tax rate is the counterfactual tax rate that a corporation would have faced in a particular period had there been no endogenous change, triggered by the tax reform, of its financial leverage and tax base. This counterfactual tax rate is derived from a detailed microsimulation model of the corporate sector, based on tax return microdata. The marginal tax rate has a statistically significant and relatively large positive effect on corporate leverage; for firms reporting positive profits, an increase of the marginal tax rate of 1 % would increase the financial leverage by approximately 0.7 %, on average. The debt ratio is less responsive to tax incentives for small corporations and firms facing high economic risks.     

Corporate tax aggression and debt

We provide a tradeoff model of the capital structure that allows leverage to be a function of a firm’s choice of tax aggressiveness. The model’s testable implications are supported empirically. Debt use is inversely related to corporate tax aggression for most firms, and the relation is economically important. This substitution effect is especially evident for firms exhibiting high tax-shelter prediction scores. The effect attenuates for benign forms of tax avoidance and during the recent credit crisis period. For the most profitable firms, debt and tax aggression are complements. Our results extend the empirical findings of Graham and Tucker (2006).     

The value relevance of corporate tax expenses in the presence of partisanship: International evidence

This study examines the value relevance of corporate tax expenses in an international setting and determines whether partisanship plays a role in its informativeness. Our empirical results indicate the greater value relevance of corporate taxes during the administration of right-leaning governments. Moreover, our cross-sectional analysis suggests that corporate tax expense is value-relevant during the administration of right-leaning governments; however, corporate tax expense does not convey information regarding returns when left-leaning parties are in office. These findings highlight the importance of the political orientation of tax policymakers in determining value-related information on corporate tax expenses.     

Corporate tax avoidance and stock price crash risk: Firm-level analysis

Using a large sample of U.S. firms for the period 1995–2008, we provide strong and robust evidence that corporate tax avoidance is positively associated with firm-specific stock price crash risk. This finding is consistent with the following view: Tax avoidance facilitates managerial rent extraction and bad news hoarding activities for extended periods by providing tools, masks, and justifications for these opportunistic behaviors. The hoarding and accumulation of bad news for extended periods lead to stock price crashes when the accumulated hidden bad news crosses a tipping point, and thus comes out all at once. Moreover, we show that the positive relation between tax avoidance and crash risk is attenuated when firms have strong external monitoring mechanisms such as high institutional ownership, high analyst coverage, and greater takeover threat from corporate control markets.     

Corporate tax avoidance: data truncation and loss firms

Loss firms are an economically significant and growing segment of the population of publicly traded corporations. Relatively little is known about the tax positions of loss firms because the firms are typically dropped from tax avoidance studies. We develop a new measure of corporate cash tax avoidance that is meaningful for all observations and reflects the extent to which a firm is tax-favored. We examine the extent to which inferences about corporate tax avoidance over the past twenty-seven years change when we examine the full population of firms, as opposed to a profitable and/or taxable subsample. In contrast to prior research findings, our results suggest that on average firms are tax-disfavored, by which we mean cash taxes paid exceed the product of the firm’s pre-tax book income and the statutory tax rate. In addition, many industries that appear to be tax-favored in profitable subsamples are tax-disfavored when the entire population is examined. We also find that the extent to which firms are tax-disfavored is increasing over time, and that domestic firms are more tax-disfavored than multinationals.     

Does corporate tax avoidance promote managerial empire building?

We examine the association between corporate tax avoidance and empire building using 35,060 firm-year observations from the United States (US) for the period 1991–2015. We build a composite empire building measure by conducting a factor analysis on four popular empire building proxies used in the literature. We find a positive association between this composite measure and the four proxies used to represent the tax avoidance of firms in our sample. As our results suggest, agency problems are inflicted upon firms employing tax avoidance strategies which, in turn, facilitate managerial rent extraction through aggressiveness in growth and the accumulation of assets. Furthermore, the relationship of corporate tax avoidance to managerial empire building is found to be more pronounced in firms with weak governance, poor monitoring mechanisms, greater Chief Executive Officer (CEO) power and weak corporate social responsibility (CSR) performance. We also find that empire building-motivated tax avoidance leads to lower firm valuation. Our results remain insensitive even when employing several robustness tests.     

The role of accountancy firms in tax avoidance: Some evidence and issues

As entrepreneurial businesses, accountancy firms have supplemented their traditional trade of selling accounting and auditing services by diversifying into a variety of other products and services. They have developed organisational structures and strategies to sell tax avoidance schemes to corporations and wealthy individuals. The sale of such services shifts tax burdens to less mobile capital and less well-off citizens. It also erodes the tax base and brings the firms into direct conflict with the state. This paper provides some evidence of the strategies and tactics used by accountancy firms to sell schemes that enable their clients to avoid corporate, sales and payroll taxes. Such strategies stimulate reflections upon the possible trajectories in the development of accountancy firms and social consequences of their trade.     

Credit refinancing and corporate tax avoidance

This study examines the disciplining effects of credit markets on firms’ corporate tax avoidance strategies. We show that, during adverse credit market conditions, firms with refinancing needs prefer to limit the after-tax cash flow benefits of tax avoidance to regain access to traditionally risk-averse credit markets. Our results show that firms increase their cash effective tax rate by two percentage points when facing refinancing constraints, and this effect is more pronounced for firms with lower asset redeployability and higher default probability. However, corporate governance mechanisms mitigate the relationship between tax avoidance and credit refinancing. Moreover, we show that firms decrease their tax avoidance strategies while leaving their leverage and debt shield unchanged. Overall, our findings are consistent with the observation that credit markets put pressure on tax-avoiding firms and contribute to the policy debate on disciplining tax avoiders.     

Chief financial officer co-option and tax avoidance in European listed firms

This paper investigates the impact of chief financial officer (CFO) co-option on corporate tax avoidance. Using hand-collected data from a sample of nonfinancial listed firms included in the S&P350-Europe from 2013 to 2019, we find that firms with co-opted CFOs exhibit higher levels of tax avoidance. We also find that the board membership of co-opted CFOs moderates their propensity to engage in tax avoidance. These results introduce novel evidence about the role of CFOs in influencing firms’ levels of tax avoidance. They also shed light on the monitoring activity of the board of directors in the presence of board members who are also key decision-makers in tax strategies.     

Determinants of tax haven utilization: evidence from Australian firms

This paper examines the major determinants of tax haven utilization based on a sample of 200 publicly listed Australian firms, over the 2006–2010 period (1,000 firm‐years). Our regression results show that variables relating to transfer pricing, intangible assets, an interaction term between transfer pricing and intangible assets, withholding taxes, performance‐based management remuneration and multinationality are positively associated with tax haven utilization. We also find that corporate governance structures are negatively associated with tax haven utilization. The magnitude and significance of the regression coefficients indicate that transfer pricing, withholding taxes, intangible assets, an interaction term between transfer pricing and intangible assets, corporate governance and multinationality are the most important drivers of tax haven utilization.