08 Taxation
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ItemThe impact of tax uncertainty and joint provision of audit services on the aggressiveness of tax advice( 2018-09-01)We examine the impact of joint provision of audit and tax services on the aggressiveness of tax advice provided by experienced tax professionals. We find evidence that joint provision of audit and tax services are negatively associated with the aggressiveness of tax advice. Analysis suggests that tax professionals weigh the influence of tax uncertainty more in the presence of joint service provision, when determining the aggressiveness of tax advice. Additional evidence suggests that tax professionals are cognizant that providing aggressive tax advice in the presence of tax uncertainty may have negative impacts on the financial statement audit. Though tax professionals do not anticipate a difference in scrutiny or objectivity when the auditor is in their firm relative to when the auditor is from a different firm, they do demonstrate greater concern for the impact of aggressive tax advice on the audit when the auditor is in their firm. Collectively, our evidence provides evidence that joint provision of audit and non-audit services can have a significant impact on the provision of non-audit service providers in the same firm.
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ItemRollover Risk and Tax Avoidance( 2018-09-01)This study examines the association between rollover risk and tax avoidance. Rollover risk, also referred to as refinancing risk, is the risk that firms are not able to obtain new debt to refinance their existing debt. On the one hand, firms may avoid taxes to generate cash internally. On the other hand, tax avoidance can increase the cost of debt. Our findings suggest that, in general, a positive relationship exists between rollover risk and tax avoidance. In cross-sectional analyses, we find that the positive association between rollover risk and tax avoidance is more (less) pronounced for firms with financial constraints (alternative financing sources). Additional analyses reveal that this positive association is attenuated when the market interest rates are higher. Furthermore, financially constrained firms operating in a higher market interest rates environment exhibit a further reduction in the positive association between rollover risk and tax avoidance. Finally, we find that firms engage in tax avoidance in anticipation of debt maturing in the following year. The findings are informative to shareholders and policy makers who have an interest in shaping firms’ tax avoidance activities.
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ItemANALYZING INTERNET SALES AND USE TAX INFLUENCES ON AMAZON’S STRATEGIC SUPPLY CHAIN DECISIONS( 2018-09-01)The strategic logistics decisions of a company are vulnerable to current legislation aimed at widespread collection of state sales taxes for e-commerce orders in their pursuit to provide excellent performance and create a competitive advantage for the company. Jeff Bezos, the founder of Amazon, based Amazon in Seattle partly to maximize the tax advantage (Elkind and Burke, 2013) with the focus on physical location as key to the success of an internet-based business. We examine two hypotheses to address the question that etailers (like Amazon) consider, when opening up distribution centers: whether they should operate under the assumption that they will bear the burden of sales and use tax compliance for internet sales and thus not account for this in supply chain decisions or whether they should continue to strategically modify their supply chains to minimize the tax burden where possible.
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ItemWho bears the costs of the corporate income tax? Evidence from state tax changes and accounting data( 2018-08-31)We examine the incidence of the corporate income tax. Tax incidence theory suggests that corporate income taxation affects the supply of capital, resulting in changes to output, demand for supplies and demand for labor (Harberger 1962). Prior studies suggest that shareholders ultimately bear incidence (Gravelle and Smetters 2006). Based on these studies, we first hypothesize that tax changes affect firms’ equity financing, consistent with taxes affecting the supply of capital. Next, we hypothesize that tax changes affect firms’ investment. Third, we hypothesize that consumers, suppliers, employees in addition to shareholders all bear the incidence of the corporate income tax. We also hypothesize that non-state governments bear incidence because firms will avoid more (less) non-state taxes in response to state tax rate increases (decreases). We use difference-in-differences regressions with state corporate income tax changes as plausibly exogenous shocks to test our hypotheses. We find that equity issuances and investment are both responsive to state tax rate increases, but not decreases. Similarly, we find that consumers, suppliers, employees and non-state governments bear incidence following state tax rate increases but not decreases. We also perform several cross-sectional tests and find results consistent with our hypotheses. In an additional test, we find that large tax decreases lead to higher wages, suggesting that labor captures some of the benefits of a tax decrease. Our study contributes to the literature on the incidence of the corporate income tax.
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ItemThe information content of the deferred tax valuation allowance: Evidence from VC backed IPO firms.( 2018-08-31)I examine the accounting choices of startup firms in the period immediately prior to their initial public offering (IPO) regarding one specific account - the deferred tax valuation allowance. This is one of the largest accruals for these firms, on average 73% of assets, and given its forward looking nature, should contain significant information for firm investors at the time of the Initial Public Offering (IPO). I first find that the distribution of the allowance is essentially binary, with 14% of the firms recording no allowance, and 76% of the firms recording a ‘full’ allowance completely offsetting any deferred tax assets. I further find that this choice is almost entirely predicted by whether the firm reports a history of losses in the pre-IPO period. For firms with a net operating loss carryforward (NOL) and pre-tax loss in the period immediately prior to IPO the likelihood of recording a full allowance is approximately 90%. For profitable firms without an NOL, it is less than 1%. This reliance on historical performance is consistent with auditors ignoring manager expectations of future profitability when making the decision to record the allowance, and increased SEC monitoring around the IPO reducing the ability of firms to manage earnings. Finally, I find that the valuation allowance sends a strong negative signal for future operating performance and firm survival, consistent with the choice to record a full allowance reflecting firm fundamentals. The results stand in contrast to literature which argues IPO firm financial disclosures lack sufficient relevance and reliability to provide useful information to investors.
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ItemLeisure Preference and Corporate Tax Planning( 2018-08-30)Using a novel cross-country measure of leisure preference to quantify managerial effort aversion, we examine its relation to corporate tax avoidance, and document a negative association between the two. The result is stronger for firms located in countries with a more complex tax system, and for firms with less access to tax consulting services — situations in which corporate tax planning can be especially onerous. Finally, tax planning appears to be one mechanism mediating the negative relation between leisure preference and firm value, implying that effort aversion is a source of agency costs that impedes value-enhancing tax planning activities.
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ItemThe Unintended Effect of Tax Avoidance Crackdown on Corporate Innovation( 2018-08-30)To constrain the use of intangible assets in tax-motivated income shifting and thus crackdown on corporate tax avoidance, many U.S. state governments adopted addback statutes. Addback statutes require firms to add back intangible-related expenses paid to related parties in other states to the taxable income reported in the state taxable income. The addback reduces the benefits that firms and managers can gain from creating intangible assets such as patents. In this study, we examine the potential unintended effect of addback statutes on corporate innovation. First, we find that the adoption of addback statutes significantly reduces a firm’s innovation, measured by the number of patents or patent citations. Second, the “disappeared patents” resulting from tax avoidance crackdown do not seem to be of lower quality than other patents. Third, after a state adopts an addback statute, a firm with material subsidiaries in that state assigns fewer patents to subsidiaries in Delaware, where income generated by intangible assets is free of state income tax. Finally, affected firms do not have lower innovation prior to the adoption of addback statues. Overall, these findings suggest that the adoption of addback statutes impedes corporate innovation. Our study has important implications for policy makers who are interested in understanding the consequences of policies that constrain tax-motivated income shifting using intangibles and prevent income base erosion.
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ItemIndirect tax aggressiveness and tax reforms: Evidence from a quasi-natural experiment( 2018-08-30)We study the incentives to engage in indirect tax aggressiveness and the implications of such actions for shareholder value. We take advantage of the recent indirect tax reforms in India to design our study as a two-stage analysis of the antecedents and consequences of tax aggressiveness. Our results suggest that the size of the product portfolio, geographical proximity of manufacturing facilities to the headquarters, and the extent of international operations are associated with the propensity to avoid indirect taxes. Further, ownership concentration, membership in business groups, and financial health of the company also affect indirect tax aggressiveness. Firms involved in tax aggressive behavior suffer shareholder value loss when their privileged position comes under risk due to tax reforms, as suggested by the stock price reaction surrounding the tax legislation. Firms endowed with sufficient liquid resources and better-connected firms appear to be able to mitigate the negative consequences suffered by their tax aggressive peers.
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ItemHow do firm's use cash tax savings? A cross-country analysis( 2018-08-30)Avoiding cash taxes can serve as a significant source of additional cash flows for firms, though how managers utilize these funds and the resulting consequences remain open empirical questions. We provide answers by examining the association between the amount of cash tax savings and two uses of cash – investment and dividend payout – for an international sample of firms. We find that firms are more likely to invest cash tax savings rather than distribute them in the form of dividends and that this results in inefficient overinvestment. We find that our results hold for an international sample of domestic-only sample, distinguishing our study from US-only studies, which focus on constraints and distortions of multi-national corporations in a worldwide tax system. We find nuanced results when partitioning on country-level governance. Our results suggest cash tax avoidance has real effects on firm decisions, namely investment and payout policies, and this effect varies based on the country in which the firm operates.
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ItemAn Empiricist’s Guide to Nonparametric Analysis in Accounting( 2018-08-28)Recent advancements in statistical packages and computing power have made various forms of nonparametric estimation accessible to empirical researchers. This study explores several of these nonparametric estimation techniques, focusing on kernel density estimates and locally weighted regression for tractability. We provide a discussion of these research design choices, including their statistical properties, limitations, and key inputs over which researchers have discretion. Then, we provide examples of these techniques, analyzing effective tax rates in the financial service industry using kernel density estimates and the relation between audit fees and size using nonparametric regression analysis. Additionally, we discuss how nonparametric techniques may be used in univariate estimates, to complement ordinary least squares regression, and in other areas in accounting.