Advances in Taxation: Volume 25

This study examines short selling as one external determinant of corporate tax avoidance. Prior research suggests that short sellers have information advantages over retail investors, and high short-interest levels are a bearish signal of targeted stock prices. As a result, when short-interest levels are high, managers have been shown to take actions to minimize the negative effect of high short interest on firms’ stock prices. Tax-avoidance activities may convey a signal of bad news (i.e., high stock price crash risk). We predict that, when short-interest levels are high, managers possess incentives to reduce firm tax avoidance in order to reduce the associated stock price crash risk. Consistent with this prediction, we find that short interest is negatively associated with subsequent tax-avoidance levels. This effect is incremental to other factors identified by prior research. We conclude that short selling significantly constrains corporate tax avoidance.

This study examines the impact of FASB Interpretation No. 48 (FIN48), Accounting for Uncertainty in Income Taxes, on earnings management (EM) activity, by focusing on changes in the deferred tax asset valuation allowance (DTVA). FIN48 was adopted, in part, over concerns that firms were using the reserve for uncertain tax positions (cushion) to manage earnings. However, there are reasons to believe that the adoption of FIN48 may have impacted the extent to which firms utilize DTVA changes as a strategic accounting choice. As the provision for income taxes is one of the final accounts closed prior to an earnings announcement, income tax accounting is generally regarded as a final opportunity to strategically meet earnings goals. To the extent that FIN48 reduced cushion-based EM, firms may have increasingly used DTVA changes as a substitute. Alternatively, the attention that FIN48 brought to firms’ income tax footnotes may have curbed the strategic use of income tax accounting, in general. This study employs a sample of publicly traded US firms over the period of 2003–2010. A regression model and an analysis of the frequency of DTVA-based EM reveal no evidence of a systematic change in behavior attributable to FIN48. However, further analysis reveals that firms identified as managing earnings to meet analyst forecasts increasingly used discretionary DTVA changes relative to changes in tax cushion in the post-FIN48 period. The results have implications for existing research on income tax-based EM.

The chapter examines whether the lowering of dividend taxes as part of the US Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) resulted in an increase in dividend payouts at the expense of research and development (R&D) spending. Using 1,206 US firm-years data, we find that R&D investments responded negatively to higher levels of dividend payout in the post-JGTRRA of 2003 tax regime compared with the pre-regime. We also find that R&D intensity and financial constraint moderate this negative relation. That is, this relation only holds for firms in low R&D-intensity industries and firms facing high levels of financial constraint. From a tax policy perspective, even though the tax cut on dividend receipts has the benefit of lowering the cost of equity capital, the benefit appears to have come at the expense of R&D investment.

Reasonable compensation is a highly scrutinized area of taxation by the Internal Revenue Service because of the tax impact on both corporations and employees. The guidance provided via statutory and administrative authority does not fully address this issue. Specifically, there is a lack of clarity and consistency in this arena of tax. Our study examines reasonable compensation in closely held corporations and the impact of gender, political affiliation, and family makeup on decisions made in the US Tax Court. The time frame of judicial decisions covers 1983 through 2014. We use regression models and chi-square tests to analyze the effect of gender, political affiliation, and family composition on US Tax Court decisions in reasonable compensation cases. We find that the judge’s gender and tenure/experience are significant. Our results also suggest a relationship between the duration of the case and the judge’s decision. Our significant variables include judge’s gender, number of tax years covered by the case, taxpayer’s gender, and tenure/experience of the judge.

This study uses a survey instrument to ask Americans living abroad about the impact of tax rules explicitly designed for these individuals. We analyze how individuals are affected by foreign tax reporting laws and how they perceive and evaluate the rules’ consequences. A common belief is that many of the foreign reporting provisions were enacted in order to eliminate or reduce tax evasion. The current political climate has increased lawmakers’ focus on tax issues related to foreign income and accounts, which lead to several new rules and regulations, such as the provisions in the Foreign Account Tax Compliance Act (FATCA), as well as an increased emphasis on the enforcement of existing laws.

Our results indicate that Americans living abroad experience FATCA negatively impacting their lives. Additionally, the respondents’ perceptions are consistent with the sentiment that their government is not concerned about the impact of the FATCA on its citizens living abroad.

This chapter investigates the effects of the corporate sector on the effectiveness of selected tax compliance instruments in the context of large corporate taxpayers belonging to the finance, manufacturing, and service sectors. Applying multilevel logit models based on real tax office and survey data from Bangladesh, it is found that the filing compliance of large corporate taxpayers is influenced by penalty, tax audit, and taxpayer services, while reporting compliance is influenced by tax audit, criminal prosecution, and tax simplification. In the case of payment compliance, two coercive instruments – penalty and tax audit – have been found to be statistically significant. However, when sector characteristics are considered, the extent of the influence of these instruments, and, in some cases, their statistical significance changes. This suggests that the effectiveness of tax compliance instruments, among other things, largely depends on the sector affiliation of corporate taxpayers. Overall, this study establishes that corporate sector plays an important role in the effectiveness of tax compliance instruments, with the caveat that findings might be different if working definitions of the study variables were measured differently.

This study examines the determinants of enforced tax compliance behavior of Malaysian citizens where trust in tax authorities is assumed to be a mediator. Quota sampling method was used to select a sample of 340 participants to participate in a survey. A two-step structural equation modeling (SEM) process was adopted to test a framework comprising 13 hypotheses. Model fit was initially measured using confirmatory factor analysis (CFA) while model specification was applied in the second stage to test the structural relationship. The mediating effects of trust in tax authorities were tested via Baron and Kenny (1986) approach, bootstrapping, and AMOS AxB estimand. The findings confirmed that trust in government, trust in tax administrator, power of Inland Revenue Board of Malaysia, and awareness influence enforced compliance. However, tax morale and tax amoral behaviors do not influence enforced compliance. The findings suggest that citizens would fulfill their tax responsibilities if they believe that tax authorities are effective in tax administration. Trust in government fosters trust in the tax authorities. This study contributes to existing literature by confirming the factors that affect enforced tax compliance.

A report of the International Labour Organization on undeclared work in Greece refers to failures of formal institutions which contribute to the asymmetry between state and civic morality. The particular asymmetry is explored through the context of tax morale, which is one of the major determinants of the shadow economy. Although several papers have been published on the Greek shadow economy, tax morale in Greece has not been adequately explored. This research aims to investigate the effect of the economic downturn on the factors determining the level of tax morale through primary data from a European Union-funded research project on the Greek shadow economy. The findings provide policy orientations toward transferring activities from the shadow to the official economy, a goal which is part of Europe 2020 strategy.