Advances in Taxation: Volume 26

In view of the recent enhanced concerns of the SEC and PCAOB that Accounting Principles Board Opinion No. 23 (APB 23)–asserting firms do not comply with the “sufficient evidence” criteria of APB 23, we examine whether APB 23–asserting firms that declared their foreign earnings as permanently reinvested abroad are less likely to repatriate those foreign earnings under the American Jobs Creation Act (AJCA) of 2004, compared with similar non-asserting firms. The asserting firms are required to disclose sufficient evidence that validates an ability to meet their domestic cash needs with only earnings generated in the United States and their plans to indefinitely reinvest foreign earnings outside the United States. Estimates show that asserting firms are more likely to repatriate their foreign earnings than non-asserting firms. In addition, we find that the probability of making an election to repatriate permanently invested foreign earnings under the AJCA of 2004 is higher for firms with nonbinding foreign tax credit (FTC) limitations that have made an APB 23 declaration to permanently invest foreign earnings abroad. These findings suggest that asserting firms’ declarations to indefinitely reinvest foreign earnings abroad are not well grounded, thereby indirectly validating the SEC’s and PCAOB’s increased scrutiny for supporting evidence for APB 23 assertion. The estimates also show that the likelihood of making an election to repatriate foreign earnings under the AJCA of 2004 increases with asserting firms’ liquidity constraints and financial distress: the financial characteristics listed as part of APB 23 criteria of sufficient evidence and highlighted by the SEC and PCAOB comment letters, indicating that asserting firms raid permanently reinvested foreign earnings to satisfy their financial needs and constraints.

Schedule UTP requires that firms disclose to the IRS the uncertain tax positions that comprise the federal portion of the tax reserve disclosed on their financial statements. To investigate whether Schedule UTP has been an effective audit tool to the IRS, we use financial statement disclosures of reductions in reserves due to a lapse in the statute of limitations (Lapse). We find that the probability of a Lapse is 3.4 percent lower after Schedule UTP. However, this result is driven by domestic firms; we do not find evidence that Schedule UTP has been effective in the audit of multinational firms.

The employment impacts of US Environmental Protection Agency (EPA) brownfield grant sites are examined. Such sites are eligible for tax incentives which can provide additional funds for cleanup. Using establishment data, employment within close proximity to such sites is found to increase during cleanup periods following grants. The employment increase was from non-brownfield establishments, i.e., a “spillover” effect. These employment effects were concentrated in certain industries. This chapter adds to the literature on brownfield redevelopment which has focused on property values. Beyond being the first empirical chapter to systematically investigate such employment effects, the chapter’s results are important in light of the current US administration’s intent to cut EPA funding.

The Compliance Assurance Process (CAP) is a federally funded IRS corporate audit program. The program’s goal is to determine the best tax treatment for complex transactions before a corporation files its tax return. The US Department of the Treasury has voiced concerns regarding resource constraints and whether the program enhances public (nonprofessional investor) and investor confidence. We conduct a behavioral experiment using 176 Master of Business Administration and Master of Accounting students as proxies for nonprofessional investors. In the experiment, we examine the effects of CAP participation and corporate tax risk profile on judgments about financial statement credibility. We use a 2 × 2 experimental design with corporate tax risk profile manipulated as high risk or low risk and participation in CAP manipulated as participatory or non-participatory. This research investigates whether CAP program participation and/or tax risk level influence nonprofessional investors’ perceptions of the certainty and accuracy of the provision for income taxes. The results suggest both CAP program participation and tax risk influence nonprofessional investors’ perceptions of the certainty of the income tax provision; and tax risk also influences nonprofessional investors’ perception of the accuracy of the income tax provision.

The “slippery slope” framework assumes that trust and power are alternative approaches to attaining taxpayers’ compliance and for reducing tax evasion. This study aimed to investigate whether the impacts of power and trust dimensions previously found in developed countries also exist in developing countries, such as Indonesia. Data were collected through a researcher-administered questionnaire survey of 274 small business taxpayers and were then analyzed through stepwise linear regressions. The results show that trust significantly influences voluntary tax compliance, but neither trust nor power promotes enforced tax compliance. Ultimately, this study’s findings only partly support the assumptions of the “slippery slope” framework. This study also contributes to current global literature on the influence of trust and power in voluntary and enforced tax compliance in developing countries, especially in Asia.

Tax evasion in developing countries is widespread. However, little attention has been paid to tax evasion in developing countries. This chapter addresses two research questions: RQ1: What are the determinants of tax evasion of Bangladesh? and RQ2: How do the interests of state actors influence tax evasion? The study focused on a developing country with reference to Bangladesh. This is because Bangladesh exhibits one of the smallest tax to GDP ratios in the world. Using quantitative and qualitative interviews, this chapter sheds light on the impact of state actor(s) role on tax evasion over the period 1981–2014. The state actor(s) failed to institutionalize the norms due to political influence. Results provide evidence that lack of enforcement increases tax evasion. The chapter provides a theoretical framework to study determinants of tax evasion.

This chapter aims to evaluate the effectiveness of the turnover tax system in South Africa. The objective of the study was to identify companies from the SARS-NT Panel that may qualify for turnover tax in order to calculate and compare turnover tax liabilities to alternative forms of taxation within the South African context. The results showed that turnover tax is not necessarily beneficial for most small businesses and the possible reasons are also highlighted.