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Article
Publication date: 1 February 2003

Tao Zeng

This paper explores the value relevant information of future income taxes under The Canadian Institute of Chartered Accountants (CICA) handbook section 3465. CICA handbook section…

Abstract

This paper explores the value relevant information of future income taxes under The Canadian Institute of Chartered Accountants (CICA) handbook section 3465. CICA handbook section 3465 requires Canadian companies to use the asset and liability method to account for income taxes. Consistent with prior studies, this paper shows that future tax assets are positively associated with share prices, suggesting that they are valued as assets. Future tax liabilities are negatively associated with share prices, suggesting that they are valued as liabilities. Future tax value allowance, which is created for future tax assets, is negatively associated with share prices. This study also explores the value relevant information of future tax asset and liability categories. In addition, this paper explores what determines the valuation of future tax assets and liabilities. It is argued that future tax assets are more (less) valuable if (no) sufficient future income will be generated in the near future to utilize these tax assets; future tax liabilities will reduce share prices more (less), if there is a higher (lower) likelihood of reversal in the short run. The results support this argument. It is shown that (1) future tax assets are less valuable if the firm's value allowance is higher (i.e., the management does not expect the firm will generate sufficient taxable income in future years to utilize these tax assets), or the firm's leverage is higher (another proxy for no sufficient future taxable income), and (2) future tax liabilities reduce share prices less if the firm's investment in capital properties is increased.

Details

Review of Accounting and Finance, vol. 2 no. 2
Type: Research Article
ISSN: 1475-7702

Keywords

Article
Publication date: 1 May 1991

S.S. Gustafsson and M. Bruyn‐Hundt

Compares the way women are taxed in the Germany, Sweden and TheNetherlands by looking at both macro and micro data from the perspectiveof a wife′s contribution to family income…

Abstract

Compares the way women are taxed in the Germany, Sweden and The Netherlands by looking at both macro and micro data from the perspective of a wife′s contribution to family income. The programs used for analysis are included in an appendix. Taxing husbands and wives by adding joint incomes and dividing by two (as in Germany) penalises dual‐earner couples and favours one‐earner couples. Completely separate taxation (as in Sweden) is a major incentive for couples to be dual‐earner. In The Netherlands the government reform of the tax system (1990) has reduced negative tax effects on secondary earnings without introducing the positive effects seen in Sweden. Tax incentives are not the only determinant of women′s participation in the labour market.

Details

Journal of Economic Studies, vol. 18 no. 5/6
Type: Research Article
ISSN: 0144-3585

Keywords

Open Access
Article
Publication date: 3 July 2020

Lindon J. Robison and Peter J. Barry

This paper demonstrates that present value (PV) models can be viewed as multiperiod extensions of accrual income statements (AISs). Failure to include AIS details in PV models may…

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Abstract

Purpose

This paper demonstrates that present value (PV) models can be viewed as multiperiod extensions of accrual income statements (AISs). Failure to include AIS details in PV models may lead to inaccurate estimates of earnings and rates of return on assets and equity and inconsistent rankings of mutually exclusive investments. Finally, this paper points out that rankings based on assets and equity earnings and rates of return need not be consistent, requiring financial managers to consider carefully the questions they expect PV models to answer.

Design/methodology/approach

AISs are used to guide the construction of PV models. Numerical examples illustrate the results. Deductions from AIS definitions demonstrate the potential conflict between asset and equity earnings and rates of return.

Findings

PV models can be viewed as multiperiod extensions of AISs. Mutually exclusive rankings based on assets and equity earnings and rates of return need not be consistent.

Research limitations/implications

PV models are sometimes constructed without the details included in AISs. The result of this simplified approach to PV model construction is that earnings and rates of return may be miscalculated and rankings based as asset and equity earnings and rates of return are inconsistent. Tax adjustments for asset and equity earnings may be miscalculated in applied models.

Practical implications

This paper provides guidelines for properly constructing PV models consistent with AISs.

Social implications

PV models are especially important for small to medium size firms that characterize much of agricultural. Providing a model consistent with AIS construction principles should help financial managers view the linkage between building financial statements and investment analysis.

Originality/value

This is the first paper to develop the idea that the PV model can be viewed as a multiperiod extension of an AIS.

Details

Agricultural Finance Review, vol. 80 no. 5
Type: Research Article
ISSN: 0002-1466

Keywords

Article
Publication date: 7 January 2019

Mohammed Amidu, William Coffie and Philomina Acquah

This paper aims to investigate how transfer pricing (TP) and earnings management affect tax avoidance of firms in Ghana.

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Abstract

Purpose

This paper aims to investigate how transfer pricing (TP) and earnings management affect tax avoidance of firms in Ghana.

Design/methodology/approach

The authors use a panel data set from 2008 to 2015 to further shed light on transfer pricing-tax avoidance nexus by examining the complex interaction of three key variables: transfer pricing, earnings management and tax avoidance.

Findings

The results show that almost all the sample firms have engaged in some form of transfer pricing strategies and the manipulation of earnings to avoid tax during 2008-2015. There is evidence to suggest that non-financial multinational corporations manipulate more earnings than the financial firms while financial firms also use more TP than non-financial firms. The overall results suggest that the sensitivity of tax avoidance to transfer pricing decreases as firms increase their earnings management. By extension, these results have important policy implication for policymakers in assessing the effectiveness of tax laws relating to transfer pricing.

Originality/value

The authors investigate how transfer pricing and earnings management affect the avoidance of firms operating in Ghana.

Details

Journal of Financial Crime, vol. 26 no. 1
Type: Research Article
ISSN: 1359-0790

Keywords

Book part
Publication date: 9 December 2020

Zhan Furner, Keith Walker and Jon Durrant

Krull (2004) finds that US multinational corporations (MNCs) increase amounts designated as permanently reinvested earnings (PRE) to maximize reported after-tax earnings and meet…

Abstract

Krull (2004) finds that US multinational corporations (MNCs) increase amounts designated as permanently reinvested earnings (PRE) to maximize reported after-tax earnings and meet earnings targets. We extend this research by examining the relationship between executive equity compensation and the opportunistic use of PRE by US MNCs, and the market reaction to earnings management using PRE designations. Firms use equity compensation to incentivize executives to strive for maximum shareholder wealth. One unintended consequence is that executives may engage in earnings management activities to increase their equity compensation. In this study, we examine whether the equity incentives of management are associated with an increased use of PRE. We predict and find strong evidence that the changes in PRE are positively associated with the portion of top managers' compensation that is tied to stock performance. In addition, we find this relationship to be strongest for firms that meet or beat forecasts, but only with the use of PRE to inflate income, suggesting that equity compensation incentivizes managers to opportunistically use PRE, especially to meet analyst forecasts.

Further, we provide evidence that investors react negatively to beating analysts' forecasts with the use of PRE, suggesting that investors find this behavior opportunistic and not fully convincing. This chapter makes an important contribution to what we know about the joint effects of tax policy, generally accepted accounting principles, and incentive compensation on the earnings reporting process.

Article
Publication date: 1 June 2023

Udisifan Michael Tanko

Some researchers regard discretionary accrual (DA) as one of the factors that drive corporate managers to conduct tax planning (Scott, 2009; Basri and Buchari, 2017). Based on…

Abstract

Purpose

Some researchers regard discretionary accrual (DA) as one of the factors that drive corporate managers to conduct tax planning (Scott, 2009; Basri and Buchari, 2017). Based on agency theory and positive accounting theory, corporate managers can transform accounting information and manipulate firm earnings to reduce tax liability. There is a lot of research concerning earnings management and tax planning in the developed economy. These studies include Wang and Chen (2012) and Pettersson and Wu (2015). In the emerging economies, it includes Jamei and Khedri (2016), Kurniasih and Sulardi Suranta (2017), Prastiwi (2017), Almashaqbeh et al. (2018), Bayunanda et al. (2018), Rani et al. (2018) and Kałdoński and Jewartowski (2019). It is important to note that none of the research mentioned above has evaluated the impact of real earnings management (REM) on tax planning in Nigeria. While in the developed economy only Kałdoński and Jewartowski (2019) used REM as an explanatory variable, while the majority of studies used DA. Consequently, no study has used REM to moderate the relationship between financial attributes and tax planning. Despite the widespread notion, as well as positive accounting theory, tax planning theory that financial attributes (profitability, leverage, liquidity and firm growth), REM and DA motivate tax planning, previous investigations have produced mixed results (Dwenger and Steiner, 2009; Wang and Chen, 2012; Chen and Zolotoy, 2014; Aghouei and Moradi, 2015; Pettersson and Wu, 2015; Ribeiro, 2015; Chen et al., 2016; Jamei and Khedri, 2016; Ogbeide, 2017; Yuniawati et al., 2017; Chen and Lin, 2017; Firmansyah and Febriyanto, 2018; Prastiwi, 2018; Rani et al., 2018; Kibiya and Aminu, 2019; Kałdoński and Jewartowski, 2019 and Siyanbonla, 2021). This study aims to use REM as a moderator to examine the relationship between financial attributes and tax planning whether it will strengthen or weaken the relationship.

Design/methodology/approach

The study examines the impact of financial attributes on the corporate tax planning of listed manufacturing firms in Nigeria. It also tests for the moderating effect of REM on the relationship between financial attributes and tax planning. Data for the study was sourced from the annual reports of sampled manufacturing firms. The study used the panel data methodology for analysis. The study used fixed effect estimation to interpret the parsimonious model and random effect was used to interpret the moderated model. The study documented that financial leverage has a positive significant influence on the tax planning of the sampled manufacturing firms. While firm growth has a negative significant impact on the tax planning of listed manufacturing firms in Nigeria. REM has a positive significant impact on tax planning. Also, REM moderate significantly the relationship between financial attributes on one hand and tax planning on the other. The study recommends that firms should go for more debt to take advantage of the tax shield of interest on the debt. Also, firm management should use non-current debt to finance non-current assets and use current debt to finance current assets to avoid the risk of taking over or liquidation. The study also recommends that firm management should engage in intercompany and intracompany transactions by selling their goods to affiliates in countries with low prices and low tax rates. A firm should also overproduce goods to have high production costs and high closing inventory since real earning management significantly reduces tax liabilities by deferring income into a later year.

Findings

The study documented that financial leverage has a positive and significant influence on the tax planning of the sampled manufacturing firms. While firm growth has a negative but significant impact on the tax planning of listed manufacturing firms in Nigeria. REM has a positive and significant impact on tax planning. Also, REM moderate significantly the relationship between financial attributes on one hand and tax planning on the other.

Originality/value

There is a lot of research concerning earnings management and tax planning in the developed economy. These studies include Wang and Chen (2012) and Pettersson and Wu (2015). In the emerging economies, it includes Jamei and Khedri (2016), Kurniasih and Sulardi Suranta (2017), Prastiwi (2017), Almashaqbeh et al. (2018), Bayunanda et al. (2018), Rani et al. (2018) and Kałdoński and Jewartowski (2019). It is important to note that none of the research mentioned above has evaluated the impact of REM on tax planning in Nigeria. While in the developed economy only Kałdoński and Jewartowski (2019) used REM as an explanatory variable, while the majority of studies used DA. Consequently, no study has used REM to moderate the relationship between financial attributes and tax planning.

Details

Journal of Financial Reporting and Accounting, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1985-2517

Keywords

Article
Publication date: 11 September 2017

Dennis Sundvik

The purpose of this paper is to examine three different responses to the Finnish 2005 tax reform that, among other things, reduced the corporate tax rate and hiked dividend…

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Abstract

Purpose

The purpose of this paper is to examine three different responses to the Finnish 2005 tax reform that, among other things, reduced the corporate tax rate and hiked dividend taxation. Focus lies on the factors influencing the decision to change the fiscal year-end and whether earnings management is more prevalent when the decision is not taken.

Design/methodology/approach

This study uses the financial statement data of Finnish private firms and studies 350 fiscal year-end changing firms and 700 non-changing firms with logistic and linear regression analysis. Discretionary accruals are the proxy for earnings management.

Findings

The results suggest that firms seize the window of opportunity and extend fiscal years depending on the magnitude of the expected tax savings. Firms that do not change their fiscal year-end engage in more tax-induced earnings management. In terms of economic consequences, the earnings management approach is less economically significant.

Research limitations/implications

This study only examines a limited number of firms that change their fiscal year-end, hence, care has been exercised in generalising the findings.

Practical implications

The findings may be considered when structuring future tax reforms, particularly when considering transition rules relating to changes in fiscal year-ends. The study may also have implications beyond tax reforms since the evidence of opportunistic changes in the fiscal year-end can be informative for tax authorities, independent auditors and creditors.

Originality/value

This study contributes to the relatively scarce literature on private firm responses to tax policy changes by analysing both upward and downward earnings management, as well as changes in the fiscal year-end. This is in contrast to previous research that mainly focusses on listed firms and absolute earnings management or earnings management in one direction.

Details

Journal of Applied Accounting Research, vol. 18 no. 3
Type: Research Article
ISSN: 0967-5426

Keywords

Article
Publication date: 16 November 2019

Qi Flora Dong, Yiting Cao, Xin Zhao and Ashutosh Deshmukh

The effect of tax policy on the repatriation of foreign earnings is a topic of ongoing discussion among policymakers, academics, and the popular press. It has become more salient…

Abstract

The effect of tax policy on the repatriation of foreign earnings is a topic of ongoing discussion among policymakers, academics, and the popular press. It has become more salient due to the 2017 Tax Cuts and Jobs Act (TCJA), which permanently removed repatriation tax. This paper synthesizes the academic literature examining US multinational firms’ responses to the repatriation tax holiday initiated by the 2004 American Jobs Creation Act (AJCA), which temporarily reduced the tax on the repatriation of foreign earnings. By synthesizing firm responses to the temporary tax reduction, we identify similarities and differences in: (1) theories about why and when repatriation tax affects firms’ repatriation decisions; (2) empirical evidence of whether repatriation tax affects firms’ repatriation decisions; and (3) empirical evidence of whether repatriation tax affects firms’ investment decisions. The analyses provide insights into the effect of the permanent removal of repatriation tax under the TCJA and explore avenues for future research. This synthesis of the AJCA literature informs tax research and practice as well as policymaking.

Details

Journal of Accounting Literature, vol. 43 no. 1
Type: Research Article
ISSN: 0737-4607

Keywords

Article
Publication date: 22 February 2008

Kingsley O. Olibe and Zabihollah Rezaee

The purpose of this paper is to examine the cross‐sectional relation between the value of cross‐border intrafirm transfers (CITs) and three dependent variables: return on…

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Abstract

Purpose

The purpose of this paper is to examine the cross‐sectional relation between the value of cross‐border intrafirm transfers (CITs) and three dependent variables: return on investment (ROI), the US effective tax rate (ETRUS), and the global effective tax rate (ETRGL) to assess the existence or nonexistence of cross‐jurisdictional income shifting.

Design/methodology/approach

Regression analysis is used to test the relationship between CIT and accounting performance and effective tax rates.

Findings

The results indicate that ROI and ETRUS increase whereas ETRGL decreases with the extent of CITs after we control for variables that impact earnings and taxes (e.g. size, industry classification, internationalization, tax shelter, and growth). This suggests that firms earn income, on average, in jurisdictions with tax rates greater than the USA, such that diverting income from overseas to the USA is a tax‐saving action. The tax results are consistent with Jacob and Mills and Newberry's findings that firms shifted income into the USA. The results also reveal that companies that engage in CITs are those that are large, relatively more profitable, and pay more US taxes.

Research limitations/implications

This study does not differentiate between transfer pricing schemes for tax minimization reasons from those done for earnings management purposes, which should be addressed by future research.

Practical implications

Results have public policy implications as an understanding of how CITs affect accounting performance and taxes is important for the craft of tax policy and transfer price regulation.

Originality/value

This study furthers our understanding of the impact of CITs on earnings and taxes, an important component of accounting research which has not been properly addressed by prior studies.

Details

Review of Accounting and Finance, vol. 7 no. 1
Type: Research Article
ISSN: 1475-7702

Keywords

Article
Publication date: 1 January 2004

Hervé Stolowy and Gaétan Breton

Accounts manipulation has been the subject of research, discussion and even controversy in several countries including the USA, Canada, the U.K., Australia, Finland and France…

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Abstract

Accounts manipulation has been the subject of research, discussion and even controversy in several countries including the USA, Canada, the U.K., Australia, Finland and France. The objective of this paper is to provide a comprehensive review of the literature and propose a conceptual framework for accounts manipulation. This framework is based on the possibility of wealth transfer between the different stake‐holders, and in practice, the target of the manipulation appears generally to be the earnings per share and the debt/equity ratio. The paper also describes the different actors involved and their potential gains and losses. We review the literature on the various techniques of accounts manipulation: earnings management, income smoothing, big bath accounting, creative accounting, and window‐dressing. The various definitions of all these, the main motivations behind their application and the research methodologies used are all examined. This study reveals that all the above techniques have common elements, but there are also important differences between them.

Details

Review of Accounting and Finance, vol. 3 no. 1
Type: Research Article
ISSN: 1475-7702

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