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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

Book part
Publication date: 19 October 2020

Xin Zhao, Greg Filbeck and Ashutosh Deshmukh

Prior studies document increased share repurchase activity after the temporary tax holiday under the American Jobs Creation Act (AJCA) of 2004. Our study examines the moderating…

Abstract

Prior studies document increased share repurchase activity after the temporary tax holiday under the American Jobs Creation Act (AJCA) of 2004. Our study examines the moderating effect of financial statement readability on share repurchases in response to a temporary reduction in repatriation tax. Building on prior literature, we argue that firms with excess cash overseas, despite the lack of investment opportunities, produce less readable financial statements to hide bad news. We find that firms with less readable financial statements initiated higher levels of share repurchases after the AJCA. Our results contribute to the existing literature showing (1) firms hold excess cash overseas mainly for tax reasons rather than for nontax reasons such as precautionary motives or empire-building concerns and (2) firms return excess funds to investors rather than squander the funds once the tax cost of repatriation is reduced. Firms that suffer from the overinvestment problem using hard-to-read financial statements to hide the bad news of a lack of investment opportunities are more likely to benefit from the tax cut. Our study provides timely evidence of potential firm response to the 2017 Tax Cut and Jobs Act, which permanently removes the repatriation tax.

Book part
Publication date: 22 October 2019

B. Anthony Billings, Chansog (Francis) Kim and Cheol Lee

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”…

Abstract

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.

Article
Publication date: 2 September 2013

Andrew M. Brajcich, Daniel L. Friesner and Matthew Q. McPherson

In 2004, as the economy lay in stagnation, Congress searched for ways to stimulate job growth. Many members of Congress believed that high US taxes on repatriated earnings…

Abstract

Purpose

In 2004, as the economy lay in stagnation, Congress searched for ways to stimulate job growth. Many members of Congress believed that high US taxes on repatriated earnings discouraged US-based multinational enterprises (MNEs) from bringing cash (in the form of dividends) home and investing those monies in the USA. As a result, Congress passed, and President Bush signed into law, the 2004 American Jobs Creation Act (AJCA), which reduced tax rates to a maximum 5.25 percent on cash repatriations to the USA over the course of a single tax year, i.e. a “tax holiday”. The purpose of this paper is to explore key determinants of repatriated earnings by US multinational enterprises.

Design/methodology/approach

This paper uses data collected from IRS documents between 2004 and 2008 to explore the drivers of MNE repatriations, including the AJCA tax holiday, from various countries to the USA. The paper applies a Lintner equation within a gravity model framework to estimate international liquidity flows.

Findings

The results indicate that repatriations to the USA are more likely to originate in Latin America and other countries in the Western Hemisphere. Significant evidence is also found of agglomeration effects; countries with higher numbers of MNE subsidiaries were significantly more or less likely (depending on the year in question) to repatriate earnings to the USA.

Originality/value

While several studies in the literature have examined the effects of the AJCA on individual firm earnings, very few studies have examined the aggregate effects of MNE repatriations in the context of the AJCA. More specifically, past studies have identified how much money flows back to the USA, but have not examined the set of countries from which most of the money flows.

Details

Multinational Business Review, vol. 21 no. 3
Type: Research Article
ISSN: 1525-383X

Keywords

Book part
Publication date: 9 December 2020

Zhan Furner, Michaele L. Morrow and Robert C. Ricketts

In this chapter we analyze how the designation of foreign earnings as “permanently reinvested” outside the US (PRE) is related to subsequent firm growth and market returns. Prior…

Abstract

In this chapter we analyze how the designation of foreign earnings as “permanently reinvested” outside the US (PRE) is related to subsequent firm growth and market returns. Prior research suggests that firms that hold excess cash in foreign markets to avoid the US corporate income tax experience lower growth, since such “trapped” cash is inefficiently invested. However, foreign earnings can be inefficiently invested in forms other than cash. We hypothesize and find that as the ratio of PRE to total assets increases, firms' growth rates decline. Our results suggest that trapped earnings, and not just trapped cash, are associated with lower growth. Because PRE have also been associated with earnings management in the literature, we further analyze the association between the use of PRE to meet or beat earnings targets and subsequent growth, observing a significant and persistent negative association. Finally, we note that the market discount for PRE, and especially for the use of PRE to manage earnings, appears to be relatively small. Our results provide support for FASB's stated plans to increase disclosure requirements surrounding the tax accrual.

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.

Book part
Publication date: 16 June 2023

K.C. Lin, Jared A. Moore and David R. Tree

We examine the stock market reaction to the Tax Cuts and Jobs Act (TCJA) of 2017 during its enactment process, focusing on its international provisions. Consistent with extant…

Abstract

We examine the stock market reaction to the Tax Cuts and Jobs Act (TCJA) of 2017 during its enactment process, focusing on its international provisions. Consistent with extant evidence, we find lower returns for high-foreign-activity firms, indicating a negative market reaction to the international provisions overall. Considering specific international provisions, we find that the market reaction was more positive (negative) for firms likely most affected by the shift to a quasi-territorial system for taxing foreign earnings (the transition tax on existing unrepatriated earnings, the tax on global intangible low-taxed income, and/or the base erosion and antiabuse tax) than for other firms. Our findings imply that investors are able to disentangle the economic implications of complex and interactive tax law changes.

Article
Publication date: 27 March 2024

Arfah Habib Saragih

This paper examines the moderating effect of good corporate governance on the association between internal information quality and tax savings.

Abstract

Purpose

This paper examines the moderating effect of good corporate governance on the association between internal information quality and tax savings.

Design/methodology/approach

This study uses a quantitative approach. It employs an Australian sample of analysis composed of 1,295 firm-year observations from the period 2017 to 2021. Data relating to corporate governance are hand-collected from the annual reports.

Findings

Based on the result of the analysis, this study demonstrates that the interaction between corporate governance and quality of internal information is positively associated with tax savings. Superior corporate governance is critical in activating the effect of internal information quality on tax savings. This finding is robust to a battery of robustness checks and additional tests.

Research limitations/implications

This examination utilizes only publicly traded companies from one developed country.

Practical implications

For the company management, an effective governance structure must be at the top because it will determine the development of all other areas. This study emphasizes the need to continuously improve the effectiveness of corporate governance practices. For long-term investors, an important indicator that can be considered in assessing the “safety” of a company’s tax strategy is its corporate governance aspects. For regulators, this study is expected to assist regulators in creating a more adequate corporate governance implementation and disclosure package to be implemented by corporations in the future.

Originality/value

This study provides new evidence on a crucial construct that can strengthen the relationship between internal information quality and tax savings.

Details

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

Keywords

Article
Publication date: 1 December 2002

Jo Carby‐Hall

Discusses the long existing and confusing problems of establishing the relationship of who is, and who if not, a dependent worker. Reflects developments which have occurred in…

1089

Abstract

Discusses the long existing and confusing problems of establishing the relationship of who is, and who if not, a dependent worker. Reflects developments which have occurred in British law as it affects the employment field, plus an evaluation and analysis of some of the different types of employment relationships which have evolved by examining, where possible, the status of each of these relationships. Concludes that the typical worker nowadays finds himself in a vulnerable position both economically and psychologically owing to the insecurity which exists.

Details

Managerial Law, vol. 44 no. 6
Type: Research Article
ISSN: 0309-0558

Keywords

Article
Publication date: 1 January 1975

Knight's Industrial Law Reports goes into a new style and format as Managerial Law This issue of KILR is restyled Managerial Law and it now appears on a continuous updating basis…

Abstract

Knight's Industrial Law Reports goes into a new style and format as Managerial Law This issue of KILR is restyled Managerial Law and it now appears on a continuous updating basis rather than as a monthly routine affair.

Details

Managerial Law, vol. 18 no. 1
Type: Research Article
ISSN: 0309-0558

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