nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2011‒04‒09
ten papers chosen by
Alexander Harin
Modern University for the Humanities

  1. On the determinants of local tax rates: new evidence from Spain By Francisco J. Delgado; Santiago Lago-Peñas; Matías Mayor
  2. Transfer Pricing – Business Incentives, International Taxation and Corporate Law By Wolfgang Schoen
  3. Special Taxation of the Mining Industry By John Freebairn; John Quiggin
  4. Timeliness of financial reporting in emerging capital markets:Evidence from Turkey By Turel, Asli
  5. Benchmarking Tax Administrations in Developing Countries: A Systemic Approach By Jaime Vázquez-Caro; Richard M. Bird
  6. WACC: Definition, misconceptions and errors By Fernandez, Pablo
  7. Preferences for redistribution, the size of government and the tax system By Fatica, Serena
  8. Tax Evasion, Welfare Fraud, and ”The Broken Windows” Effect: An Experiment in Belgium, France and the Netherlands By Mathieu Lefebvre; Pierre Pestieau; Arno Riedl; Marie Claire Villeval
  9. Optimal Capital Structure for Finite Cash Flows By Ignacio Vélez Pareja; Felipe Mejia-Pelaez; James W. Kolari
  10. Accruals, Cash-Flows and Tobin’s q : An Investment Perspective on Firm Accruals By Christian Calmès; Denis Cormier; Francois Racicot; Raymond Théoret

  1. By: Francisco J. Delgado (University of Oviedo); Santiago Lago-Peñas (REDE, IEB and University of Vigo); Matías Mayor (University of Oviedo)
    Abstract: This paper studies the determinants of local tax rates. For the two main local taxes in Spain - the property tax and the motor vehicle tax - we test the existence of tax mimicking, yardstick competition and political trends in a sample of 2,713 municipalities. Using different spatial models, the results support the hypothesis of tax mimicking, with coefficients over 0.40. We also show the relevance of political variables such as the ideology of the incumbents and political fragmentation. The fact that incumbents with weaker political support display stronger mimicking behaviour is interpreted as evidence in favour of yardstick competition. Finally, we find incumbents mimic neighbouring municipalities ruled by the same political party, confirming the political trends hypothesis.
    Keywords: Local taxation, tax mimicking, yardstick competition, political trends
    JEL: C31 H71 H77
    Date: 2011
  2. By: Wolfgang Schoen
    Abstract: Transfer pricing is relevant in three different contexts: From a managerial perspective, intra-firm transfer prices are employed to set incentives for sub-divisional managers to enhance efficient allocation of resources. From an international tax perspective, transfer pricing rules under the arm's length standard serve as a means to allocate profits to corporate entities within a multinational enterprise and to allocate taxing rights to the involved jurisdictions. From a corporate law perspective, transfer prices within a group are controlled in order to avoid asset diversion by related-party transactions ("tunneling"). This article shows the interaction between these three perspectives. It pleads for a deviation from the arm's length standard: source countries should tax profits derived by local group companies under managerial transfer pricing and additionally tax rents derived by foreign companies from intra-firm intangibles and intra-firm specific investment. Corporate law requirements hardly pre-empt this shift away from the arm's length standard. Finally, this concept is applied to some widely discussed court cases on transfer pricing.
    Keywords: Transfer Pricing, International Taxation, Related Party Transactions, Multinational Enterprises, Corporate Groups, Taxing Rights
    Date: 2011–01
  3. By: John Freebairn (University of Melbourne); John Quiggin (Department of Economics, University of Queensland)
    Abstract: The mining industry in Australia, and in most other countries, pay special taxes for the use of community owned resources in additional to taxes levied on businesses in general. General taxes include the corporate income tax, payroll and transaction taxes, and labour pay personal income taxes. In the states and territories the additional tax in most cases takes the form of a royalty levied as a tax on production, either as a specific tax per unit of production or as an ad valorem percentage of the value per unit mined. Details are in The Treasury (2008). In the case of offshore energy resources, the commonwealth imposes a special tax either as a royalty or as the petroleum resource rent tax (PRRT) (The Treasury, 2008).
    Date: 2010–12
  4. By: Turel, Asli
    Abstract: Timely financial reporting is an essential ingredient for a well-functioning capital market. This study has two objectives. The first one is to measure the extend of timeliness of financial reporting in a developing country, Turkey. The second one is to establish the impact of both company specific and audit related factors on timeliness of financial reporting in Turkey. This study reports on the results of an empirical investigation of the timeliness of financial reports by 211 non-financial companies listed on the Istanbul Stock Exchange. The descriptive analysis indicates that 59% of the companies that prepares separate financial statements and 66% of the companies that prepares consolidated financial statements release their financial statements less than the maximum time allowed after the financial year-end. 28% of the companies that prepares separate financial statements and 16% of the companies that prepares consolidated financial statements exceeded the regulatory deadline. The multivariate regression analysis indicates that both sign of income, audit opinion, auditor firm and industry affect timeliness. The findings indicate that the companies, which report net income, have standard audit opinion, and operate in manufacturing industry release their financial statements earlier while the companies are audited by the big four audit firms report their financial statements later.
    Keywords: Timeliness; financial reporting; accounting; Turkey
    JEL: M41 M4
    Date: 2010–11
  5. By: Jaime Vázquez-Caro; Richard M. Bird (Rotman School of Management, University of Toronto)
    Abstract: Benchmarking as a way of establishing standards for evaluating the performance of tax administrations has become increasingly popular in recent years. Two common approaches to benchmarking are ‘benchmarking by numbers’ – the quantitative approach and ‘benchmarking by (presumed) good institutional practice’ – the qualitative approach. Both these approaches consider each component or aspect of the tax administration separately. This paper suggests a contrasting approach to benchmarking, the purpose of which is less to allow others to assess the performance of a tax administration than it is to permit an administration to understand and improve its own performance. This systemic approach is more conceptually and operationally difficult because it requires considering how all aspects of the administrative system function as a whole in the context of the environment within which that system is embedded and operates. On the other hand, it is also more directly aimed at understanding and improving the key operational strategies that define good, better and best tax administrations.
    Keywords: tax administration, benchmarking, developing countries
    Date: 2011–03–24
  6. By: Fernandez, Pablo (IESE Business School)
    Abstract: The WACC is just the rate at which the Free Cash Flows must be discounted to obtain the same result as in the valuation using Equity Cash Flows discounted at the required return to equity (Ke) The WACC is neither a cost nor a required return: it is a weighted average of a cost and a required return. To refer to the WACC as the "cost of capital" may be misleading because it is not a cost. The paper includes 7 errors due to not remembering the definition of WACC and shows the relationship between the WACC and the value of the tax shields (VTS).
    Keywords: required return to equity; value of tax shields; company valuation; cost of debt;
    JEL: G12 G31 M21
    Date: 2011–03–01
  7. By: Fatica, Serena
    Abstract: Using survey data from a cross-section of European countries, this paper analyzes the determinants of individual support for a large government motivated by redistributive policies and for progressive tax schedules. Preferences for political redistribution, as well as fairness beliefs, aversion to equality and perceptions on the actual functioning, the sustainability and the effects - among which immigration - of the welfare system are found to significantly determine the demand for more generous benefits and higher taxes. Moreover, preferences for redistribution play an important role in shaping the attitudes toward progressive income taxation, in addition to self-interest calculus. Overall, these findings are revealing on the political feasibility of tax reforms, as well as of alternative measures to achieve fiscal consolidation - a relevant policy issue after the strains put by the recent financial and economic crisis on national budgets.
    Keywords: political redistribution; size of goverment; tax progressivity
    JEL: D63 H11 A13 H24
    Date: 2011–02
  8. By: Mathieu Lefebvre; Pierre Pestieau; Arno Riedl; Marie Claire Villeval
    Abstract: In a series of experiments conducted in Belgium (Wallonia and Flanders), France and the Netherlands, we compare behavior regarding tax evasion and welfare dodging, with and without information about others’ behavior. Subjects have to decide between a ‘registered’ income, the realization of which will be known to the tax authority for sure, and an ‘unregistered’ income that will only be known with some probability. This unregistered income comes from self-employment in the Tax treatment and from black labor supplementing some unemployment compensation in the Welfare treatment. Subjects have then to decide on whether reporting their income or not, knowing the risk of detection. The results show that (i) individuals evade more in the Welfare treatment than in the Tax treatment; (ii) many subjects choose an option that allows for tax evasion or welfare fraud but report their income honestly anyway; (iii) examples of low compliance tend to increase tax evasion while examples of high compliance exert no influence; (iv) tax evasion is more frequent in France and the Netherlands; Walloons evade taxes less than the Flemish. There is no cross-country difference in welfare dodging.
    Date: 2011
  9. By: Ignacio Vélez Pareja; Felipe Mejia-Pelaez; James W. Kolari
    Abstract: This paper shows how to proceed to find the optimal capital structure and value with period-to-period constant and variable leverage, when the discount rate for tax shields is Ke, the cost of levered equity. Numerical procedures and recursive closed-form non-circular expressions for the finite-period and perpetuity cases are presented, which facilitate any kind of implementation including Montecarlo simulations.
    Date: 2011–03–30
  10. By: Christian Calmès (Département des sciences administratives, Université du Québec (Outaouais), Chaire d'information financière et organisationnelle, ESG-UQAM, Laboratory for Research in Statistics and Probability, LRSP); Denis Cormier (Département de stratégie des affaires, Université du Québec (Montréal), et Chaire d'information financière et organisationnelle, ESG-UQAM); Francois Racicot (Département des sciences administratives, Université du Québec (Outaouais), Chaire d'information financière et organisationnelle, ESG-UQAM, et Laboratory for Research in Statistics and Probability, LRSP); Raymond Théoret (Département de stratégie des affaires, Université du Québec (Montréal), Chaire d'information financière et organisationnelle, ESG-UQAM, et Université du Québec (Outaouais))
    Abstract: Following Zhang (Accounting Review, 2007) we cast firm accruals in terms of short-term investment. Since many studies consider accruals as a smoothed measure of cash flows, we first adopt Zhang specification and augment the standard Jones model with a cash-flow variable. Second, if accruals are indeed a form of short-term investment they should also be influenced by firm’s performance as measured by Tobin’s q. Consequently we propose a new version of the accrual model including a proxy for Tobin’s q. Given that accounting data and Tobin’s q are generally measured with errors, we also introduce a new estimation method based on a modified version of the Hausman artificial regression, featuring an optimal weighting matrix composed of higher moments instrumental variable estimators. Our results suggest that all the key parameters of the accrual models are indeed systematically biased with measurement errors. More importantly, our findings largely qualify Zhang’s conjecture on accruals, as both cash-flows and Tobin’s q are found strongly significant regressors of firm accruals. Relatedly we find that the Tobin’s q augmented model better isolate discretionary accruals so that the residuals of the equation are particularly well-suited to forecast stock returns.
    Keywords: Discretionary accruals; Earnings management; Investment; Measurement errors; Higher moments; Instrumental variable estimators.
    JEL: M41 C12 D92
    Date: 2010–09–21

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