nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2014‒11‒22
ten papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Recent developments in Corporate Taxation in Sweden By Thomann, Christian
  2. Interrelationship between taxes, capital structure decisions and value of the firm: A panel data study on Indian manufacturing firms By Sinha, Pankaj; Bansal, Vishakha
  3. Effects of corporate governance reform on the quality of internal controls: Evidence from Japan By Hiroshi Uemura
  4. Iceland: Technical Assistance Report-Modernizing the Icelandic VAT By International Monetary Fund. Fiscal Affairs Dept.
  5. 2012 Update Report to the Study to quantify and analyse the VAT Gap in the EU-27 Member States By Luca Barbone; Mikhail Bonch-Osmolovskiy; Grzegorz Poniatowski
  6. Do Actions Speak Louder than Words? By Luca Anderlini; Dino Gerardi; Roger Lagunoff
  7. Current account imbalances in the Euro area: Competitiveness or financial cycle? By Mariarosaria Comunale; Jeroen Hessel
  8. A Primer on Regulatory Bank Capital Adjustments By Lubberink, Martien
  9. Credit risk measurement, leverage ratios and Basel III: proposed Basel III leverage and supplementary leverage ratios By Ojo, Marianne
  10. Capital Flows and Capital Account Management in Selected Asian Economies By Sen Gupta, Abhijit; Sengupta, Rajeswari

  1. By: Thomann, Christian (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: This article investigates if increasing neutrality between debt and equity capital might improve the efficiency in a corporate tax system. Firm-level and sector-level taxation data from Sweden is used to study if a tax system that is characterized by very few limitations with respect to the deductibility of interest costs leads to systematic differences in the taxes paid by different sectors. This paper finds that there are differences between different sectors’ tax payments and these differences can be explained by the sectors’ use of debt capital.
    Keywords: Tax Reform; Corporate Tax; Debt; Equity
    JEL: D58 H25
    Date: 2014–10–10
  2. By: Sinha, Pankaj; Bansal, Vishakha
    Abstract: Since the development of efficient proxies for taxes, many researchers have proved the existence of impact of tax on financing decisions. The ultimate aim of each business decision is to enhance the value of the firm; hence it is important to study the tax implications of financing decisions on the firm’s value. In this study an attempt is made to study the interrelationship between taxes, financing decisions and value of the firm. A panel data of 188 Indian manufacturing firms over a period from 1990 to 2013 is employed to assess the relationship. Unlike the results of Fama and French (1998), the analyses undertaken in this study is able to capture the tax effects of debt. It shows clearly that companies consider partial consequences of employing debt and justify the higher use of debt. This study brings forth the empirical evidence that the personal tax implications flowing through financing decisions contribute towards forming perceptions of the investors and thus may affect the firm value in the opposite direction.
    Keywords: debt, equity, dividends, firm value, corporate tax, personal tax, panel data, fixed effects model
    JEL: C23 G32 G38
    Date: 2014–06–05
  3. By: Hiroshi Uemura (School of Management, Kochi University of Technology)
    Abstract: This study examines Japanese corporations that disclose significantdeficiencies (SDs) in internal controls and analyses whether replacing the chief executive (CEO), enhancing the independence of boards of directors, and upgrading the financial expertise of corporate boards are followed by a remediation of SDs. This study demonstrates that Japanese companies which report SDs are more likely to replace their CEOs and to increase the independence of their board of directors. In addition, it finds that replacing CEOs and increasing the board’s independence are unrelated to remediating SDs. However, upgrading the board’s accounting expertise correlates positively with remediation of SDs.
    Keywords: internal controls, significant deficiencies, executive turnover, corporate governance independence, corporate governance expertise
    JEL: M41 M42 J63 K2
    Date: 2014–10
  4. By: International Monetary Fund. Fiscal Affairs Dept.
    Abstract: EXECUTIVE SUMMARY Iceland’s government, elected in 2013, is conducting a general review of its tax policy with a view toward making it more efficient and less distortionary.1 To this end, it has targeted VAT reform as a priority to become more reliant on consumption rather than income taxation. The narrow base and wide gap between the very high 25.5 percent main VAT rate and lower rate of 7 percent distort economic behavior and encourage tax arbitrage, evasion and lobbying. The efficiency of the Icelandic VAT is thus currently well below the European and OECD averages. To address this situation, the government plans in the near term to broaden the base by eliminating exemptions, raising the lower rate, and reducing the top rate. In the medium term, the government targets a single-rate system. To offset the potentially inflationary effects of VAT reform and reduce price distortions, the government is considering repealing the commodity tax and reviewing the trade regime for agriculture. It may also seek to increase social benefits for low-income households most affected by the VAT increases. These measures are all in accord with recommendations made by two previous IMF missions in 2010 and 2011. This mission reiterates its previous recommendations that Iceland should in the near term: (1) eliminate exemptions at least for tourism, transport, sports and culture; (2) limit VAT refunds to local government to services that could be outsourced; (3) double the lower rate to 14 percent; (4) reduce the top rate as revenue permits, depending on base broadening; and (5) in the longer term, move to a single VAT rate of about 21 percent. In addition, this report makes the following major recommendations: • Consider at least doubling the VAT threshold to ISK 2,000,000 (about USD 17,850 or EUR 12,900). A higher threshold will ease administration, allowing limited RSK resources to be focused on the large taxpayers who generate most VAT revenue. • Fully tax all sales and leasing of commercial buildings, as well as first sales of new residential buildings. While materials and construction activities are subject to VAT, sale of buildings has been exempt. This has created pressure for special refund schemes for builders to recoup their input VAT. Taxing commercial buildings and rent will remove this necessity and prevent cascading, while taxing first residential sales will broaden the VAT base to include housing consumption. • Eliminate special VAT refund schemes for buses, and domestic boats and aircraft, as well as CO2 tax refunds for rental car imports. These schemes have been encouraged by the exemption of passenger transport, and by the anomalous taxation of car rental services at the top rate. Taxing transportation will remove the need for these accommodations and level the playing field for car rental companies. • Repeal the commodity tax on building products, appliances and electronics. This will help offset the one-off inflationary effects of VAT reform and remove price distortions on these goods, which having neither inelastic demand nor negative externalities do not meet the criteria for special excise taxation. • If the sugar tax portion of the commodity tax is retained, conduct a study to ensure that the price increase it imposes on sweetened products is sufficient to discourage their consumption. Alternatively, repeal the sugar tax and move sweetened products to the top VAT rate.
    Keywords: Value added tax;Consumption taxes;Tourism;Sugar;Indirect taxation;Tax reforms;Technical assistance missions;Iceland;
    Date: 2014–09–23
  5. By: Luca Barbone; Mikhail Bonch-Osmolovskiy; Grzegorz Poniatowski
    Abstract: This report provides estimates of the VAT Gap for 26 EU Member States for 2012, as well as revised estimates for the period 2009-2011. It is a follow-up to the report “Study to quantify and analyse the VAT Gap in the EU-27 Member States”,1 published in September 2013. This update incorporates the NACE Rev. 2 classification of economic activities into the calculation of the theoretical liability. The year 2012 saw overall unfavourable economic developments, as the GDP of the European Union shrank by 0.4 percent. These developments contributed to a slowdown of nominal final consumption and of other economic activities that form the basis of the Value Added Tax.A few countries applied changes to standard or reduced rates, but on the whole the structure of VAT rates was relatively stable compared to the numerouschanges in the wake of the onset of the Great Recession in 2008-2009. For the EU-26 as a whole, VAT revenues grew by slightly over 2 percent, from Euro 904 billion in 2011 to Euro 922 billion in 2012; and the theoretical VAT liability (VTTL) also grew by a similar percentage. The overall VAT Gap, as estimated according to the refined methodology, for the EU-26 saw a slight increase in absolute numbers (of about Euro 6 billion) between 2011 and 2012, to reach Euro 177 billion, but remained essentially stable as a percentage of the overall VTTL, at 16 percent. The estimates for 2009-2011 have been revised because of the switch to NACE-2 classification and refinements in the methodology, and are slightly lower compared to those discussed in the 2013 VAT Gap report.2 In 2012, Member States’ estimated VAT Gaps ranged from the lo of 5 percent in the Netherlands and Finland, to the high of 44 percent in Romania. The median absolute change in the VAT Gap of the individual Member States from 2011 to 2012 was 1.1 percent, with a number of countries registering considerably higher changes. Overall, 11 Member States decreased their VAT Gap, with the largest improvements noted in Greece, despite the depth of its recession, and Bulgaria. However, 15 Member States saw an increase in the VAT Gap, ranging from virtually nil (e.g., Slovenia) to a substantial deterioration (e.g., Slovakia, Poland). This report also provides estimates of the Policy Gap for the EU-26. This is an indicator of the additional VAT revenue that a Member State could theoretically collect if it applied uniform taxation to all consumption. Estimates of the Policy Gap confirm the finding that in most countries the loss of revenue compared to an “ideal” system with no reduced rates and no exemptions, is due to a greater extent to policy decisions than to non-compliance and weak enforcement.
    Keywords: Optimal Taxation, Efficiency, Incidence, Externalities, Redistributive Effects, Environmental Taxes and Subsidies, Personal Income and Other Nonbusiness Taxes and Subsidies, Business Taxes and Subsidies, Tax Evasion, Other Sources of Revenue, Other
    JEL: H20 H24 H25 H26 H62
    Date: 2014
  6. By: Luca Anderlini; Dino Gerardi; Roger Lagunoff
    Abstract: We study the relative performance of disclosure and auditing in organizations. We consider the information transmission problem between two decision makers who take actions at dates 1 and 2 respectively. The first decision maker has private information about a state of nature that is relevant for both decisions, and sends a cheap-talk message to the second. The second decision maker can commit to only observe the message (disclosure), or can retain the option to observe the action of the first decision maker (auditing) or, at some cost, to verify the state. In equilibrium, state verification will never occur and the second decision maker effectively chooses between auditing and disclosure. When the misalignment is preferences reflects a bias in a decision maker's own action relative to that of the other - we call this an agency bias - then, in equilibrium, the second decision maker chooses to audit. Actions speak louder than words in this case. When one decision maker prefers all actions to be biased relative to the other decision maker - we call this an ideological bias - then, if the misalignment is large enough, in equilibrium the second decision maker chooses disclosure. In this case words speak louder than actions. While firms are usually characterized by agency bias, ideological bias is more common in political systems. Our results indicate that the ability to commit not to audit has value in the latter case. However such commitment is rarely feasible in the political sphere.
    Keywords: Auditing, Disclosure, Agency Bias, Ideological Bias
    JEL: C73 D63 D72 D74 H11
    Date: 2014
  7. By: Mariarosaria Comunale; Jeroen Hessel
    Abstract: The current account imbalances that are at the heart of the European sovereign debt crisis are often attributed to differences in price competitiveness. However, recent research suggests that domestic demand booms related to the financial cycle may have been more important. As this would have very different policy implications, this paper aims to investigate the relative role of price competitiveness and domestic demand as drivers of the current account imbalances in the euro area. We estimate panel error-correction models for exports, imports and the trade balance. We specifically look at fluctuations in domestic demand at the frequency of the financial cycle. We conclude that although differences in price competitiveness have an influence, differences in domestic demand are more important than is often realized. Fluctuations at the frequency of the financial cycle are more suitable to explain the trade balance than fluctuations at the frequency of the normal business cycle. Our results call for more emphasis on credit growth and macro prudential policy, in addition to the current attention for competitiveness and structural reforms.
    Keywords: Current account deficits; Economic and Monetary Union; competitiveness; domestic boom; financial cycle
    JEL: E32 F32 F41 F44
    Date: 2014–10
  8. By: Lubberink, Martien
    Abstract: To calculate regulatory capital ratios, banks have to apply adjustments to book equity. These regulatory adjustments vary with a bank’s solvency position. Low-solvency banks report values of Tier 1 capital that exceed book equity. They use regulatory adjustments to inflate regulatory solvency ratios such as the Tier 1 leverage ratio and the Tier 1 risk-based capital ratio. In contrast, highly solvent banks report Tier 1 capital that is lower than book equity. These banks adjust their solvency ratios downward for prudential reasons, despite their resilient solvency levels. These results weaken the case for regulatory adjustments. The decreasing relationship between regulatory adjustments and bank solvency reflects the cost of deleveraging, a cost that demonstrates the resistance of banks to substituting equity for debt.
    Keywords: Keywords: Banking, Regulatory Capital, Solvency, Accounting.
    JEL: G21
    Date: 2014–03–30
  9. By: Ojo, Marianne
    Abstract: The Basel III Leverage Ratio, as originally agreed upon in December 2010, has recently undergone revisions and updates – both in relation to those proposed by the Basel Committee on Banking Supervision – as well as proposals introduced in the United States. Whilst recent proposals have been introduced by the Basel Committee to improve, particularly, the denominator component of the Leverage Ratio, new requirements have been introduced in the U.S to upgrade and increase these ratios, and it is those updates which relate to the Basel III Supplementary Leverage Ratio that have primarily generated a lot of interests. This is attributed not only to concerns that many subsidiaries of US Bank Holding Companies (BHCs) will find it cumbersome to meet such requirements, but also to potential or possible increases in regulatory capital arbitrage: a phenomenon which plagued the era of the original 1988 Basel Capital Accord and which also partially provided impetus for the introduction of Basel II. This paper is aimed at providing an analysis of the recent updates which have taken place in respect of the Basel III Leverage Ratio and the Basel III Supplementary Leverage Ratio – both in respect of recent amendments introduced by the Basel Committee and proposals introduced in the United States. As well as highlighting and addressing gaps which exist in the literature relating to liquidity risks, corporate governance and information asymmetries, by way of reference to pre-dominant based dispersed ownership systems and structures, as well as concentrated ownership systems and structures, this paper will also consider the consequences – as well as the impact - which the U.S Leverage ratios could have on Basel III. There are ongoing debates in relation to revision by the Basel Committee, as well as the most recent U.S proposals to update Basel III Leverage ratios and whilst these revisions have been welcomed to a large extent, in view of the need to address Tier One capital requirements and exposure criteria, there is every likelihood,indication, as well as tendency that many global systemically important banks (GSIBS), and particularly their subsidiaries, will resort to capital arbitrage. What is likely to be the impact of the recent proposals in the U.S.? The recent U.S proposals are certainly very encouraging and should also serve as impetus for other jurisdictions to adopt a pro-active approach – particularly where existing ratios or standards appear to be inadequate. This paper also adopts the approach of evaluating the causes and consequences of the most recent updates by the Basel Committee, as well as those revisions which have taken place in the U.S, by attempting to balance the merits of the respective legislative updates and proposals. The value of adopting leverage ratios as a supplementary regulatory tool will also be illustrated by way of reference to the impact of the recent legislative changes on risk taking activities, as well as the need to also supplement capital adequacy requirements with the Basel Leverage ratios and the Basel liquidity standards.
    Keywords: credit risk; liquidity risks; global systemically important banks (G-SIBs); leverage ratios; harmonization; accounting rules; capital arbitrage; disclosure; stress testing techniques; U.S Basel III Final Rule
    JEL: D8 E3 G3 G32 K2
    Date: 2014–08
  10. By: Sen Gupta, Abhijit; Sengupta, Rajeswari
    Abstract: Gross capital inflows and outflows to and from emerging market economies (EMEs) have witnessed a significant increase since early 2000s. This rapid increase in the volume of flows accompanied by sharp swings in volatility has amplified the complexity of macroeconomic management in EMEs. While capital inflows provide additional financing for productive investment and offer avenues for risk diversification, unbridled flows could also exacerbate financial instability.In this paper we focus on the evolution of capital flows in a few select emerging Asian economies, and analyze surge and stop episodes as well as changes in the composition of flows across these episodes. We also provide a comprehensive description of the capital account management policies adopted by the host countries and evaluate the efficacy of these measures by analyzing whether they achieved the desired goals.This kind of an analysis is highly relevant especially a time when EMEs around the world are about to face the repercussions of a potential Quantitative Easing (QE) tapering by the US or launch of fresh QE measures by the Euro-zone, either of which could once again heighten the volatility of cross-border capital flows thereby posing renewed macroeconomic challenges for major EMEs.
    Keywords: Capital flows, Exchange market pressure, Impossible Trinity, Sterilized intervention, Capital controls, Global financial crisis.
    JEL: F32 F36 F41
    Date: 2014–09–29

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