nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2017‒04‒02
seven papers chosen by

  1. Taxing multinational enterprises as unitary firms By Picciotto, Sol
  2. Capital depreciation and the underdetermination of rate of return: A unifying perspective By Magni, Carlo Alberto
  3. When do managers highlight their effective tax rate? By Flagmeier, Vanessa; Müller, Jens; Sureth-Sloane, Caren
  4. Revisiting personal income tax in Latin America: Evolution and impact By Alberto Barreix; Juan Carlos Benítez; Miguel Pecho
  5. Financial analysis of 100 major lighting manufacturers worldwide By Aurelio Volpe
  6. Getting the Ball Rolling: Basis for Assessing the Sports Economy By Douglas Barrios; Stuart Russell; Matt Andrews
  7. Employee Downsizing and Accounting Choices By Keishi FUJIYAMA; Makoto KUROKI

  1. By: Picciotto, Sol
    Abstract: The international tax system needs a paradigm shift. The rules devised over 80 years ago treat the different parts of a multinational enterprise as if they were independent entities, although they also give national tax authorities powers to adjust the accounts of these entities. This creates a perverse incentive for multinationals to create ever more complex groups in order to minimise taxes, exploiting the various definitions of the residence of legal persons and the source of income. While states may attempt to combat these strategies, they also compete to offer tax incentives, many of which facilitate such techniques to undermine other countries’ taxes. Several alternative approaches have been identified, which start from the economic reality that multinationals operate as unitary firms. These include residence-based worldwide taxation, under which the ultimate home country of a multinational taxes its worldwide profits but with a credit for equivalent foreign taxes paid; a destination-based cash flow tax, which attributes the tax base to the country of ultimate sales to third parties; and unitary taxation with formulary apportionment, which apportions the firm’s consolidated profits according to factors reflecting its real presence in each country. This volume outlines the nature of the problem and discusses attempts to resolve it, including the recent G20/OECD project on base erosion and profit shifting (BEPS). It then explores unitary taxation with formulary apportionment. The contributions discuss how to move towards such a system starting from the current rules; the role of accounting in defining the consolidated tax base; lessons from the experience of existing formulary systems, especially in the USA; evidence from quantitative studies of tax base misalignment under current rules and the possible effects of different apportionment formulas; specific issues in the finance and extractive industries sectors; and the prospects for regional adoption.
    Keywords: Development Policy, Economic Development, Finance, Governance,
    Date: 2017
  2. By: Magni, Carlo Alberto
    Abstract: This paper shows that the notion of rate of return is best understood through the lens of the average-internal-rate-of-return (AIRR) model, first introduced in Magni (2010a). It is an NPV-consistent approach based on a coherent definition of rate of return and on the notion of Chisini mean, it is capable of solving the conundrums originated by the rate-of-return notion and represents a unifying theoretical paradigm under which every existing measure of wealth creation can be subsumed. We show that a rate of return is underdetermined by the project’s cash-flow stream; in particular, a unique return function (not a unique rate of return) exists for every project which maps depreciation classes into rates of return. The various shapes a rate of return can take on (internal rate of return, average accounting rate of return, modified internal rate of return etc.) derive from the (implicit or explicit) selection of different depreciation patterns. To single out the appropriate rate of return for a project, auxiliary assumptions are needed regarding the project’s capital depreciation. This involves value judgment. On one side, this finding opens terrain for a capital valuation theory yet to be developed; on the other side, it triggers the creation of a toolkit of domain-specific and purpose-specific metrics that can be used, jointly or in isolation, for analyzing the economic profitability of a given project. We also show that the AIRR perspective has a high explanatory power that enables connecting seemingly unrelated notions and linking various disciplines such as economics, finance, and accounting. Some guidelines for practitioners are also provided.
    Keywords: Investment decision, project appraisal, rate of return, depreciation, capital, net present value, AIRR, mean.
    JEL: C0 G0 G1 G11 G22 G3 G31 G32 G35 M2 M41 N0
    Date: 2016–12
  3. By: Flagmeier, Vanessa; Müller, Jens; Sureth-Sloane, Caren
    Abstract: We examine the disclosure of GAAP effective tax rate (ETR) information in firms' financial statements. Applying the theoretical underpinnings of Wagenhofer (1990) to a tax setting, we argue that firms face a tradeoff in their GAAP ETR disclosure decision. On the one hand, firms have incentives to increase GAAP ETR disclosure if the ratio has a condition that is favorable from an investor's perspective, expecting positive capital market reactions. On the other hand, the disclosure might draw tax auditors' and public attention to the GAAP ETR and result in proprietary costs in terms of additional tax payments or reputational damages. We empirically test the disclosure behavior by examining the relation between disclosure intensity and five different measures of favorable GAAP ETR conditions. First, we provide evidence that the annual report section in which most of the firms disclose GAAP ETR information is the management report, indicating that firms assign considerable relevance to the ratio. Second, we find a higher disclosure intensity if the GAAP ETR has a favorable condition, i.e. is decreasing or near the average ratio of firms in the same industry or size group. We do not find a significant relation to the disclosure level for smooth GAAP ETRs. Our findings indicate that firms assess the benefits of providing the favorable GAAP ETR information to be higher than the related costs. Documenting firms' GAAP ETR reporting behavior, we contribute to the tax disclosure literature by providing insights into possible disclosure incentives. Further, our results could increase awareness among investors to have a second look at the GAAP ETR if the disclosure intensity with respect to the ratio is low.
    Keywords: Effective Tax Rate,Disclosure,Proprietary Costs
    Date: 2017
  4. By: Alberto Barreix (Inter-American Development Bank); Juan Carlos Benítez (OECD Development Centre); Miguel Pecho (Inter-American Center of Tax Administrations)
    Abstract: This study documents the process through which standard tax reliefs and tax allowances reduce the taxable base of the Personal Income Tax (PIT) in Latin American countries by using the models developed in Taxing Wages in Latin America and the Caribbean 2016. The theoretical estimations on the personal income tax are complemented with data from the tax administrations. The study finds that the PIT is progressive, but only paid by a small proportion of formal high-wage earning individuals. On average, more than 80% of the PIT is paid by the richest ten per cent of the population but at average effective rates below the region’s average statutory minimum tax schedule rate. The combination of these factors results in the PIT having a scant revenue-raising capacity and a meagre impact on income redistribution.
    Keywords: Personal income tax, tax deductions, tax exemptions, tax system, wage distribution
    JEL: D31 H24
    Date: 2017–03–30
  5. By: Aurelio Volpe (CSIL Centre for Industrial Studies)
    Abstract: The report Financial Analysis of 100 Major Lighting Manufacturers Worldwide is at its first edition. It is the result of CSIL processing a dataset made up of a selection of medium and large companies. The aim of the report is: to assess the state of health of the lighting industry. The size of the sample is of over 700 companies, averaging a workforce of 675 and a turnover of USD 103 million; to provide a basic judgement on the performance (in terms of growth, profitability and financial situation) of the top 100 companies, ranked according to an index that takes into account those variables. The report is structured as follows: Lighting sector performance. Analysis of Key financial data of more than 700 balance-sheet, for the period 2011-2015. Overview of the total sample in terms of profitability, turnover indicators, employment and productivity, financial structure and analysis by company size (four turnover ranges). Analysis by geographical area. This chapter breaks down the over 700 companies by geographical areas, highlighting top players and key financial data for each area. Analysis by segment. Each company is classified according to its core activity. The following Lighting segments are identified: Lighting fixtures, Automotive Lighting, and Lighting Components. Companies to watch. The chapter aims to provide company rankings in relation to the main indicators from the balance sheet analysis (growth, profitability, structure data). For each variable, companies are ordered in descending. Updated company profiles of largest companies by turnover are also provided. Top 100 companies. The top 100 companies are selected from the sample of 713 companies on the basis of a synthetic indicator that includes the main profitability, performance, and financial indicators. Among the considered financial ratios: Operating Revenue (Turnover), Sales, EBIT, Added Value, P/L before Tax, Net Income, Total Assets, Shareholders Funds, Cash Flow, ROE, ROI, EBITDA margin, EBIT margin, Current and Solvency ratio, Number of Employees, Turnover per Employee, Added value per Employee, Labour Cost of Employees. Countries considered: North and Latin America, Asia and Oceania Area, European Area, and Other countries.
    JEL: L25
    Date: 2017–03
  6. By: Douglas Barrios (Center for International Development at Harvard University); Stuart Russell (Center for International Development at Harvard University); Matt Andrews (Center for International Development at Harvard University)
    Abstract: Data on the sports economy is often difficult to interpret, far from transparent, or simply unavailable. Data fraught with weaknesses causes observers of the sports economy to account for the sector differently, rendering their analyses difficult to compare or causing them to simply disagree. Such disagreement means that claims regarding the economic spillovers of the industry can be easily manipulated or exaggerated. Thoroughly accounting for the industry is therefore an important initial step in assessing the economic importance of sports-related activities. For instance, what do policymakers mean when they discuss sports-related economic activities? What activities are considered part of the "sports economy?" What are the difficulties associated with accounting for these activities? Answering these basic questions allows governments to improve their policies. The paper below assesses existing attempts to understand the sports economy and proposes a more nuanced way to consider the industry. Section 1 provides a brief overview of existing accounts of the sports economy. We first differentiate between three types of assessments: market research accounts conducted by consulting groups, academic accounts written by scholars, and structural accounts initiated primarily by national statistical agencies. We then discuss the European Union’s (EU) recent work to better account for and understand the sports economy. Section 2 describes the challenges constraining existing accounts of the sports economy. We describe two major constraints - measurement challenges and definition challenges - and highlight how the EU's work has attempted to address them. We conclude that, although the Vilnius Definition improves upon previous accounts, it still features areas for improvement. Section 3 therefore proposes a paradigm shift with respect to how we understand the sports economy. Instead of primarily inquiring about the size of the sports economy, the approach recognizes the diversity of sports-related economic activities and of relevant dimensions of analysis. It therefore warns against attempts at aggregation before there are better data and more widely agreed upon definitions of the sports economy. It asks the following questions: How different are sports-related sectors? Are fitness facilities, for instance, comparable to professional sports clubs in terms of their production scheme and type of employment? Should they be understood together or treated separately? We briefly explore difference in sports-related industry classifications using data from the Netherlands, Mexico, and the United States. Finally, in a short conclusion, we discuss how these differences could be more fully explored in the future, especially if improvements are made with respect to data disaggregation and standardization.
    Date: 2016–07
  7. By: Keishi FUJIYAMA (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); Makoto KUROKI (Yokohama City University, Japan)
    Abstract: An increasing number of studies show the influences of labors on management decisions. The accounting literature proposes two competing hypotheses regarding accounting practices around labor negotiations: earnings management hypothesis and informative accounting practice hypothesis. This study investigates accounting choices around employee downsizing, using data from Japan, where employee downsizing is constrained by social norms and case law, and involves employee negotiations. Specifically, it focuses on accounting conservatism, which informs employees and/or labor unions of firms’ real economic conditions, and discretionary accruals, which represents opportunistic management behaviors. We find that downsizing firms report more conservative earnings in years during and after downsizing than non-downsizing firms do. However, we find no evidence suggesting that managers engage in income-decreasing earnings management around downsizing. These results are consistent with informative accounting practice hypothesis, in which managers make accounting choices to inform their employees of the firm’s real economic conditions. In addition, downsizing firms report more conservative earnings than non-downsizing firms do, regardless of unionization, suggesting that both types of Japanese firms are constrained by lifetime employment norm and case law and further supporting the informative accounting practice hypothesis.
    Keywords: Accounting conservatism, Earnings management, Employee, Labor negotiation, Downsizing, Trust
    Date: 2017–03

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