nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2017‒11‒05
ten papers chosen by

  1. IAS 19 valuations for DB Schemes – true or fair? By Bridget McNally
  2. International Transfer Pricing and Tax Avoidance: Evidence from Linked Trade-Tax Statistics in the UK By Li Liu; Tim Schmidt-Eisenlohr; Dongxian Guo
  3. Curbing Corporate Debt Bias: Do Limitations to Interest Deductibility Work? By Ruud A. de Mooij; Shafik Hebous
  4. Tax Revenue Losses through Cross-Border Loss Offset: An Insurmountable Hurdle for Formula Apportionment By Mohammed Mardan; Michael Stimmelmayr
  5. Wages and Nominal and Real Unit Labour Cost Differentials in EMU By Gustav A. Horn; Andrew Watt
  6. Fiscal Measures and Corporate Investment in France By Jean-Charles Bricongne; Lucia Granelli; Susanne Hoffmann
  7. Indirect Taxation of Financial Services By Vidar Christiansen
  8. The true art of the tax deal: Evidence of aid flows and bilateral double tax agreements By Braun, Julia; Zagler, Martin
  9. Relational Contracts, the Cost of Enforcing Formal Contracts, and Capital Structure Choice - Theory and Evidence By Matthias Fahn; Valeria Merlo; Georg Wamser
  10. Reforming Australia's Superannuation Tax System and the Age Pension to Improve Work and Savings Incentives By David Ingles and Miranda Stewart

  1. By: Bridget McNally (Department of Economics, Finance and Accounting, Maynooth University.)
    Abstract: Purpose - This paper argues that the accounting standards’ requirement for pension scheme liabilities to be discounted by reference to market yields at the end of the reporting period on high quality corporate bonds, potentially produces an artificial result which is at odds with the “fair representation” objective of these standards. Design/methodology/approach –The approach is a theoretical analysis of the relevant reporting standards with the use of a theoretical example to demonstrate the impact where trustees adopt a hedged approach to portfolio investment. Findings - Where the fund has adopted a hedging strategy and has invested in “risk – free” assets, the term, quantity and duration/maturity of which, is intended to match the term quantity and maturity of the scheme liabilities, applying the requirements potentially results in the reporting in sponsoring company financial statements of fluctuating surpluses or deficits each year which are potentially ill-informed and misleading. Originality/value – Pension scheme surpluses or deficits reported in the financial statements of listed companies are potentially very significant numbers, however the dangers posed by theoretical nature of the calculation has largely gone unreported.
    Date: 2017
  2. By: Li Liu; Tim Schmidt-Eisenlohr; Dongxian Guo
    Abstract: This paper employs unique data on export transactions and corporate tax returns of UK multinational firms and finds that firms manipulate their transfer prices to shift profits to lower-taxed destinations. It uncovers three new findings on tax-motivated transfer mispricing in real goods. First, transfer mispricing increases substantially when taxation of foreign profits changes from a worldwide to a territorial approach in the UK, with multinationals shifting more profits into low-tax jurisdictions. Second, transfer mispricing increases with a firm’s R&D intensity. Third, tax-motivated transfer mispricing is concentrated in countries that are not tax havens and have low-to-medium-level corporate tax rates.
    Keywords: transfer pricing, corporate taxation avoidance, multinational firms
    JEL: F23 H25 H32
    Date: 2017
  3. By: Ruud A. de Mooij; Shafik Hebous
    Abstract: Tax provisions favoring corporate debt over equity finance (“debt bias†) are widely recognized as a risk to financial stability. This paper explores whether and how thin-capitalization rules, which restrict interest deductibility beyond a certain amount, affect corporate debt ratios and mitigate financial stability risk. We find that rules targeted at related party borrowing (the majority of today’s rules) have no significant impact on debt bias—which relates to third-party borrowing. Also, these rules have no effect on broader indicators of firm financial distress. Rules applying to all debt, in contrast, turn out to be effective: the presence of such a rule reduces the debt-asset ratio in an average company by 5 percentage points; and they reduce the probability for a firm to be in financial distress by 5 percent. Debt ratios are found to be more responsive to thin capitalization rules in industries characterized by a high share of tangible assets.
    Keywords: corporate tax, capital structure, debt bias, thin capitalization rule
    JEL: G32 H25
    Date: 2017
  4. By: Mohammed Mardan; Michael Stimmelmayr
    Abstract: This paper analyzes the relevance of firm losses for tax revenues and welfare when switching from separate accounting to a system of tax base consolidation with formula apportionment. We find that a system change unambiguously decreases tax revenues in the short run, in which neither firms nor governments can adjust their behavior, due to the cross-border loss offset inherent to formula apportionment. In the medium run, in which only firms can adjust their strategies, tax revenues are still lower under formula apportionment if the probability of incurring losses or the costs of profit shifting are sufficiently small. However, in the long run, where both firms and governments are able to adjust their behavior after the system change, a switch from separate accounting to formula apportionment is beneficial under the aforementioned conditions. Furthermore, we show that a higher weight of input shares in the apportionment formula may mitigate tax competition because, contrary to output factors, input factors provide an insurance against tax revenue shortfalls due to loss-making affiliates.
    Keywords: separate accounting, formula apportionment, corporate losses, cross-border loss offset, CCCTB
    JEL: H73 H25 F23
    Date: 2017
  5. By: Gustav A. Horn; Andrew Watt
    Abstract: This paper addresses the issue of current account imbalances of countries within a monetary union, now widely agreed to have been a major contributor to the persistent economic crisis in the EMU. In particular we focus on the role of wages for current account developments and a possible role for nominal incomes policies in limiting and correcting imbalances. We set out why national current accounts remain important in a monetary union and examine the forces driving the current account balance. We present empirical evidence on current account developments in the Euro Area, focusing on countries in which a correction has occurred. Detailed counter-factual model-based simulations for Germany show that “wage policy” on its own is scarcely able to make an impact on its huge and destabilising surplus; what is needed is a combined approach in which nominal wages follow a wage norm (productivity plus ECB target inflation rate) while aggregate demand is managed (in this case stimulated) to fully utilise productive potential. Against this analytical background we develop a proposal for institutional reform of the Euro Area, building on existing institutions. Key elements are: reinstating the Broad Economic Policy Guidelines as the conceptual framework guiding economic policy, expanding the remit of the Fiscal Council and the Productivity Boards to cover the entire policy mix, and substantially developing the EU Macroeconomic Dialogue in particular by setting up MEDs at Euro Area and Member State levels.
    JEL: D40 E31 L51
    Date: 2017–07
  6. By: Jean-Charles Bricongne; Lucia Granelli; Susanne Hoffmann
    Abstract: The purpose of this paper is to assess the effect of fiscal measures on the investment decisions of French non-financial corporations. As a reference framework, we use the model developed by Eudeline et al. (2013). We extend this framework by introducing the effect of fiscal incentives on investments. We estimate the effect of a decrease in the corporate tax rate in France, which passed from 42 % in 1990 to 33.3 % nowadays and is planned to be reduced to 28 % by 2020 and to 25% in 2022. Fiscal measures are found to have a positive effect on investment, although the growth rate of economic activity and the corporate saving rate remain the main drivers of corporate investment.
    JEL: C22 E22 E62
    Date: 2017–07
  7. By: Vidar Christiansen
    Abstract: An important question is whether VAT exemption of financial services is a desirable property or whether it is justified only due to practical and administrative necessity. This paper singles out a number of financial services for discussion of this issue in a context allowing for other taxes and other preexisting distortions. It discusses taxation of intermediation that facilitates savings and borrowing, payment services and currency exchange. It also elaborates on the distortionary effects of taxing intermediate goods due to VAT exemption with focus on exports and consumer prices.
    Keywords: financial services, indirect taxation, value added tax, VAT exemptions
    JEL: H20 H21 H22
    Date: 2017
  8. By: Braun, Julia; Zagler, Martin
    Abstract: Nash bargaining model shows that a deal is struck only if both countries mutually benefit. • The model predicts voluntary signature of asymmetric double tax agreements only if there is compensation for the capital importer. Empirical evidence indicates that foreign aid from the capital exporter to the capital importer increases on average by 6 million USD In the signature year of a double tax agreement
    JEL: H2
    Date: 2017
  9. By: Matthias Fahn; Valeria Merlo; Georg Wamser
    Abstract: This paper shows that the cost of enforcing contracts governing non-financial relationships between firms affects a firm’s financing structure. We analyze the interaction between a firm’s capital structure and the type of contracts it uses to deal with its suppliers. We first develop a theoretical model where a downstream party needs an intermediate good from an upstream party, and this intermediate good can be of high or low quality. Court-enforceable contracts can be used to enforce high quality, but their use is costly. If these costs are too high, relational contracts - self-enforcing informal arrangements that can be sustained in long-term relationships - are needed. Relational contracts, though, can only be sustained if debt is not too high. The reason is that a firm’s commitment in relational contracts is determined by its future profits in the cooperative relationship, and the need to repay debt reduces future profits. We therefore derive the prediction that, on average, higher costs of enforcing formal contracts should be associated with firms having less leverage. We test this prediction with the help of two datasets. First, the Microdatabase Directinvestment (MiDi) provided by Deutsche Bundesbank, which records balance-sheet information on the universe of German investments abroad, including detailed information on external debt and equity capital. Second, the World Bank’s Doing Business Database, which provides information on the average cost of enforcing (formal) contracts between a firm and a supplier of an intermediate good. Using a panel data model for fractional response variables, we can show that an increase in the cost of enforcing contracts in a country makes firms use substantially more equity financing.
    Keywords: relational contracts, organizational economics, capital structure, corporate finance
    Date: 2017
  10. By: David Ingles and Miranda Stewart
    Abstract: Australia's retirement income system combines private and public provision for old age. Retirees rely on private (but highly regulated) superannuation saving that attracts large tax concessions; a public, means-tested age pension; home ownership; and other private savings. Despite recent changes intended to make the system fairer and more fiscally sustainable, Australia's retirement income system still lacks coherence, produces inequitable outcomes and creates high effective tax rates on work and saving. This article proposes a more coherent approach to address fairness, reduce the effective tax rates on work and saving and provide adequate earnings replacement rates with greater fiscal sustainability than is delivered in the recent reforms.
    Keywords: age pension, income tax, retirement saving, superannuation, work incentives
    Date: 2017–09–11

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