nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2019‒10‒14
eleven papers chosen by

  1. Can Whistleblower Programs Reduce Tax Evasion? Experimental Evidence By David Masclet; Claude Montmarquette; Nathalie Viennot-Briot
  2. Tax Administration vs. Tax Rates: Evidence from Corporate Taxation in Indonesia By Rema Hanna; Benjamin A. Olken
  3. US Fiscal Cycle and the Dollar By Zhengyang Jiang
  4. Tax law and the transfer of start-up losses: A European overview and categorization By Bührle, Anna Theresa; Spengel, Christoph
  5. VAT Notches, Voluntary Registration, and Bunching: Theory and UK Evidence By Almunia, Miguel; Liu, Li; Lockwood, Ben; Tam, Eddy H.F.
  6. Thinking infrastructure and the organization of markets: the creation of a legal market for cannabis in Colorado By Pflueger, Dane; Palermo, Tommaso; Martinez, Daniel
  7. Profit shifting and the effect of stricter transfer pricing regulation on tax revenue By Bakke, Julia Tropina; Hopland, Arnt Ove; Møen, Jarle
  8. A Summary of Selected CBO Reports on Cash and Accrual Budgeting: Working Paper 2019-09 By Megan Carroll; David Torregrosa
  9. Net foreign assets and current account balances By Michael Bleaney; Mo Tian
  10. Monitor Reputation and Transparency By Ivan Marinovic; Martin Szydlowski
  11. Outside Directors (Auditors) Affiliated through Interlocking Shareholding and Firm Value (Japanese) By XU Peng; TAKAHASHI Hidetomo; TANAKA Wataru

  1. By: David Masclet (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - UNIV-RENNES - Université de Rennes - CNRS - Centre National de la Recherche Scientifique, CIRANO - Centre interuniversitaire de recherche en analyse des organisations - UQAM - Université du Québec à Montréal); Claude Montmarquette (CIRANO - Centre interuniversitaire de recherche en analyse des organisations - UQAM - Université du Québec à Montréal); Nathalie Viennot-Briot (CIRANO - Centre interuniversitaire de recherche en analyse des organisations - UQAM - Université du Québec à Montréal)
    Abstract: There are many ways of tackling tax evasion. The traditional strategies implemented by tax authorities fight fiscal fraud through audits and penalties. However, there also exist a plethora of unconventional methods, such as whistleblower programs. Although there is rich economic literature on tax evasion, auditing and penalties, tax agencies‘ heavy reliance on whistleblower programs has mostly been ignored. We ran an experiment in which taxpayers can punish tax evaders by reporting them to the authorities, even though it is costly for them to do so and despite the lack of any material benefit from doing so. Information on other taxpayers' compliance rates together with the opportunity to report tax evaders have a positive and very significant effect on the level of income reported. Observing the compliance rates of other participants alone does not suffice to increase tax revenues.
    Keywords: fiscal fraud,whistleblowers,ambiguous risk,laboratory experiment.
    Date: 2019–09
  2. By: Rema Hanna (Center for International Development at Harvard University); Benjamin A. Olken
    Abstract: Developing countries collect a far lower share of GDP in taxes than richer countries. This paper asks whether changes in tax administration and tax rates can nevertheless raise substantial additional revenue – and if so, which approach is most effective. We study corporate taxation in Indonesia, where the government implemented two reforms that differentially affected firms. First, we show that increasing tax administration intensity by moving the top firms in each region into “Medium-Sized Taxpayer Offices,” with much higher staff-to-taxpayer ratios, more than doubled tax revenue from affected firms over six years, with increasing impacts over time. Second, using non-linear changes to the corporate income tax schedule, we estimate an elasticity of taxable income of 0.59, which implies that the revenue-maximizing rate is almost double the current rate. The increased revenue from improvements in tax administration is equivalent to raising the marginal corporate tax rate on affected firms by about 23 percentage points. We suggest one reason improved tax administration was so effective was that it flattened the relationship between firm size and enforcement, removing the additional “enforcement tax” on large firms. On net, our results suggest that improving tax administration can have significant returns for developing country governments.
    Keywords: Tax Administration
    JEL: H25 H26 O23
    Date: 2019–10
  3. By: Zhengyang Jiang (Kellogg School of Management, Northwestern University)
    Abstract: I document a new pattern unique to the US: When the US fiscal condition is strong, the dollar is strong and continues to appreciate in the next 3 years. This pattern makes the dollar an extraordinary asset, because most assets have lower prices when their expected returns increase. A stylized model accounts for this pattern, provided that the US fiscal cycle comoves with the US investors' risk premium. This model further predicts that the US fiscal cycle explains the forward premium puzzle, the term premium, the dollar carry trade, and currency return momentum, all confirmed in the data. What makes this fiscal-currency comovement unique to the US? I conjecture its exceptional external balance sheet and its special role as the hegemon issuer of the world's reserve assets are contributing factors, and provide suggestive evidence from cross-border capital flows and official foreign reserves.
    Date: 2019
  4. By: Bührle, Anna Theresa; Spengel, Christoph
    Abstract: Most of the European Member States employ anti-loss trafficking rules. They aim to prevent the acquisition of mere corporate shells with high tax loss carryforwards for the tax asset to be utilized in profitable companies. However, other corporations can unintentionally be affected by the anti-abuse regulations if there is a change in ownership or activity. The transfer restrictions have been argued to impair start-up financing, as investors are faced with the risk of losing accumulated loss carryforwards in the corporation upon the entering of new or the capital increase of existing investors. This study provides an overview over the design and development of loss transfer restrictions in the EU28 over a time period of 19 years (2000-2018). Different aspects of the regulations are analyzed against the background of their impact on start-ups. Finally, the rules are categorized with respect to their strictness. Over time, more countries introduced restrictions. At the same time, the regulations became more lenient, offering start-ups more opportunities to maintain their loss carryforwards and, therefore, decreasing the risk for investors.
    Keywords: tax loss carryforward,loss trafficking,loss transfer,entrepreneurship,start-ups
    JEL: M13 H25 H32 L52
    Date: 2019
  5. By: Almunia, Miguel; Liu, Li; Lockwood, Ben; Tam, Eddy H.F.
    Abstract: Using administrative tax records for UK businesses, we document both bunching in annual turnover below the VAT registration threshold and persistent voluntary registration by almost half of the firms below the threshold. We develop a conceptual framework that can simultaneously explain these two apparently conflicting facts. The framework also predicts that higher intermediate input shares, lower product-market competition and a lower share of business to consumer (B2C) sales lead to voluntary registration. The predictions are exactly the opposite for bunching. We test the theory using linked VAT and corporation tax records from 2004-2014, finding empirical support for these predictions.
    Keywords: bunching; UK; Value-Added Tax (VAT); Voluntary registration
    JEL: H21 H25 H32
    Date: 2019–09
  6. By: Pflueger, Dane; Palermo, Tommaso; Martinez, Daniel
    Abstract: This chapter explores the ways in which a large-scale accounting system known as Marijuana Enforcement Tracking Reporting and Compliance (METRC) contributes to the construction and organization of a new market for recreational cannabis in the US state of Colorado. Mobilizing the theoretical lenses provided by the literature on market devices on the one hand, and infrastructure on the other, we identify and unpack a changing relationship between accounting and state control through which accounting and markets unfold. We describe this movement in terms of a distinction between knowing devices and thinking infrastructures. In the former, we show, regulators and other authorities perform the market by making it legible for the purpose of intervention, taxation and control. In the latter, thinking infrastructures, an ecology of interacting devices is made and remade by a variety of intermediaries, disclosing the boundaries and possibilities of the market, and constituting both opportunities for innovation and domination through “protocol”.
    Keywords: infrastructure; cannabis; markets; market devices; accounting; regulation
    JEL: J1 M40
    Date: 2019–08–07
  7. By: Bakke, Julia Tropina (Dept. of Business and Management Science, Norwegian School of Economics); Hopland, Arnt Ove (Dept. of Business and Management Science, Norwegian School of Economics); Møen, Jarle (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: Using a 20-year-long, population-wide panel with detailed firm and group level data from Norway, we study the profitability change in companies that shift from being domestic to being multinational as well as companies that shift from being multinational to being domestic. Profitability falls when domestic companies become multinational and increases when multinational companies become domestic. The average change in profitability is about 24 %, all else equal. We attribute our findings to the profit shifting opportunities that are available for multinational companies, and we display several patterns in the data that are consistent with this interpretation. We find that the extent of profit shifting decreases after the introduction of stricter transfer pricing regulations, and an increase in transfer pricing audits, starting in 2007/2008. Our best estimate of the total corporate tax revenue lost due to profit shifting is about 6 % in the last year of the sample, 2012. We estimate that the revenue loss would have been twice as large in absence of the new regulatory framework.
    Keywords: Multinational companies; profit shifting; BEPS; Transfer pricing; Tax gap
    JEL: F23 H25 H26
    Date: 2019–10–03
  8. By: Megan Carroll; David Torregrosa
    Abstract: Federal retirement programs and some federal insurance programs have long-term effects on the budget. But the federal budget process typically uses cash-based accounting measures that cover a 10-year period, which may be too short to accurately report those programs’ net budgetary effects over the long term. In contrast, using accrual accounting for such programs would accelerate the recognition of long-term costs and would display the expected costs of new commitments when they were incurred and thus were most controllable. However, such estimates are less transparent and
    JEL: G00 H50 H60 H61 H81 H83 J32 J45
    Date: 2019–10–09
  9. By: Michael Bleaney; Mo Tian
    Abstract: Theory predicts a negative long-run equilibrium relationship between net foreign assets and net exports (the trade balance plus net transfers). In a large sample of countries back to 1971, the data are found to be consistent with this provided that the short-run dynamics are allowed to vary across countries. By contrast, the correlation between net foreign assets and net exports in a given year tends to be positive in most years. The correlation between net foreign assets and the current account balance shows a similar pattern: negative in time series but positive in cross-section. Shocks to relative prices and cycles in international lending prevent the world from settling on an equilibrium for any length of time.
    Keywords: current account, exchange rates, net foreign assets, net exports
    Date: 2019
  10. By: Ivan Marinovic (Stanford University); Martin Szydlowski (University of Minnesota)
    Abstract: We study the disclosure policy of a regulator overseeing a monitor with reputation concerns, such as a bank or an auditor. The monitor faces a manager, who chooses how much to manipulate given the monitor’s reputation. Reputational incentives are strongest for intermediate reputations and uncertainty about the monitor is valuable. Instead of providing transparency, the regulator’s disclosure keeps the monitor’s reputation intermediate, even at the cost of diminished incentives. Beneficial schemes feature random delay. Commonly used ones, which feature immediate disclosure or fixed time delay, destroy reputational incentives. Surprisingly, the regulator discloses more aggressively when she has better enforcement tools.
    Date: 2019
  11. By: XU Peng; TAKAHASHI Hidetomo; TANAKA Wataru
    Abstract: The Japanese Corporate Governance Code compiled by the FSA and TSE in 2015 requires listed companies to have at least two outside directors or to provide explanations for having fewer outside directors. Thereafter, the proportion of companies with at least two outside directors increased rapidly to almost 100% in 2018. As of September 2018, however, in 348 companies, or about 20% of companies listed in the first section of the Tokyo Stock Exchange, half or more of the outside directors (auditors) are affiliated through relational shareholdings. This paper explores the determinants of incidences of these outside directors (auditors). We show that low firm value, high relational ownership and weak pressure from foreign institutional investors are related to having half or more of the outside directors (auditors) affiliated through relational shareholding. Moreover, we find that having half or more of the affiliated outside directors (auditors) is associated with an economically significant reduction in firm value. Our findings call for a reconsideration of disclosure rules on relational shareholding; in particular we argue that outside directors (auditors) affiliation through relational shareholding should be disclosed.
    Date: 2019–09

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NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.