nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2020‒12‒07
four papers chosen by

  1. Tax Expenditure Reporting and Its Use in Fiscal Management; A Guide for Developing Economies By International Monetary Fund
  2. New Zealand's Tax Reforms and 'Tax Sheltering' Behaviour By Gemmell, Norman
  3. On the Role of Internationalization of Firm-Level Corporate Governance – The Case of Audit Committees By Afzali, Haaron; Martikainen, Minna; Oxelheim, Lars; Randoy, Trond
  4. A Q-Theory Of Banks By Juliane Begenau; Saki Bigio; Jeremy Majerovitz; Matias Vieyra

  1. By: International Monetary Fund
    Abstract: This note aims to inform governments on how to account for tax expenditures and use that information in fiscal management. The emphasis is on developing and emerging market economies, where the use of such accounts is in its infancy because of data constraints, insufficient human and financial resources, and weak fiscal institutions. Most developing economies, more-over, do not have tax policy units in their Ministry of Finance to provide analytical support to the govern¬ment and legislature that integrates all revenue policy aspects. As a result, the tax policy framework can be fragmented: line ministries compete in the provision of sectoral tax incentives, but do not report on their cost. The note is organized as follows. The second section outlines the role that tax expenditure measurement and reporting can play in fiscal management. The third section provides a step-by-step approach on how tax expenditure accounts can be built, with emphasis on data, methods and models, and institutional requirements. The section is concerned primarily with the direct cost of tax expenditures—that is, the revenue forgone because of them. It does not deal with their indirect costs, which could include economic efficiency losses and additional tax administration resources, and it does not address assessment of the benefits of tax expenditures. The fourth summarizes the current sta¬tus of tax expenditure reporting in developing econo¬mies, with some reference to advanced economies. The last section concludes.
    Keywords: Tax expenditures;Income tax systems;Value-added tax;Income and capital gains taxes;Public financial management (PFM);FADHTN,HTN,tax expenditure,expenditure estimate,accounting exercise,cost estimate,outlay expenditure
    Date: 2019–03–27
  2. By: Gemmell, Norman
    Abstract: This paper examines two episodes of tax reform in New Zealand to evaluate the extent of tax sheltering in New Zealand. Tax sheltering refers to activities undertaken by taxpayers to earn income in forms that allow this income to be ‘sheltered’ (legally or illegally) from the tax that would normally apply in the absence of such activities. Identifying the nature and extent of tax sheltering behaviour is, however, not straightforward given incentives to hide it and the high resource cost of comprehensive taxpayer auditing. As a result, researchers are often reduced to identifying ‘traces’ (indirect and imprecise indicators) of sheltering activity. This paper examines a variety of variables that can be expected to reveal such traces of sheltering activity related to the ‘legal form’ (corporate, personal, trust, etc.) by which income is earned and taxed. Two substantive reforms to income taxation in New Zealand, in 2000 and 2010, generated two pre- and post-reform tax regimes that allow examination of the issue. The tax regime changes gave rise to different hypothesised effects on ‘legal-form’ tax sheltering that the analysis seeks to exploit. The results provide strong support for those hypotheses. Firstly, tax changes in 2000 created an incentive for individual taxpayers to reduce their personal taxable income (when they paid the top personal rate), and to shift income towards corporate and trust entities. The evidence is consistent with these predictions. Secondly, reforms in 2010, removed the trust route to tax sheltering and reduced incentives and opportunities to earn income via some, but not all, types of corporate ‘arrangement’. Pre- and post-2010 evidence confirms both that the use of trusts declined, and that the most tax-favoured corporate arrangements increased in use after 2010.
    Keywords: Tax sheltering, New Zealand income tax, Tax policy, Trust taxation, Corporate taxation,
    Date: 2020
  3. By: Afzali, Haaron (Hanken School of Economics, Helsinki, Finland); Martikainen, Minna (University of Vaasa, Faculty of Business Studies, Vaasa, Finland); Oxelheim, Lars (School of Business and Law, University of Agder, Kristiansand, Norway); Randoy, Trond (School of Business and Law, University of Agder, Kristiansand, Norway)
    Abstract: Motivated by agency theory and arguments from linguistic studies, we argue in this paper the internationalization of a firm’s audit committee to be associated with weaker firm-level corporate governance. Based on 2,015 publicly traded European firms from 16 countries over 2000-2018, we find the presence of foreign directors on audit committees to have a significant negative impact on financial reporting quality (FRQ). The effect is found to be weaker in countries with strong investor protection. We find linguistic differences within audit committees an important explanation for the negative influence of foreign directors on FRQ. The results are robust to alternative FRQ measures and model specifications, including difference-in-differences and propensity score matching. While foreign directors on a corporate board may create value for the firm by boosting the advisory capacity of that board, recruiting a foreign director to that firm’s audit committee may compromise the board’s monitoring function and the firm’s FRQ.
    Keywords: Reporting Quality; Foreign Directors; Audit Committee; Investor Protection
    JEL: F23 G34 K22 M16 M42
    Date: 2020–11–24
  4. By: Juliane Begenau (Stanford GSB and NBER and CEPR); Saki Bigio (UCLA, Visiting Scholar SF Fed & NBER); Jeremy Majerovitz (MIT); Matias Vieyra (Bank of Canada)
    Abstract: We document five facts about banks: (1) market and book leverage diverged during the 2008 crisis, (2) Tobin's Q predicts future profitability, (3) neither book nor market leverage appears constrained, (4) banks maintain a market leverage target that is reached slowly, (5) pre-crisis, leverage was predominantly adjusted by liquidating assets. After the crisis, the adjustment shifted towards retaining earnings. We present a Q-theory where leverage notions differ because book accounting is slow to acknowledge loan losses. We estimate the model and show that it reproduces the facts. We examine counterfactuals: different accounting rules produce a novel policy tradeoff.
    Keywords: Banks, Tobin's Q, Delayed Accounting, Adjustment Costs
    JEL: G21 G32 G33 E44
    Date: 2020–11

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