nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2021‒09‒27
five papers chosen by

  1. Perspectives from mainland China, Hong Kong and the UK on the development of China’s auditing firms: implications and a research agenda By Macve, Richard
  2. Challenges of international business taxation in the context of digitalization By Milogolov Nikolai; Berberov A.
  3. Organizational Capacity and Profit Shifting By Katarzyna A. Bilicka; Daniela Scur
  4. External Balance Sheets and the COVID-19 Crisis By Galina Hale; Luciana Juvenal
  5. IPOs and Corporate Taxes By Christine L. Dobridge; Rebecca Lester; Andrew Whitten

  1. By: Macve, Richard
    Abstract: Based on gaining privileged access to interview senior representatives of audit firms, regulatory bodies, financial institutions, universities and other organisations in mainland China, Hong Kong and the UK, this exploratory study presents a range of informed views about the rapid development of China’s auditing profession over the last 25 years. It explores the emerging roles of the firms in the 2nd-tier international networks and among the larger stand-alone firms as challengers to the Big 4, nationally and internationally. It identifies national and international institutional interactions that have shaped and are being shaped by this rapid growth, with particular reference to the overarching role of the State’s shifting strategies to create a domestic profession in China that can compete internationally. The potential consequences, given China’s unequalled size and its expanding global influence, could change the nature and structure of the global profession. A significant contribution of this exploratory empirical study has been to deconstruct the continuing conventional political and academic rhetoric that dichotomises firms into ‘foreign vs local’ and ‘Big 4 vs other’. It contributes new voices and alternative perspectives to the emerging literature on the glocalization of large professional services firms and suggests new opportunities for future auditing research.
    Keywords: Chinese auditing profession; International Auditing Standards (ISA); Big 4; 2nd-tier audit networks; international professional service firms (IPSFs); auditing research
    JEL: F3 G3
    Date: 2020–11–09
  2. By: Milogolov Nikolai (Gaidar Institute for Economic Policy); Berberov A. (Gaidar Institute for Economic Policy)
    Abstract: The current system of international taxation does not result in a fair distribution of the tax base between countries in a digital environment violating the principle of taxation in accordance with the added value created in the particular country. In the absence of international consensus, countries reform their tax systems aimed to collect taxes in the digital economy unilaterally by imposing Digital Services Tax (DST). By their nature, being indirect, these taxes (DST) are collected on the turnover of foreign digital companies in the market country (the country of the source of income).
    Keywords: Russian economy, taxation, international business taxation
    JEL: H2 H24 H25
    Date: 2021
  3. By: Katarzyna A. Bilicka; Daniela Scur
    Abstract: This paper analyses the effect of a firm’s organizational capacity on the reported profitability of multinational enterprises (MNEs). Better organizational practices improve productivity and the potential taxable profits of firms. However, higher adoption of these practices may also enable more efficient allocation of profits across tax jurisdictions, lowering actual taxable profits. We present new evidence that MNE subsidiaries with better such practices, when located in high-tax countries, report significantly lower profits and have a higher incidence of bunching around zero returns on assets. We show these results are driven by patterns consistent with profit-shifting behavior. Further, using an event study design, we find that firms with better practices are more responsive to corporate tax rate changes. Our results suggest organizational capacity, especially monitoring-related practices, enables firms to engage in shifting profits away from their high-tax subsidiaries.
    JEL: H26 H32 M11 M2
    Date: 2021–09
  4. By: Galina Hale; Luciana Juvenal
    Abstract: At the onset of the COVID-19 economic crisis, as in other crisis episodes, the flight to safety was accompanied by a rapid appreciation of “safe haven” currencies. We quantify currency-induced balance sheet effects for total external positions as well as for individual asset classes using new data on the currency composition of cross-border stocks for 48 countries for the first quarter as well as for the full year 2020. We also conduct the stock-flow reconciliation of net international investment positions to measure overall valuation effects. We show that for many countries currency-induced valuation gains mitigated losses that resulted from declining asset prices in the first quarter of 2020. Moreover, for countries with excess capital out flows during this period, the impact on external balance sheet positions was mitigated by valuation gains. This is because, in contrast with past financial crises, many emerging markets did not experience negative external balance sheet effects from their currency depreciation, partly due to currency-induced valuation gains on equity positions offsetting losses on debt positions, partly due to reduced currency mismatch on their external debt positions.
    JEL: F32 F34 G15
    Date: 2021–09
  5. By: Christine L. Dobridge; Rebecca Lester; Andrew Whitten
    Abstract: How does going public affect firms’ tax obligations and tax planning? Using a panel of U.S. corporate tax return data from 1994 to 2018, we compare tax payments for firms that completed an IPO with those that filed for an IPO but later withdrew and remained private. We find that in the years immediately following IPO completion, firms have a higher probability of paying taxes and pay more U.S. tax. The effects occur regardless of tax status in the pre-IPO period and are not explained by statutory limitations imposed on the use of pre-IPO losses. Higher income reported for financial reporting purposes, as well as lower interest deductions attributable to debt repayment, contribute to the increased tax payments. These increases are partially offset by higher tax deductions for post-IPO investment and employment spending. Furthermore, the IPO is associated with increased tax planning through foreign tax haven use. The evidence adds to the nascent literature examining corporate tax implications of the IPO decision.
    Keywords: Corporate tax; IPO; Investment; Tax haven
    JEL: G31 G32 H25
    Date: 2021–09–07

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