nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2022‒02‒14
five papers chosen by

  1. The role of reporting institutions and image motivation in tax evasion and incidence By Kaisa Kotakorpi; Satu Metsälampi; Topi Miettinen; Tuomas Nurminen
  2. Ending Wasteful Year-End Spending: On Optimal Budget Rules in Organizations By Siemroth, Christoph
  3. Using Accounting Information to Predict Aggressive Tax Placement Decisions by European Groups By Matteo Borrotti; Michele Rabasco; Alessandro Santoro
  4. The minimum wage, informal pay and tax enforcement By Anikó Bíró; Daniel Prinz; László Sándor
  5. From accounting to economics: the role of aggregate special items in gauging the state of the economy By Abdalla, Ahmed; Carabias, Jose M.

  1. By: Kaisa Kotakorpi; Satu Metsälampi; Topi Miettinen; Tuomas Nurminen
    Abstract: We investigate effects of tax reporting mechanisms on evasion and incidence in experimental double auction markets where counterfactual reporting and market outcomes can be studied after convergence. There are two control conditions: (i) markets without taxes and (ii) markets where taxes are automatically levied. These are compared to (iii) markets with seller-reporting only and fines paid if low-probability audit discovers evasion, to (iv) markets with both seller- and buyer-reporting and a higher audit probability due to any gap in the numbers reported by the seller and her customers, and to (v) markets where, in addition, buyer-reporting is costly. The latter two mimic varying reporting incentives in the so called third-party reporting in tax enforcement. We find that 20% of the sellers are truthful when only sellers report, but that 80% and 66% of them are truthful under costless and costly third-party reporting, respectively. Pricing, incidence, and reporting patterns in all treatments can be explained by a model of lying costs with image concerns based on Gneezy et al. (2018).
    JEL: H21 H22 H26 D40 D44 D91
    Date: 2021–06
  2. By: Siemroth, Christoph
    Abstract: What can organizations do to minimize wasteful year-end spending before the annual budget expires? I introduce a two-period model to derive the optimal budget rollover and audit rules. A principal tasks an agent with using their budget to fulfill the organization's spending needs, which are private information of the agent. The agent can misuse funds for private benefit at the principal's expense. The principal decides upfront which share of unused funds the agent can roll over to next year, and which spending amounts to audit in order to punish fund misuse. The optimal rules are to allow the agent to roll-over a share of the unused funds, but not necessarily the full share, in most cases to audit only suffciently large spending, and to exert maximum punishment if fund misuse is detected. An extension with endogenous budget levels shows that strategically underfunding the agent can be optimal.
    Keywords: Auditing; Budget Carry-Forward; Budget Roll-Over; Fund Misuse, Moral Hazard; Year-End Spending
    Date: 2022–02–07
  3. By: Matteo Borrotti; Michele Rabasco; Alessandro Santoro
    Abstract: Aggressive tax planning (ATP) consists in taxpayers’ reducing their tax liability through arrangements that may be legal but are in contradiction with the intent of the law. In particular, ATP by multinational groups (MNE) is a source of major concern. In this paper we consider the MNE’s decision to locate or to maintain a company in a tax haven as a relevant symptom of ATP. The research question we want to address is whether this decision can be predicted using publicly available accounting information. We use ORBIS database and we focus on European MNEs. We observe that, in 2021, slightly less than 40% of European MNEs have a company located in a tax haven. Thus, for a tax authority it would be difficult, without a specific analysis, to identify riskier MNEs. We find that a random forest model that uses accounting information for years between 2015 and 2019 predicts reasonably well the decision to locate (or maintain) a company in a tax haven in 2021. Using this model in 2019, a tax authority could have identified almost 80% of European MNEs that were going to locate or maintain a company in a tax haven in 2021. We observe that the most important variables for prediction are those associated to the size of the group, to its positive profitability and to its financial structure, while individual time-invariant features are less relevant. We also find that the predictive performance of the model is maximized when the information is taken from the time subset 2017-2019 and that most important predictors for the risk of using tax havens are also good predictors for the level of intensity of such a use, as measured by the share of subsidiaries located in tax havens. The main policy implication of these results is that (European) non-tax havens could effectively anticipate (and prevent) the decision to locate (or maintain) companies in tax havens, and shape their policies accordingly, with particular reference to cooperative compliance schemes. These policies are more credible in the context of renewed international cooperation in the design of corporate tax rules, and in particular, of the implementation of Pillar Two within the European Union.
    Keywords: Tax Planning, European Multinationals, Machine Learning
    Date: 2022–02
  4. By: Anikó Bíró (Institute for Fiscal Studies); Daniel Prinz (Institute for Fiscal Studies); László Sándor (Institute for Fiscal Studies)
    Abstract: We study the taxation of the minimum wage in an environment with imperfect enforcement and informality. We leverage an increase in the audit threat for earnings below a reporting threshold at twice the minimum wage in Hungary and estimate reporting and employment responses with administrative panel data. Using bunching estimators and difference-in-differences methods, we show that a substantial share of those who report earning the minimum wage earn at least the same amount off the books. When enforcement is imperfect, a taxed minimum wage serves as a backstop on underreporting and recovers some revenue but also increases informality.
    Date: 2021–11–15
  5. By: Abdalla, Ahmed; Carabias, Jose M.
    Abstract: We propose and find that aggregate special items conveys more information about future real GDP growth than aggregate earnings before special items because the former contains advance news about future economic outcomes. A two-stage rational expectations test reveals that professional forecasters fully understand the information content of aggregate earnings before special items, but underestimate that of aggregate special items when revising their GDP forecasts. Using vector autoregressions, we show that aggregate earnings before special items has predictive ability for GDP because, as suggested by previous literature, it acts as a proxy for corporate profits included in national income. In contrast, aggregate special items captures changes in the behavior of economic agents on a timely basis, which, in turn, have real effects on firms' investment and hiring, as well as consumers' wealth and spending. Consistent with news-driven business cycles, we find that aggregate special items produces synchronized movements across macroeconomic aggregates.
    Keywords: aggregate earnings; aggregate special items; GDP growth; asymmetric timeliness; rational expectations; news-driven business cycles
    JEL: E01 E32 E60 M41
    Date: 2022–01–01

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