nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2023‒05‒08
seven papers chosen by

  1. Changes in Effective Tax Rates due to Fundamental Corporate Tax Reforms: Analysis of Financing Neutrality Using a Forward-Looking Model By Toshiyuki Uemura
  2. The international tax agreement of 2021: Why it's needed, what it does, and what comes next? By Kimberly A. Clausing
  3. Cost and uptake of income-based tax incentives for R&D and innovation By Silvia Appelt; Ana Cinta González Cabral; Tibor Hanappi; Fernando Galindo-Rueda; Pierce O’Reilly
  4. Finding Anomalies in China By Hou, Kewei; Qiao, Fang; Zhang, Xiaoyan
  5. US Taxation of Gambling Winnings and Incentives to Bet By Whelan, Karl
  6. Model Risk for Acceptable, but Imperfect, Discrimination and Calibration in Basel PD and LGD Models By Henry Penikas
  7. Design features of income-based tax incentives for R&D and innovation By Ana Cinta González Cabral; Pierce O’Reilly; Silvia Appelt; Fernando Galindo-Rueda; Tibor Hanappi

  1. By: Toshiyuki Uemura (School of Economics, Kwansei Gakuin University)
    Abstract: While the current corporate tax system in Japan allows interest expense on debt to be deductible, no such mechanism exists for other financing, leading to a "debt bias." Therefore, the Comprehensive Business Income Tax (CBIT), Allowance for Corporate Equity (ACE), and Allowance for Corporate Capital (ACC) have been proposed. According to international comparisons by the OECD, the marginal effective tax rates in ACE-adopting countries are low, and these countries have reformed their corporate tax systems toward financing neutrality. This study conducts a comprehensive survey of empirical analyses of Japan's effective corporate tax rates and classifies them into four effective corporate tax rates. Further, fundamental corporate tax reform proposals using forward-looking effective tax rates are analyzed in line with Hanappi (2018), OECD (2020), and Spengel et al. (2020), who conducted international comparative studies of effective corporate tax rates. This study makes improvements to Japan's 2020 parameters in Spengel et al. (2020) to obtain the cost of capital (user cost of capital), marginal effective tax rate, and average effective tax rate values by financing and assets. The parameters of the proposed reforms are then incorporated into a model of the effective corporate tax rate to conduct a simulation analysis under a constant statutory tax rate. First, a simple CBIT that does not allow deductions of interest expenses increases the cost of capital, marginal effective tax rate, and average effective tax rate for debt financing. Second, a simple ACE that allows the deduction of opportunity cost at the notional interest rate on equity lowers the cost of capital, the marginal effective tax rate, and the average effective tax rate for retained earnings and new equity. Third, a simple ACC that allows all financing to deduct opportunity costs at the notional interest rate lowers the cost of capital, marginal effective tax rate, and the average effective tax rate for all financing. However, these results are difficult to compare due to different average effective tax rates. Therefore, conducting similar simulations under a constant average effective tax rate results in statutory tax rates of 25.57% for CBIT, 42.33% for ACE, and 42.62% for ACC, compared with 31.30% for the base case. Thus, CBIT reduces its tax rate by five percentage points from the current rate, but ACE/ACC requires a ten percentage point increase. It is also indicated that CBIT increases the cost of capital and the marginal effective tax rate while ACE/ACC reduces these rates. The above simulations are conducted assuming a simple CBIT with no deductible interest expense, a simple ACE/ACC where the notional interest rate matches the nominal interest rate, and the rate at which ACE/ACC is applied matches the statutory corporate income tax rate. Simulations that relax these conditions are conducted under a constant average effective tax rate. First, under CBIT, varying the deductibility of interest expenses has a limited effect on the cost of capital and the marginal effective tax rate. Second, when the notional interest rate is set lower than the nominal interest rate or when the tax rate to which ACE/ACC is applied is set lower than the statutory tax rate, the effect on the marginal effective tax rate is significant. These results have some implications: CBIT can ensure financing neutrality, but it increases the cost of capital and the marginal effective tax rate, which may negatively affect investment. On the contrary, ACE/ACC decreases the cost of capital and marginal effective tax rate, which can positively affect investment. In particular, the ACE has been introduced in many countries and is considered a promising proposal for future corporate tax reform in Japan.
    Keywords: Financing Neutrality, Forward-Looking Effective Tax Rates, Fundamental Corporate Tax Reform
    JEL: H25 H32
    Date: 2023–04
  2. By: Kimberly A. Clausing (Peterson Institute for International Economics)
    Abstract: In 2021, more than 135 jurisdictions agreed on transformative new international tax rules that would establish a minimum tax rate of 15 percent on multinational corporate income regardless of where it was reported. In December 2022, the European Union unanimously moved forward to implement this minimum tax, and other countries, including South Korea, Japan, Australia, Canada, and the United Kingdom, are also either implementing the tax or taking substantial steps toward implementation. In tandem, the United States should also reform its international tax system and adopt a stronger minimum tax. While the future of the international agreement is uncertain, it has important implications for the ability of governments worldwide to create tax systems that are administrable, fair, and efficient. The agreement also demonstrates important guiding principles for the future of multilateral cooperation on global collective action problems, including efforts to protect public health from future pandemics, address nuclear proliferation, and resolve territorial conflicts. US progress on international tax reform would enhance much needed international cooperation on these issues.
    Date: 2023–04
  3. By: Silvia Appelt; Ana Cinta González Cabral; Tibor Hanappi; Fernando Galindo-Rueda; Pierce O’Reilly
    Abstract: Despite the increasing adoption of income-based tax incentives for R&D and innovation in the OECD area and beyond, evidence on the availability, design, generosity and actual cost of these incentives remains scarce. This report helps fill this gap by documenting government efforts to provide preferential tax treatment of economic outputs of innovation activities. Drawing on the responses of national contact points to the OECD KNOWINTAX surveys carried out in 2020 and 2021, it presents new evidence on the cost (foregone tax revenues) and uptake of income-based-tax incentives by businesses in 2019, and tracks their distribution by firm size and industry and their evolution over the 2000-2019 period.
    Keywords: innovation, research and development, tax incentives
    JEL: O34 O38 H25
    Date: 2023–04–20
  4. By: Hou, Kewei (Ohio State U); Qiao, Fang (U of International Business and Economics, Beijing); Zhang, Xiaoyan (Tsinghua U)
    Abstract: To study the cross-section of returns in the Chinese stock market, we follow the anomaly literature and construct 454 strategies between 2000 and 2020, based on 208 firm-level trading and accounting signals. With the conventional single-testing t-statistic cutoff of 1.96, 101 strategies have significant value-weighted raw returns, and 20 remain significant after risk adjustments. To avoid false discoveries, we recalibrate the t-statistic cutoff to 2.85 to accommodate multiple testing. 36 strategies survive the higher hurdle rate in value-weighted raw returns, while none remains significant after risk adjustments. When we use machine learning techniques to combine information from multiple signals, the resulting composite strategies mostly have significant returns after risk adjustments, even with the higher t-statistic cutoff. We relate Chinese anomaly returns to aggregate economic conditions and find that they comove with financial market development, accounting quality, market liquidity, and government regulations.
    JEL: G1 G12
    Date: 2023–01
  5. By: Whelan, Karl
    Abstract: Sports betting is growing rapidly in the US after its legalization by the Supreme Court in 2018. This paper describes the treatment of gambling winnings and losses in the federal tax code and shows how the system may incentivize some gamblers to substantially increase the scale of their betting in order to have a chance to win. This incentive stems from the fact that gambling losses can only be deducted if taxpayers are filing for itemized deductions, meaning the scale of gambling losses has to be large enough to push a taxpayer’s eligible deductions over the standard deduction. This incentive to engage in large-scale betting applies mostly to lower and middle-income households.
    Keywords: Taxation; risk taking
    JEL: D81 H24 L83
    Date: 2023–02–06
  6. By: Henry Penikas (Bank of Russia, Russian Federation)
    Abstract: The Basel Internal-Ratings-Based (IRB) approach allows banks to use sufficiently good credit risk models for the daily computation of their capital adequacy ratio. However, being sufficiently good does not naturally mean being perfect. Conventionally, risk managers increase the mean probability of default (PD) and loss given default (LGD) values by some margin when developing a model. They expect that it is sufficient to offset for potential model risk. This add-on, thought to be conservative enough, gave rise to the term Ôconservative marginÕ. The novelty of this paper is that we are the first to identify the cases when such a margin is not sufficient. The principal cause is the previously ignored requirement to ÒfreezeÓ capital against the existing loans. This capital tie-up does not allow reallocating excessive capital requirements from actual non-defaults (false negatives) to unforeseen defaults (false positives). This is the first time when such a novel cause of model risk is discussed. The value the paper creates is severalfold. First, the revealed model risk has a material scale and can be part of the bankÕs explicit or implicit risk-taking strategy. Therefore, it should be considered by researchers, as well as by validators and supervisors. Second, the paper offers an indicator to expand the risk indicator dashboard suggested by the Basel Committee, when designing risk-reward remuneration. This is especially true of contracts with risk model developers.
    Keywords: validation, IRB, Basel II, AUROC, CLAR, Loss Shortfall, Brier skill score, traffic light approach
    JEL: C52 G28 G32
    Date: 2022–04
  7. By: Ana Cinta González Cabral; Pierce O’Reilly; Silvia Appelt; Fernando Galindo-Rueda; Tibor Hanappi
    Abstract: Tax incentives that provide preferential tax treatment to the incomes arising from research and development (R&D) and innovation activities, such as intellectual property regimes, have become widespread in recent years. This paper describes the key design features of tax incentives available in 49 member countries of the Inclusive Framework on BEPS (IF), covering all OECD countries and EU countries. It outlines differences in the design of such incentives that may translate into differences in the tax benefits offered. The information collected and reported in this paper is a first step towards a more systematic comparison of tax support policies for R&D and Innovation.
    Date: 2023–04–20

General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.