nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2024‒04‒29
four papers chosen by

  1. Deciphering the GloBE in a Low-Tax Jurisdiction By Mr. Shafik Hebous; Mr. Cory Hillier; Andualem Mengistu
  2. A Q-Theory of Banks By Juliane Begenau; Saki Bigio; Jeremy Majerovitz; Matias Vieyra
  3. Corporate Income Tax (CIT) and Capital By Stanislas T. M. D. C. Agossadou
  4. Optimal Auction Design with Flexible Royalty Payments By Ian Ball; Teemu Pekkarinen

  1. By: Mr. Shafik Hebous; Mr. Cory Hillier; Andualem Mengistu
    Abstract: Pillar Two rules of the Inclusive Framework agreement on a minimum corporate tax (known as ‘Global Anti-Base Erosion Rules’, for short GloBE) have important implications for the design of the corporate income tax. This chapter discusses these implications particularly from the perspective of low-tax jurisdictions. It argues that it is not possible to design a system that always guarantees generating exactly the bare minimum tax intended by the rules and motivates that this should not be the policy objective anyway. Importantly, if no profit tax already exists, countries need to consider whether to adopt one, and if yes, in what form. There is a case for introducing a general profit tax beyond the GloBE rules, together with a qualifying GloBE domestic minimum top-up tax as a backstop. The familiar alternatives of efficient economic rent tax designs, however, are no longer equivalent under the GloBE. In practice, given the specifics of the rules, an efficient rent tax on in-scope multinationals cannot be combined with a statutory tax rate below a certain cutoff, because the minimum tax becomes always binding. Under the GloBE, immediate expensing particularly maintains the time-value of fully deducting the cost of investment, without impacting the GloBE effective tax rate.
    Keywords: Investment; Minimum Tax; Tax Competition; Rent Taxation; Cash-Flow Tax; International Taxation
    Date: 2024–03–22
  2. By: Juliane Begenau; Saki Bigio; Jeremy Majerovitz; Matias Vieyra
    Abstract: We introduce a dynamic bank theory featuring delayed loss recognition and a regulatory capital constraint, aiming to match the bank leverage dynamics captured by Tobin’s Q. We start from four facts: (1) book and market equity values diverge, especially during crises; (2) Tobin’s Q predicts future bank profitability; (3) neither book nor market leverage constraints are strictly binding for most banks; and (4) bank leverage and Tobin’s Q are mean reverting but highly persistent. We demonstrate that delayed loss accounting rules interact with bank capital requirements, introducing a tradeoff between loan growth and financial fragility. Our welfare analysis implies that accounting rules and capital regulation should optimally be set jointly. This paper emphasizes the need to reconcile regulatory dependence on book values with the market’s emphasis on fundamental values to enhance understanding of banking dynamics and improve regulatory design.
    Keywords: Bank Leverage Dynamics, Market vs. Book Values, Accounting Rules, Bank Regulation, Financial Stability
    Date: 2024–04
  3. By: Stanislas T. M. D. C. Agossadou (FASEG/UAC - Faculté des Sciences Economiques et de Gestion (FASEG) de l'Université d'Abomey-Calavi (UAC))
    Abstract: This research consists of verifying whether CIT has an effect on capital given the financing risk incurred. A review of several capital theories has shown that CIT is one of the main determinants of a firm's capital structure. The inclusion of CIT in capital structure models continues to divide the world of corporate finance. Debt interest deduction in computing CIT reinforces the controversy over the question of the capital structure that optimizes the tax savings provided by this deduction. The consequence is the existence of two opposing groups on the optimum capital structure: on the one hand, the group of those who believe that there is one and only one optimal capital structure, and on the other, the group of those who reject out of hand any possibility of an optimal capital structure. The sample starts with a case study of two hypothetical identical firms, one indebted and the other non- indebted, with the same profitable investment project over a period of time, and ends with 101 pairs of identical firms belonging to different classes of financing risk. The hypothesis of non-gratuity of cost and income is used, and capital markets are assumed to be pure and perfect. The results confirm that CIT has no effect on the structure, value, cost and return of capital for a given financing risk, and reveal the existence of a third source of financing called "public capital", whose cost is the corporate capital tax rate (CCTR). There is no longer any question of thinking about the optimum capital structure, which is a pure financial illusion. This paper is one of the first to show that CIT does not affect capital, and to propose a model that explains capital structure behavior in the presence of CIT.
    Abstract: Cette recherche consiste à vérifier si l'IS a un effet sur le capital compte tenu du risque de financement encouru. L'examen de plusieurs théories de capital a montré que l'IS est l'un des principaux déterminants de la structure de capital de la firme. La prise en compte de l'IS dans les modèles de détermination de la structure de capital continue de diviser le monde de la finance d'entreprise. La déduction des intérêts de la dette dans le calcul de l'IS, renforce la controverse sur la question de la structure de capital permettant d'optimiser l'économie fiscale procurée par cette déduction. La conséquence est l'existence de deux groupes opposés sur l'optimum de la structure de capital : d'un côté, le groupe de ceux qui pensent qu'il existe une et une seule structure optimale de capital, de l'autre, le groupe de ceux qui rejettent d'emblée toute possibilité d'une structure optimale de capital. L'échantillon part de l'étude de cas de deux firmes identiques hypothétiques, l'une est endetté et, l'autre, est non endetté, ayant le même projet d'investissement rentable sur une période, pour aboutir sur 101 couples de firmes identiques appartenant à des classes différentes de risque de financement. L'hypothèse de non-gratuité de coût et de revenu est utilisée et les marchés de capitaux sont supposés purs et parfaits. Les résultats confirment que l'IS n'a aucun effet sur la structure, la valeur, le coût et le rendement de capital pour un risque de financement donné et ont révélé l'existence d'une troisième source de financement appelée « capital public » dont le coût est le taux de l'impôt sur le capital des sociétés (CCTR). Il n'est plus question de penser à l'optimum de la structure de capital qui, constitue une pure illusion financière. Ce papier est l'un des premiers à montrer que l'IS n'a pas d'effet sur le capital et à proposer un modèle qui explique le comportement de la structure de capital en présence d'IS.
    Keywords: Capital structure; firm value; weighted average cost of capital (WACC); return on investment; financial integration of corporate tax., Capital structure, firm value, weighted average cost of capital (WACC), return on investment, financial integration of corporate tax.
    Date: 2024–03–17
  4. By: Ian Ball; Teemu Pekkarinen
    Abstract: We study the design of an auction for a license. Each agent has a signal about his future profit from winning the license. If the license is allocated, the winner can be charged a flexible royalty based on the profits he reports. The principal can audit the winner, at a cost, and charge limited penalties. We solve for the auction that maximizes revenue, net auditing costs. In this auction, the winner pays linear royalties up to a cap, beyond which there is no auditing. A more optimistic bidder pays more upfront in exchange for a lower royalty cap.
    Date: 2024–03

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