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on Accounting and Auditing |
| By: | Thomadakis, Apostolos |
| Abstract: | The current international system that coordinates corporate income tax is increasingly unable to deal with a highly integrated and digitalised economy. To avoid taxes, multinational enterprises (MNEs) exploit the system’s inadequacies by shifting profits to low or non-tax jurisdictions – about 40 % of EU MNEs’ profits have been shifted to low-tax jurisdictions. In July 2021, to ensure that profits are taxed where economic activities take place, the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) agreed on an historic two-pillar solution. Following this, in December 2021 the European Commission proposed a directive to implement Pillar Two in the EU. In December 2022, after several attempts to harmonise taxes, Member States finally and unanimously agreed to adopt the Directive, ensuring a global minimum level of taxation of 15 % for MNEs. A new study ‘EU corporate taxation in the digital era’, highlights the main developments in corporate taxation over the last few decades in both the EU and the US. It analyses MNEs’ activity and profit shifting, and the impact of a 15 % minimum corporate tax. It also discusses the critical points in Pillar Two’s design that have raised concerns and require careful calibration. Finally, it proposes recommendations on how to improve Pillar Two’s functioning and how to implement the Business in Europe: Framework for Income Taxation BEFIT, stressing the importance of simplicity and uniformity. Launched in February 2022, a CEPS-ECMI Task Force brought together a working group of industry experts, corporates, academia and EU/international institutions for research and discussion over a period of 18 months. To improve the functioning of Pillar Two, the study specifically proposes that: There should be consistency between the sequencing of the Global Anti-Base Erosion (GloBE) rules in the EU Directive and the OECD’s Administrative Guidance. The principles of the single market must be adhered to, while the constant streamlining of national rules should be promoted. Cleary defining safe harbours should stabilise and substantially simplify the GloBE rules, and if this takes longer than anticipated to finalise, extending the transitory country-by-country safe harbour rules should be considered. The rules for settling litigation should be a high priority within the Inclusive Framework, while special rules at EU level should also be considered. To ensure the coordination of Pillar Two with the BEFIT, the study recommends that: BEFIT should aim for simplification, a reduction in compliance costs and uniformity within the EU to increase the EU’s competitiveness. In short, it should build on Pillar Two rules as much as possible. The optionality of rules could be considered, at least on a temporary basis. BEFIT should be based on strict derivation from financial reporting, with very few corrections. For the sake of simplification and uniform application within the EU, International Accounting Standards and International Financial Reporting Standards should apply and, contrary to the GloBE rules, the use of national accounting rules should not be allowed. As for when to implement BEFIT, an adequate timespan relating to the implementation of the GloBE rules would be best, to avoid overburdening tax administrations and taxpayers. |
| Date: | 2023–09 |
| URL: | https://d.repec.org/n?u=RePEc:eps:cepswp:40760 |
| By: | Buchak, Greg (Stanford U); Matvos, Gregor (Northwestern U); Piskorski, Tomasz (Columbia U); Seru, Amit (Stanford U) |
| Abstract: | The traditional model of bank-led financial intermediation, where banks issue demandable deposits to savers and make informationally sensitive loans to borrowers, has seen a dramatic decline since 1970s. Instead, private credit is increasingly intermediated through arms-length transactions, such as securitization. This paper documents these trends, explores their causes, and discusses their implications for the financial system and regulation. We document that the balance sheet share of overall private lending has declined from 60% in 1970 to 35% in 2023, while the deposit share of savings has declined from 22% to 13%. Additionally, the share of loans as a percentage of bank assets has fallen from 70%to 55%. We develop a structural model to explore whether technological improvements in securitization, shifts in saver preferences away from deposits, and changes in implicit subsidies and costs of bank activities can explain these shifts. Declines in securitization cost account for changes in aggregate lending quantities. Savers, rather than borrowers, are the main drivers of bank balance sheet size. Implicit banks’ costs and subsidies explain shifting bank balance sheet composition. Together, these forces explain the fall in the overall share of informationally sensitive bank lending in credit intermediation. We conclude by examining how these shifts impact the financial sector’s sensitivity to macroprudential regulation. While raising capital requirements or liquidity requirements decreases lending in both early (1960s) and recent (2020s) scenarios, the effect is less pronounced in the later period due to the reduced role of bank balance sheets in credit intermediation. The substitution of bank balance sheet loans with debt securities in response to these policies explains why we observe only a fairly modest decline in aggregate lending despite a large contraction of bank balance sheet lending. Overall, we find that the intermediation sector has undergone significant transformation, with implications for macroprudential policy and financial regulation. |
| JEL: | E50 G20 G21 G22 G23 G24 G28 |
| Date: | 2024–02 |
| URL: | https://d.repec.org/n?u=RePEc:ecl:stabus:4181 |
| By: | Amina Ebrahim; Sebastián Castillo; Vincent Leyaro; Ezekiel Swema; Oswald Haule; Massaga Fimbo; Ephraim Mdee |
| Abstract: | This study measures the VAT compliance gap for small and medium-sized entities in Tanzania. Specifically, the study measures the under-reporting component of the VAT compliance gap. This study uses VAT declaration and audit data to conduct a bottom-up estimation to measure the extent of VAT misreporting in small, medium, and micro enterprises. The study's objective is to examine the extent of VAT under-reporting from 2014 to 2020 and identify the behaviour of firms that contribute to the VAT gap. |
| Keywords: | Value-added tax, Tax compliance, Tax gap, Audits, Bottom-up approach, Income under-reporting |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:unu:wpaper:wp-2024-66 |
| By: | Hess, Ryan (U of Georgia); Black, Emily (New York U); Javed, Zaynah (Stanford U); Hennessy, Jonathan (Stanford U); Lester, Rebecca (Stanford U); Goldin, Jacob (U of Chicago); Ho, Daniel E. (Stanford U); Portz, Annette (US Internal Revenue Service) |
| Abstract: | U.S. partnerships control more than $40 trillion in assets, vastly outnumber U.S. public firms, and contribute significantly to the U.S. tax non-compliance of pass-through entities, which is larger than the non-compliance of publicly traded corporations. However, the prior literature provides extremely little evidence explaining the pervasive use of such entities and which specific characteristics enable the lightly taxed nature of partnership business income. Using administrative U.S. tax data, we first create graphical organizational structures by tracing income through millions of partnership entities. We show that 80 percent of partnership groups are simple structures composed of one single partnership owned directly by individual taxpayers. In contrast, the most complex structures resemble “webs, †characterized by multiple tiers of ownership and clusters of overlapping partners. Second, we determine the entity attributes associated with partnerships developing into complex organizations. Third, conditional on being selected for audit, complex partnerships are four percent less likely to be assessed additional tax, but the amount of assessments is larger. Fourth, we show that complex partnership audits have a high return-on-investment, generating $20 of assessments for each $1 spent, which is a rate over eight times that for corporations. Thus, beyond adding to the nascent literature explaining the prevalent use of partnerships, we provide new insights about the under-reporting of tax on U.S. business income and quantify the potentially large increases in tax revenue collection that could be obtained from increased enforcement of complex partnership businesses. |
| JEL: | D85 H24 H25 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecl:stabus:4219 |
| By: | Cowx, Mary (Arizona State U); Lester, Rebecca (Stanford U); Nessa, Michelle (Michigan State U) |
| Abstract: | We study the tax payment and innovation consequences of limiting the tax deductibility of research and development (“R&D†) expenditures. Beginning in 2022, U.S. companies are required to capitalize and amortize R&D rather than immediately deduct these expenditures. We utilize variation in U.S. firms’ fiscal year ends to test the effects of the R&D tax change in a difference-in-differences framework. We first document that affected U.S. firms’ cash effective tax rates increase by 11.9 percentage points (62%), on average. We then test and find decreases in R&D investment among domestic-only, research-intensive, and constrained firms. In aggregate, these estimates translate to a reduction in R&D of $12.2 billion in the first year among the most research-intensive firms. Further, we observe decreased capital expenditures and share repurchases among affected companies, suggesting that firms also reduced other types of investment and shareholder payout to meet the increased cash tax liability. The paper provides policy relevant evidence about the significant real effects of limiting innovation tax incentives. |
| JEL: | H25 M41 M48 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecl:stabus:4192 |
| By: | Kluth, Guido (Tilburg University, School of Economics and Management) |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:tiu:tiutis:0487cef8-9723-4ac6-bef6-f85f3e2339ce |
| By: | Barak, Ronen E.; Aharon, Itzhak; Hatzor, Limor |
| Abstract: | The accruals anomaly, a well-documented financial phenomenon lacking a comprehensive scientific explanation, is addressed in this study through the proposition of a novel behavioral theory. The theory centers around the concept of a cross-modality anchoring bias, wherein the mental anchor is the magnitude of operating income, modified by the intensity of discretionary accounting accruals. This anchoring effect distorts the distribution of future cash flows used in valuation processes, potentially explaining the anomaly's persistence and robustness. To test this theory, an experiment was conducted, involving participants with suitable financial knowledge and varying levels of practical experience. The experimental results support the presence of the cross-modality anchoring effect, as estimated future cash flows differed significantly across accruals categories, despite being drawn from the same distribution. The magnitude of the bias was influenced by the level of practical financial experience and gender, with women exhibiting lower susceptibility to the interdimensional anchor. |
| Keywords: | accruals anomaly, anchoring bias, cross-modality anchor, valuation, accounting conventions |
| JEL: | G41 G12 M41 |
| Date: | 2023 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:esprep:306142 |
| By: | Selin, Håkan (IFAU - Institute for Evaluation of Labour Market and Education Policy) |
| Abstract: | In a dual income tax (DIT) system, labor income is taxed progressively, while capital income is subject to a lower proportional tax. DIT systems were introduced in Sweden, Norway, and Finland in the early 1990s. In the absence of rules restricting capital income distributions, owners of closelyheld corporations would easily be able to circumvent the progressive tax on earned income by withdrawing an appropriate amount of dividends instead of wages. The Nordic countries adopted very different income splitting models, with immediate implications for the tax treatment of dividends. In this article I first review the principles of the income splitting rules of Sweden, Norway, and Finland. I then discuss some of the tradeoffs involved in the design of such rules. |
| Keywords: | Income taxation; Nordic comparison; dividend taxation |
| JEL: | G35 H32 |
| Date: | 2024–11–18 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:ifauwp:2024_020 |
| By: | Granja, Joao (U of Chicago); Jiang, Erica Xuewei (U of Southern California); Matvos, Gregor (Northwestern U); Piskorski, Tomasz (Columbia U); Seru, Amit (Stanford U) |
| Abstract: | In the face of rising interest rates in 2022, banks mitigated interest rate exposure of the accounting value of their assets but left the vast majority of their long-duration assets exposed to interest rate risk. Data from call reports and SEC filings shows that only 6% of U.S. banking assets used derivatives to hedge their interest rate risk, and even heavy users of derivatives left most assets unhedged. The banks most vulnerable to asset declines and solvency runs decreased existing hedges, focusing on short-term gains but risking further losses if rates rose. Instead of hedging the market value risk of bank asset declines, banks used accounting reclassification to diminish the impact of interest rate increases on book capital. Banks reclassified $1 trillion in securities as held-to-maturity (HTM) which insulated these assets book values from interest rate fluctuations. More vulnerable banks were more likely to reclassify. Extending Jiang et al.’s (2023) solvency bank run model, we show that capital regulation could address run risk by encouraging capital raising, but its effectiveness depends on the regulatory capital definitions and can by eroded by the use of HTM accounting. Including deposit franchise value in regulatory capital calculations without considering run risk could weaken capital regulation’s ability to prevent runs. Our findings have implications for regulatory capital accounting and risk management practices in the banking sector. |
| JEL: | G20 G21 G28 |
| Date: | 2024–04 |
| URL: | https://d.repec.org/n?u=RePEc:ecl:stabus:4182 |
| By: | Koeniger, Winfried (University of St. Gallen); Kress, Peter (University of St. Gallen) |
| Abstract: | We use novel transaction-level card expenditure data to estimate the effect of the temporary value-added tax (VAT) cut in Germany 2020. We find that the annualized growth rate of expenditures for durables increased by 6 percentage points (pp) during the tax cut, with a particularly strong increase of up to 11 pp for consumer electronics. The expenditure growth rate for semi-durables and non-durables did not change by and large. The estimates imply a consumption multiplier of 0.2 and an elasticity of fiscal revenues to a VAT rate reduction of two thirds. |
| Keywords: | consumption expenditure, transactional data, temporary VAT cut, unconventional fiscal policy |
| JEL: | D12 E21 E62 E65 H31 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17412 |
| By: | Taoufik Anni (UM5 - Université Mohammed V de Rabat [Agdal]); Botaina Mjidila (ENCG - École Nationale de Commerce et de Gestion d'Agadir - Université Ibn Zohr = Ibn Zohr University [Agadir]); Mohamed Akhlafou |
| Abstract: | The article examines the significant evolution of the role of management controllers in the development and implementation of human resources (HR) strategies, particularly in response to the rapid transformations in the labor market. Traditionally, management controllers were primarily responsible for overseeing finances and optimizing costs. However, market fluctuations and the increasing complexity of economic environments have led to a redefinition of their responsibilities. Management controllers now work closely with HR departments to align financial objectives with talent management strategies. This collaboration ensures that investments in human resources directly contribute to the overall performance of the company. In Quebec companies, the role of management controllers has evolved to become more strategic, with a strong focus on crossfunctional collaboration and innovation in response to changing labor market dynamics. This transformation enables companies to better navigate an uncertain economic environment while optimizing their human capital. |
| Keywords: | Management Control HR transformation overall performance Contrôle de Gestion RH transformation performance globale. Management Control, Auditing and Finance Review (MCAFR), Management Control, HR, transformation, overall performance Contrôle de Gestion, RH, performance globale. Management Control |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04754921 |