File Name: taxation and tax planning book .zip
Research finds that companies that incorporate their tax-planning decisions into their overall enterprise risk management are better able to find that balance of risk and reward. To do this, boards should 1 Take responsibility for risk oversight; 2 Engage in risk-monitoring activities on a regular basis; and 3 Foster an appropriate risk mindset. The five largest U.
In this study, tax avoidance is defined as a reduction in the effective corporate income tax rate through tax planning activities, whether these are legal, questionable, or even illegal. Three measures of tax avoidance are used and factors at the country and firm level that have already been associated with tax avoidance in prior research are controlled. Using samples that range from 9, to 15, publicly-traded companies from 35 countries, covering to , it is found that IFRS adoption is associated with higher levels of corporate tax avoidance, even when the level of book-tax conformity required in the countries and the volume of accruals are controlled, both of which are considered potential determinants of this relationship.
Furthermore, the results suggest that after IFRS adoption, firms in higher book-tax conformity environments engage more in tax avoidance than firms in lower book-tax conformity environments. It is also identified that engagement in tax avoidance after IFRS adoption derives not only from accruals management, but also from practices that do not involve accruals.
The main conclusion is that companies engage more in tax avoidance after mandatory IFRS adoption. A partir de uma amostra que varia de 9. The introduction of an international accounting standard aims to harmonize the financial information companies present.
While various studies seek to identify whether there are informational benefits from IFRS adoption and what these are, the taxation related effects of this adoption have been scarcely explored. Simone notes that there is little research examining the relationship between IFRS adoption and tax planning. This study therefore investigates the taxation effects of IFRS adoption; more specifically, whether IFRS adoption around the world is associated with higher levels of tax avoidance among publicly-traded companies.
Initially, the idea of adopting a new accounting standard would not lead to consequences in the area of taxation, especially considering that the aim of IFRS is to provide more useful information to users in general and that such a set of norms does not aim to serve any specific needs, such as those of tax authorities.
However, alterations in taxable income and in tax planning activities, especially in activities that increase levels of tax avoidance, may have occurred with the adoption of IFRS.
Many jurisdictions that adopted IFRS for the purposes of preparing and presenting financial statements continued to require the local GAAP to be kept as a starting point for calculating taxes Deloitte, Along these lines, Chan, Lin, and Mo , Chan, Lin, and Tang , Chen and Gavious , and Karampinis and Hevas have identified that after IFRS adoption some distancing occurred between the rules for the preparation and presentation of general purpose financial statements and those for taxation purposes; that is, there was a reduction in the level of book-tax conformity.
Atwood, Drake, Myers, and Myers , Chan et al. Researchers that have identified this relationship have mainly based their findings on the fact that managers in high conformity environments face a book-tax trade-off in which any decision to discretionarily reduce taxable income affects the value of the profit that will be reported to external users.
According to Desai , Hanlon, Laplante and Shevlin , and Hanlon and Shevlin , when the level of book-tax conformity decreases, managers do not face the book-tax trade-off and there is thus no longer this greater constraint on them reporting profits in the most convenient way.
Strong evidence that IFRS adoption may have affected tax avoidance levels can thus be identified via the indirect relationship between these two variables; IFRS adoption has reduced required levels of book-tax conformity and lower book-tax conformity is associated with greater tax avoidance.
Another condition that may establish a relationship between mandatory IFRS adoption and increased levels of tax avoidance is the possible increase in discretionary and non-discretionary accruals identified after IFRS adoption.
Atwood et al. Given that an increase in accruals was identified after IFRS adoption and that aggressiveness of accruals is associated with a higher level of tax avoidance, then IFRS adoption may have indirectly contributed to increasing tax avoidance. Other evidence that IFRS adoption can affect the activities that increase tax avoidance was identified by Simone This author found an increase in profit transfers for taxation purposes, from jurisdictions with higher tax burdens to jurisdictions with lower tax burdens, after the adoption of IFRS.
According to De George, Li, and Shivakumar , the first studies on IFRS mostly present the benefits of adoption for companies and countries in terms of improved transparency, investments between countries, comparability of financial statements, reduced cost of capital, and an increase in foreign analysts. It is noted that the literature on IFRS has sought to identify the impacts of adopting this accounting standard on the quality of financial information and its repercussions. This study thus intends to fill gaps in the scarce literature on IFRS adoption and its taxation effects.
Hanlon et al. Thus, it is of key importance for investors and capital market users to know whether taxable income, which provides information used in the decision-making process of resource allocation, is being manipulated to reduce tax expenses. Knowing if IFRS adoption is associated with a higher level of tax avoidance is also of interest to the governments of countries adopting the new set of accounting norms and countries that are thinking about adopting them, since it enables them to know how the behavior of the revenues derived from corporate income tax may have been or are affected by IFRS adoption.
The study can thus contribute to the literature on this topic, which is of interest to governments, companies, and investors, and which contains little empirical evidence. There are no universally accepted definitions or constructs for tax avoidance, which is a challenge for research in the area.
The term can mean different things to different people. For Slemrod , tax avoidance is defined as legal actions that aim to reduce tax liabilities. The limitation of the definition to only legal actions is debated, especially in light of the argument of the difficulty in determining which activities executed in order to reduce tax burdens are legal and which are not Atwood et al. Supporting the discussions regarding the difficulty in distinguishing between legal and illegal activities, Dyreng et al.
Hanlon and Heitzman therefore mention that they do not technically distinguish the legal act of avoiding taxation from the illegal act, for two reasons: i most of the behaviors in question revolve around transactions that are generally considered as technically legal and ii the legality of tax avoidance transactions is generally determined after the fact.
Along these far-reaching lines, Chen, Chen, Cheng, and Shevlin define tax avoidance as management that aims to reduce taxable income through tax planning activities, whether these are legal, questionable, or even illegal.
The term tax avoidance, as in Atwood et al. According to the IFRS Foundation Constitution , the aim of the International Accounting Standards Board IASB is to develop, by taking the public interest into account, a single set of high quality, comprehensible, executable, and globally accepted accounting standards based on clearly articulated principles.
These standards should require high quality, transparent, and comparable information in order to help investors, capital market participants around the world, and accounting information users to take economic decisions. In observing the aim of the IASB, it is noted that the focus of IFRS is to enable financial statements to be elaborated in a way that they provide useful information for the economic decision-making of users in general, and that IFRS are not intended to serve the specific needs of tax authorities.
In adopting IFRS, countries with a high level of book-tax conformity needed to define between: i also using IFRS as a basis for calculating taxable income, thus maintaining levels of conformity high; ii using IFRS to prepare and present general purpose financial statements and maintaining local GAAP as the basis for calculating taxable income, thus reducing the level of conformity, and iii creating standards for tax purposes independent of the GAAP used, thus reducing the level of conformity.
In adopting IFRS, countries with a low level of conformity could: i use IFRS to prepare and present general purpose financial statements and maintain the already existing legislation for tax purposes, thus maintaining a low level of conformity or ii also start using IFRS as the basis for calculating taxable income, thus increasing the level of conformity.
According to Deloitte , many jurisdictions that adopted IFRS with the aim of preparing and presenting financial statements continued to require the local GAAP to be kept as the basis for calculating tax. Thus, the studies from Chan et al. The discretion given to managers to choose the methods to be used in preparing of general purpose financial statements is questioned and generally not accepted by tax authorities for calculating taxable income.
The reduction in the level of book-tax conformity experienced by various countries when IFRS was adopted may have had an impact on the activities that increase levels of tax avoidance, given that there is empirical evidence that a low level of conformity can lead to an increase in the level of tax avoidance Atwood et al.
When there is a high level of book-tax conformity, an increase in financial earnings generally implies an increase in taxable income, thus resulting in a higher level of tax liabilities for companies, which they would presumably prefer to avoid Hanlon et al. If companies opt for transactions that generate book-tax differences in order to achieve the best of both worlds high reported earnings and low taxable income , it could raise suspicions that one or possibly both measures of earnings have been opportunistically reported Hanlon et al.
In contrast, when the level of book-tax conformity is low, managers do not face the book-tax trade-off and there is thus not the greater constraint to report earnings in the most convenient way for them. In this setting, companies more easily avoid paying tax by using strategies that create book-tax differences, which are less costly strategies.
As a result, companies located in countries with a low level of book-tax conformity tend to engage more in tax avoidance Atwood et al. Another indirect relationship between IFRS adoption and levels of tax avoidance can be established via increases in discretionary and non-discretionary accruals.
This increase in the aggressiveness of accruals may be due to the greater flexibility given to managers after IFRS adoption, since this set of accounting standards is based on principles and does not have any detailed guides for implementation.
Given that managers have incentives to exploit accounting discretion in their favor, increased discretion after IFRS adoption will probably lead to more earnings management, ceteris paribus Ahmed et al.
Frank et al. The authors found that if a company has the possibility of managing its reported earnings upwards and its taxable income downwards in the same period, it will engage in this behavior. Given that IFRS adoption is related to an increase in the aggressiveness of accruals and that a higher level of aggressiveness of accruals is positively associated with a higher level of tax avoidance, IFRS adoption may have contributed to an increase in tax avoidance.
Another point that warrants attention is the increase in reported earnings via accruals after the adoption of IFRS. Increased reported earnings can cause an increase in tax avoidance, without there in fact being an increase in the practices that avoid paying tax.
The tax avoidance metrics that involve the effective tax rate ETR generally take pre-tax earnings as their denominator; if these earnings increase and tax remains constant, the effective tax rate will be reduced due to the increase in the denominator and an increase in tax avoidance will be identified, but not due to specific behaviors to reduce taxation.
IFRS adoption can also affect the level of tax avoidance of entities due to other factors. Simone verified that subsidiary companies in the European Union became more involved in profit transfers for tax reasons after the adoption of IFRS, estimating that on average those subsidiaries that mandatorily adopted IFRS transferred The preferred method is to obtain information on specific contractual terms celebrated with or by independent companies for comparable transactions.
Since the availability of this information is limited, multinational entities generally use reference transfer prices, identifying a set of observable, economically comparable, and independent companies, which use similar accounting standards to compare profit margins.
Thus, the adoption of a single standard such as IFRS by various jurisdictions expands the set of companies that can be used as potential references and can enable multinational entities to choose more favorable references to support transfer pricing with tax advantages Simone, Based on the reasons mentioned, which show that mandatory IFRS adoption may have positively affected levels of corporate tax avoidance, the following hypothesis is formulated:.
This metric was proposed by Atwood et al. As in Atwood et al. The other tax avoidance metrics TA2 and TA3 used in this study were based on the proposal from Tang To estimate tax avoidance, the difference between the home-country statutory corporate income tax rate and the the current effective tax rate were used, with the effective rate being measured by dividing the current tax expense by pre-tax earnings before exceptional items model 3 and by dividing the current tax expense by operating cash flow model 4.
All of the other variables have already been previously defined. In agreement with Tang , observations with a negative OCF were eliminated. Effective rates of current tax expense with a value of greater than 1 were substituted by 1.
To remove the influence of potential outliers, the winsorize technique was used for the variables TA1, TA2, and TA3 in the 1 st and 99 th percentiles for each year. Control variables that have already presented a significant association with tax avoidance in previous studies were used. The control variables were divided into control variables at the country level and at the firm level. The LegEnf variable is calculated as the average of three variables: regulatory quality, rule of law, and the level of corruption in a country.
It varies from The InvRig variable is an indicator of investor rights; it varies from 0 to 6 and the higher the indicator, the greater investor rights. The OwnCon c variable represents the ownership concentration in a country, and the higher it is, the greater that ownership concentration.
For all of the other control variables at the firm level, the winsorize technique was used in the 1 st and 99 th percentiles for each year. Given that IFRS adoption may have caused a reduction in book-tax conformity, which in turn may cause in an increase in tax avoidance, it was verified how the association between IFRS adoption and tax avoidance behaves when the level of conformity between reported earnings and taxable income is kept constant and whether this association differs in high and low conformity environments.
To do so, the level of book-tax conformity in the countries over the years was measured using the metric proposed by Atwood, Drake, and Myers The authors modeled book-tax conformity as the amount of the variation in the current tax expense that is not explained by the variation in pre-tax earnings. In the original model there was also the ForPTBI variable, which is the estimated pre-tax foreign earnings. The authors, however, estimated the model without this variable and the results were qualitatively similar.
Due to the permanence of the results without this variable and the limitation of the databases used, in which the data needed to estimate it were not available, the variable was removed from the model. Total dividends Item DVT were included in the model to control for potential cross-sectional differences in the current tax expenses related to the distribution of dividends.
In cases in which there are missing values, it is assumed that DIV is equal to zero. The estimated model is for country-year in order to enable changes in tax rates and in book-tax conformity between countries and within the same country over time. A higher lower root mean-squared error RMSE indicates lower higher book-tax conformity. For the regression analysis, the countries were ranked decreasing ranking every year based on the RMSE from model 5.
Then it was divided by n-1 so that the ranking scale varied between 0 and 1; those countries with higher positions in the ranking in a given year have greater book-tax conformity. The scaled result of the ranking is the BTaxC variable. To verify how the association between IFRS adoption and tax avoidance behaves when the level of book-tax conformity is kept constant, the following model was used:. To determine the countries that are above and below the median, an increasing ranking of the countries that compose the sample was carried out based on the average book-tax conformity required for each country during the study period.
The countries below the ranking median are those that present low book-tax conformity and the countries above the ranking median are those that present high book-tax conformity.
The strength of this book on tax planning and management lies in the exclusive emphasis on legitimate tax planning, which should go a long way in facilitating a viable tax-saving strategy. The Present Publication is the 24th Edition, authored by Dr. Vinod K. Monica Singhania, with the following noteworthy features:. Detailed provisions with respect to non-residents and business restructuring practices prevalent in India, are also given.
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(University ed.). Taxmann Publications Pvt. Ltd. 3. Sengupta, C.H. Law and Practice of Direct and Indirect Taxes, Dey Book Concern.
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In this study, tax avoidance is defined as a reduction in the effective corporate income tax rate through tax planning activities, whether these are legal, questionable, or even illegal. Three measures of tax avoidance are used and factors at the country and firm level that have already been associated with tax avoidance in prior research are controlled. Using samples that range from 9, to 15, publicly-traded companies from 35 countries, covering to , it is found that IFRS adoption is associated with higher levels of corporate tax avoidance, even when the level of book-tax conformity required in the countries and the volume of accruals are controlled, both of which are considered potential determinants of this relationship. Furthermore, the results suggest that after IFRS adoption, firms in higher book-tax conformity environments engage more in tax avoidance than firms in lower book-tax conformity environments.
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