This website uses cookies to ensure you have the best experience. Learn more

Corporate Tax Avoidance And Benford's Law

3255 words - 14 pages

I will test the hypothesis in this study based on the results of the t-test on the digit with an unusually high frequency in the financial statements of avoiders. As mentioned above, the test sample will be used in a regression model to see if the finding of the first test is correct and persists when controls are included for firm characteristics which are associated with cash effective tax rates. More specifically, firm characteristics which have been proven to be a determinant of corporate tax avoidance in prior research.
The following regression model is estimated to test the hypothesis stated in this study:

CASH ETRi,t = β0 + β1HIGH FREQi,t + β2ROAi,t + β3LEVi,t + β4NOLi,t + β5∆NOLi,t ...view middle of the document...

One limitation of the annual CASH ETR is that the numerator and denominator could be misaligned. This is the case when the numerator, thus cash taxes paid contains taxes paid on earnings in a different period, for example, earnings from an IRS audit which was completed in the current year, while the denominator “pre-tax income” contains earnings solely from the current year (Hanlon and Heitzman 2010). A second limitation is that the CASH ETR does not capture the changes in tax accounting accruals. The CASH ETR for firm i for the year t is measured as follows:
Cash taxes paidi,t / Pre-tax incomei,t.
The variable of interest in this study is HIGH FREQ, which is dummy variable that is equal to one if a firm has an unusually high frequency of a certain digit, and zero otherwise. Firms that are tax avoiders usually have a low cash effective rate. Therefore, I expect a negative coefficient on the HIGH FREQ variable implying that the firms with an unusually high frequency of a certain digit have a negative influence on the CASH ETR. There are different controls for firm characteristics that have been reported to be associated with tax avoidance measures. I use the same control variables for firm characteristics as Chen et al. (2010).
Return on asset (ROA) is calculated as the pre-tax income deducted by extraordinary items divided by lagged assets. Return on assets generally measures the profitability and operations of a firm. Effective tax rates are an outcome of the proportion of tax incentives to financial accounting income. In this case, tax incentives, such as depreciation, are items that create differences between financial accounting income and taxable income. To the extent that tax inducements are not consistently associated with financial accounting income, effective tax rates can be altered because of changes in financial accounting income. Thus, ROA captures changes in the operating results of a firm (Richardson and Lanis 2007). In contrast, Manzon and Plesko (2001) state that firms which are more profitable are able to use tax deductions and tax credits and benefit from tax exemptions. Therefore, they have more resources to engage in tax avoidance activities. Profitable firms have an advantage compared to firms that are not profitable in that they can use for example, tax exemptions and tax deductions to minimize taxable income which in turn will increase book-tax differences. Their results are consistent with this notion. In contrast, studies by Gupta and Newberry (1997), Richardson and Lanis (2007), Chen et al. (2010) find that firms that are more profitable usually have higher effective tax rates. Therefore I do not have a certain prediction on the association between the ROA and the CASH ETR variables.
Leverage (LEV) is computed as long-term debt divided by lagged assets. Financing decisions of a firm may have an effect on effective tax rates. This is because tax laws usually allow differential tax treatment to the capital...

Find Another Essay On Corporate tax avoidance and Benford's Law

Thailands Tax Essay

1383 words - 6 pages for them within the topic of tax structures and avoiding/minimising tax.[7: Phillip Lynch, 'Human Rights and Corporate Social Responsibility' (2006) 10(3) Corporations and Markets Advisory Committee <$file/Human_Rights_CSR.pdf>]There is a fine line between tax avoidance and tax planning. Tax planning can be descried as the arrangement of financial affairs to take full

Professional Challenges in Computing Essay

2073 words - 8 pages paying no or less corporate tax to UK government. Google’s own slogan “Do no Evil”, does not applicable to the Google itself as they are paying less amount of tax to the UK government by twisting and bending tax law. Also, “the US technology giant (Apple) used tax assumptions from share awards to employees to help rub out the actual tax responsibilities of its UK businesses” (Chan, 2013). International / Pure play companies are becoming more

Taxation influences multinational companies structure and investment Decisions

992 words - 4 pages they might manage the affairs of the entity they manage. In that case, this claim of a ‘duty’ is actually used as an excuse to justify chosen corporate behaviour. [1] 3.) There may be a valid reason for a company locating a subsidiary in a tax haven if real trade is occurring and no suggestion of tax avoidance would result. However, it is largely due to when careful planning of group company structure decides that it not only wishes to take

IRS and Tax Regulations

2115 words - 8 pages . Examples of items recognized under the IRS but not GAAP include Percentage depletion of natural resources in excess of their cost, and deduction for dividends received from U.S. corporations (2012). These differences do not cause any tax assets or liabilities. The idea that corporate social responsibility plays a role in tax avoidance is interesting because business people are supposed to be ethical. The studies show that companies that have

latin king

892 words - 4 pages Zoila VegaKim SmithDoug DiChiaraMike Garbowski Jessica GilbertMini Case # 2August 25, 2014Define and discuss what an inversion is and the effects it can have on the U.S. Economy.(3 points)Tax inversions are a form of tax avoidance. They are driven by several factors, but the most prevalent factor is that the U.S. tax code seeks to impose income tax on profits earned abroad by American corporations.An inversion occurs when a company based in one

International Tax Planning

1334 words - 5 pages greater transparency in the banking system and corporate structures. The majority believe the term "offshore company" and "illegal money" are almost synonymous. In fact, offshore company is only a tool, that can be used for a lawful, and, unfortunately, for illegal purposes. To my opinion, it should be a clear distinction between tax planning and tax evasion. Tax planning is an activity to minimize the taxes, which is not in conflict with the law

Taxation of Foreign Corporations

2268 words - 9 pages issue of the corporate use of holding companies to evade taxes persists as an issue that, in many cases, within the jurisdiction of the law. There are many people in the U.S and around the world who see the issue resulting in the creation of tax havens. For example, Atrium Offshore, which proclaims to be a specialist in, “tailor-made solutions for wealth preservation and enhancement” describes Delaware as an, “offshore tax haven in the for non

Tax Shelters

1358 words - 5 pages Reporting and Compliance"). Furthermore, same or significantly similar transactions that IRS has determined to carry a tax avoidance flavor must be identified via notice (7). In light of the recent Federal regulations, promoters have to "register confidential corporate tax shelters, material advisors have to maintain and furnish information, including names of investors, concerning sales and transfersin potentially abusive tax shelters," and

United States Taxation on Worldwide Income

2894 words - 12 pages percent of all federal revenues came from corporate income taxes, of which about half was paid by multinational corporations reporting foreign income (CBO). Thus, many corporations are following suit, using tax avoidance schemes to reduce the scope of their U.S. tax burden or simply moving to other tax jurisdictions. The United States is one of only two countries in the world that taxes its citizens on their worldwide income, without regard to

Double Taxation Relief

3628 words - 15 pages ensure that this system will be efficient, a country should limited the exemption to foreign source income that is subject to foreign tax comparable to domestic tax. Thus it has several requirements (1) dynamic source of income and expense rules, (2) anti-avoidance rules to prevent low-taxed foreign source income from qualifying for exemption and (3) expense allocation rules to prevent taxpayers from deducting against their domestic income.3.CREDIT


1945 words - 8 pages Introduction Economic substance and sham transactions are critical issues, in determining whether to respect an entity. The case of Gregory v. Helvering, 293 U.S. 465 (1935) was the first case of its kind to come before the courts on the issue of whether there were a tax free corporate reorganization, where there were no intent to carry on a business, but only to avoid taxes. The Gregory case was a milestone case by the Supreme Court that is

Similar Essays

Tax Planning And Tax Avoidance Analysis

2668 words - 11 pages organization as one that does not participate in revenue contribution in the country (Mintz and Weichenrieder, 2010, p. 731). This has the implication of damaging the corporate image of the company because payment of tax is considered a social responsibility. Tax avoidance in the corporate world is considered schemes that are not transparent and not being in compliance with tax laws. Despite tax avoidance being within legal limits, it is perceived

Tax Evasion Or Tax Avoidance: Is Starbucks` Tax Planning And Practice Setting A Bad Precedent?

1949 words - 8 pages tax issues within the framework of the law. There may be a question of ethics but a legal approach to arrange international associated dealings to take advantage of the various countries tax laws and double tax agreements would normally pass the test. However the arm's length nature needs to be addressed to determine whether there is a transfer pricing issue, and if so, is an adjustment a possibility?  Tax Avoidance – This is a case of ethics and

Tax Law And Accounting Paper

1306 words - 5 pages avoiding corporate income taxes.Social Considerations provided by Federal tax law include medical benefits to employees that are nontaxable to employees, pension or profit sharing plans contributions and earnings are not taxed to the employee until the funds are distributed, tax deductions for charitable contributions and tax credits for minors or disable dependents (Hoffman, pg 1-27).A prime example of equity consideration is allowing a deduction

Corporate Bailout And The Law Essay

1487 words - 6 pages issue citing that other forms of protectionism in addition to corporate bailouts have a long and distinguished history in the United States. For instance, in 1816, the government initiated the protection of the sugar industry against market forces (Bovard, p.71). Despite the fact that taxpayers stand a chance of losing close to $14 billion in the bailout of GM and Chrysler, supporters of the bailout, mostly the pro-Obama’s government, argue that