Explicit, Implicit and Total Taxes in the Corporate Sector: Evidence for the Netherlands

This paper provides empirical evidence on the existence of implicit taxes in the corporate sector. With this finding, it provides support for the offsetting nature of explicit versus implicit taxes. Governments continuously provide tax preferences (tax incentives) to firms to induce these firms to alter their investment, production and financing decisions to reallocate resources towards outcomes that the government prefers. Tax preferences lead to lower explicit tax rates for firms that make use of these preferences. However (see Scholes and Wolfson (1992) and Wilkie (1992)), economic theory suggests that in equilibrium all firms must earn the same after-tax return (e.g. ROE). Hence high (low) implicit taxes (tax preference induced adjustments of pre-tax returns) can be expected for firms with low (high) explicit taxes. This paper uses financial statements of 123 listed firms for six years (1991-1996) to provide empirical evidence on the existence of implicit taxes in the corporate sector in the Netherlands. The paper finds that the inverse relation between implicit and explicit taxes exists, but is not a strong as expected, suggesting market frictions that prevent the equalisation of after-tax returns.microeconomics ;

Determinants of the Variability of Corporate Effective Tax Rates (ETRs): Evidence for the Netherlands

A sizeable portion of US research has tried to assess the ‘fairness’ of the corporate income tax system, that is: are companies treated in a non-discriminatory way under the corporate income tax system. Similar research has, however, never taken place in the Netherlands. The goal of this paper is to address this shortcoming. This paper examines whether an association can be found between the variation in average effective tax rates (ETRs) among Dutch companies and company characteristics such as size, asset mix, extent of foreign operations, performance, leverage, being a public company and being a listed company. Controls are used for net operating loss status, negative tax expense status, and interaction between firm size and net operating loss status and negative tax expense status. The results in the paper are based on an analysis of a pooled panel of company-level data from financial statements in the CD-ROM REACH A datafile for five years, 1994 to 1998. In this paper two financial statement based ETR measures are used. One ETR measure is based on income before taxes and another ETR measure is based on cash flow. Results from a fixed effects generalised linear model provide support for the conclusion that, after controlling for indirect effects, the taxation of corporate profits in the Netherlands is fairly neutral. These results are supported by additional sensitivity analysis.microeconomics ;

Voluntary adoption of non-local GAAP in the European Union: a study of determinants

This study examines the determinants of voluntary adoption of non-local accounting principles for financial reporting (non-local GAAP) by non-financial companies listed and domiciled in the European Union. We restrict ourselves to the two most predominant internationally accepted sets of accounting standards: International Accounting Standards (IAS) and United States generally accepted accounting principles (US GAAP). The maintained hypothesis is that firms will switch from local to non-local GAAP if the benefits outweigh the costs. This study provides insight in the characteristics of firms that experience positive net-benefits from non-local GAAP adoption. Considering that mandatory adoption of IAS is envisaged for listed EU companies from 2005 on, the results are of potential interest to EU and national financial reporting regulators.We have used various sources to identify EU companies that use non-local GAAP. The 1999 annual reports of all these companies were examined. We find that 133 non-financial companies in the EU voluntarily adopted non-local GAAP in 1999. This suggests that the net-benefits of using non-local GAAP are positive for only a small minority of EU companies.Companies that do voluntarily use non-local GAAP are more likely to be listed on a US exchange, the EASDAQ exchange in Brussels, and have more geographically dispersed operations. Furthermore, they are more likely to be domiciled in a country with lower quality financial reporting and where IAS is explicitly allowed as an alternative to local GAAP.accounting and auditing ;

The Value Relevance of Dirty Surplus Accounting Flows in the Netherlands

Recently the Dutch financial reporting standard setters have taken steps to make dirty surplus accounting flows more visible to parties outside firms, either by eliminating their possibility or by requiring comprehensive income type statements. These steps are presumably based on the idea that dirty surplus accounting flows are value relevant to investors and hence have to be visible to them. Whether dirty surplus accounting flows are indeed value relevant is an empirical issue. This paper therefore explores both incremental and relative value relevance of various dirty surplus accounting flows for Dutch listed firms. We find evidence that dirty surplus goodwill write-offs in particular are relevant in explaining returns and that the clean surplus earnings perform better than the reported earnings over 1-year intervals. Taken together, these 1-year interval empirical results indeed imply that the Dutch managers in the period considered wrote-off value relevant information via dirty surplus accounting flows. Over longerterm intervals, dirty surplus items are not or negatively related to returns and reported income becomes more value relevant than clean surplus income.accounting;incomes;value relevance;Netherlands