Income-Related Minimum Taxation Concepts and Their Impact on Corporate Investment Decisions

In this paper we analyze the impact of various minimum taxation concepts on corporate investment decisions. These investments can be realized in the form of either a real or a financial investment. In a quantitative analysis we refer to the future values of the investments as an indicator of tax-favored and tax-discriminated projects. Varying the concept-specific loss-offset parameters and cash flow time structure and performing a Monte Carlo simulation reveals the impact of the particular minimum taxation concept. For the first time a comprehensive set of equations has been deduced to integrate different minimum tax concepts in a unique model. The resulting equations can be used as a basis for further analyses of group taxation, wealth taxation and asymmetric taxation and allows us to gain first insights into the direction and magnitude of tax distortions of possible competing concepts. Depending on the set of parameters, complex and ambiguous tax effects can be identified. The effect of minimum taxation depends on the existence and magnitude of a depreciation effect. Both effects run contrary to each other, and the depreciation effect is always greater. We find that all concepts distort in the same direction and that real investments with increasing cash flows are more likely to be discriminated by minimum taxation than financial investments or real investments with constant cash flows. However, in comparison to real investments with decreasing cash flows financial investments suffer more from income-related minimum taxation concepts. These results provide interesting information for corporate investors having to decide on the location of an investment, and for tax reform discussions

The Impact of Profit Taxation on Capitalized Investment with Options to Delay and Divest

In entrepreneurial decisions making uncertain future profits often are a main characteristics of real investment opportunities. If investors can react to uncertainty the degree of irreversibility and timing flexibility inherent in the available project should be integrated into the decision calculus. In this paper we investigate the interdependencies of effects from profit taxation and real options. We model an investment decision including an option to invest and an option to abandon. We show that increasing the tax rate can lead to paradoxical tax effects, i.e. may foster an investor's willingness to invest into a capitalized investment. Instead, if we abstract from the possibility to abandon the investment object such paradoxical effect cannot be identified. Determining the after-tax value of the option to enter the investment project with and without an abandonment option we receive a critical cash flow cutoff level. We find that the value of the option to abandon depends on the tax rate and the amount of periodical cash flows. The option value can be increasing or decreasing in the tax rate. We find scenarios with paradoxical tax effects and show that the observed paradoxical effects are due to the presence of the real abandonment option itself. This finding contributes to the stream of literature that explains potential sources of paradoxical tax effects. The generated decision rules are helpful for investors facing risky investment opportunities and for discussing the economic impact of tax reforms. Furthermore, we highlight the overwhelming importance of integrating taxes in typically applied valuation approaches

Cross-Border Group-Taxation and Loss-Offset in the EU - An Analysis for CCCTB (Common Consolidated Corporate Tax Base) and Etas (European Tax Allocation System)

The European Commission proposed to replace the currently existing Separate Accounting by an EU-wide tax system based on a Common Consolidated Corporate Tax Base (CCCTB). Besides the CCCTB, there is an alternative tax reform proposal, the European Tax Allocation System (ETAS). In a dynamic capital budgeting model we analyze the impacts of selected loss-offset limitations currently existing in the EU under both concepts on corporate crossborder real investments of MNE. The analyses show that replacing Separate Accounting by either concept can lead to increasing profitability due to cross-border loss compensation. However, if the profitability increases, the study indicates that the main criteria of decisions on location are the tax rate divergences within the EU Member States. High tax rate differentials in the Member States imply significant redistribution of tax payments under CCCTB and ETAS. The results clarify that in both reform proposals tax payment reallocations occur in favor of the holding. National loss-offset limitations and minimum taxation concepts in tendency lose their impact on the profitability under both proposals. However, we found scenarios in which national minimum taxation can encroach upon the group level, although in our model the minimum taxation's impacts seem to be slight. Moreover, we identify harmful paradoxes in ETAS due to the tax credit mechanism. Our results can contribute to the current discussion on corporate group tax harmonization within the EU and other economic zones, e.g. the US, and help to anticipate the tax effects of lossoffset restrictions under the respective tax systems

The Impact of Corporate Taxes and Flexibility on Entrepreneurial Decisions with Moral Hazard and Simultaneous Firm and Personal Level Taxation

In this paper we investigate the incentive effects of corporate taxes in an agency setting with a principal facing an investment opportunity including an abandonment option. We are particularly interested in the interplay of taxation and the real option on the principal's incentives to motivate the agent to work hard. First, we extend the well-known studies on tax effects on decision making under uncertainty to moral hazard settings. In a benchmark case we find that, as confirmed in current literature, the corporate income tax has no incentive effect. If the principal accounts for the real option we show that paradoxical tax effects may occur. Also, with respect to the effect of the real option on the incentive problem we show that the option makes it less attractive for the principal to induce the agent to exert a high effort

Prodoc helps transform doctoral training at Business Schools in German-speaking contries

Jahnke H, Sureth C. Prodoc helps transform doctoral training at Business Schools in German-speaking contries. POMS Chronicle. 2010;18(1):16-17

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