Does accounting for taxes on income provide information about tax planning performance? Evidence from German multinationals

This paper investigates the quality of information on tax planning performance which is provided by financial accounting based on IAS 12 (Income taxes). A simple theoretical investment model is used to show that reported tax expenses can be misleading as an indicator of tax planning performance, since timing effects of tax depreciations are suppressed. However, it is shown that IAS 12 provides meaningful information if tax planning strategies are driven by statutory tax rate differences, e.g. in the case of profit shifting. Our empirical analysis of actual tax planning behaviour, based on a panel of German balance sheet data, suggests that in practice international tax planning is significantly driven by statutory tax rates. However, we find that tax depreciation impacts on the size of investment as well and thus, IAS 12 does not fully disclose tax planning performance. --International Taxation,Financial Accounting,Income Taxes,Firm-level Data

Efficiency of different numerical methods for solving Redfield equations

The numerical efficiency of different schemes for solving the Liouville-von Neumann equation within multilevel Redfield theory has been studied. Among the tested algorithms are the well-known Runge-Kutta scheme in two different implementations as well as methods especially developed for time propagation: the Short Iterative Arnoldi, Chebyshev and Newtonian propagators. In addition, an implementation of a symplectic integrator has been studied. For a simple example of a two-center electron transfer system we discuss some aspects of the efficiency of these methods to integrate the equations of motion. Overall for time-independent potentials the Newtonian method is recommended. For time-dependent potentials implementations of the Runge-Kutta algorithm are very efficient

Remarks on the OECD/G20 program of work: Profit allocation and minimum taxation

The OECD proposes new nexus rules and formula-based allocation of large digital and consumer-oriented MNE’s residual profits to market states where the respective MNEs serve their customers (Pillar One Proposal, POP) combined with a worldwide minimum taxation regime (Pillar Two Proposal, PTP). POP creates a hybrid system of international profit allocation because it comes on top of the traditional arm’s length principle (ALP). The new hybrid system causes the risk of double taxation due to overlapping tax bases. In addition, MNEs have new tax planning opportunities when determining the amount of residual profits in the market states. PTP suggests an internationally agreed effective minimum tax rate combined with a (residence-based) income inclusion rule and a (source-based) undertaxed payment rule. In principle, the income inclusion rule would be sufficient and avoid an otherwise necessary priority rule. Without setting a minimum tax rate, the allocation of MNEs’ profits to market states in effect also establishes a minimum taxation regime. Therefore, waiving POP as well as PTP in favor of a full-fledged formula-based profit allocation scheme is a valid tax policy option. POP and PTP call for an unprecedented level of international tax cooperation. States have to agree on the details of the tax base as well as on the tax rate. Credibility is paramount for such far-reaching international cooperation. Up to now, the OECD has not envisaged an international tax agency, which has the power to establish an effective enforcement procedure. If the OECD fails to establish a long-term international tax agreement, ongoing tax competition may convert the corporate income tax into a pure benefit tax. National tax policy could adapt by placing a higher personal income tax burden on corporate profit distributions to resident shareholders as well as on resident shareholders’ gains from the sale of corporate shares

Taxation and capital structure choice: evidence from a panel of German multinationals

This paper analyzes the impact of taxes and lending conditions on the financial structure of multinationals? foreign affiliates. The empirical analysis employs a large panel of affiliates of German multinationals in 26 countries in the period from 1996 until 2003. In accordance with the theoretical predictions, the effect of local taxes on leverage is positive for both types of debt. Moreover, while adverse local credit market conditions are found to reduce external borrowing, internal debt is increasing, supporting the view that the two channels of debt finance are substitutes. --Corporate Income Tax,Multinationals,Capital Structure,Firm-Level Data

Taxation and Capital Structure Choice – Evidence from a Panel of German Multinationals

This paper analyzes the impact of taxes and lending conditions on the financial structure of multinationals' foreign affiliates. The empirical analysis employs a large panel of affiliates of German multinationals in 26 countries in the period from 1996 until 2003. In accordance with the theoretical predictions, the effect of local taxes on leverage is positive for both types of debt. Moreover, while adverse local credit market conditions are found to reduce external borrowing, internal debt is increasing, supporting the view that the two channels of debt finance are substitutes.corporate income tax, multinationals, capital structure, firm-level data

The Impact of Thin-Capitalization Rules on Multinationals’ Financing and Investment Decisions

This paper analyzes the role of Thin-Capitalization rules for capital structure choice and investment decisions of multinationals. A theoretical analysis shows that the imposition of such rules tends to affect not only the leverage and the level of investment but also their tax-sensitivity. An empirical investigation of leverage and investment reported for affiliates of German multinationals in 24 countries in the period between 1996 and 2004 offers some support for the theoretical predictions. While Thin-Capitalization rules are found to be effective in restricting debt finance, investment is found to be more sensitive to taxes if debt finance is restricted.corporate income tax, multinationals, leverage, Thin-Capitalization rules, firm-level data

The impact of thin-capitalization rules on multinationals' financing and investment decisions

This paper analyzes the effectiveness of thin-capitalization rules in preventing debt finance by intercompany loans and explores their consequences for corporate decisions. A theoretical discussion emphasizes that limitations of the deduction of interest owed to foreign affiliates would not only affect multinationals' capital structure choice but also investment. An empirical investigation exploits a large firm-level panel dataset of multinationals in order to analyze the impact of thin-capitalization rules on capital structure choice and investment in the OECD and some further European countries in the time period between 1996 and 2004. The results indicate that thin-capitalization rules are effective in curbing tax planning via intercompany loans. However, investment is found to be adversely affected. --Corporate Income Tax,Multinationals,Leverage,Thin-Capitalization Rules,Firm-Level Data