What if IAS/IFRS were a Tax Base? New Empirical Evidence from an Austrian Perspective.

In particular in Germany and Austria, but also in other countries, extensive theoretical and analytical research has been published on the potential tax effects in case IAS/IFRS were used as the basis for corporate taxation. Very few quantitative papers exist. This motivated us to conduct a study that quantifies the actual effects of a potential decisiveness of IAS/IFRS for the national tax base - without further questioning the usefulness of an IAS/IFRS relevance. Our paper extends existing research substantially. The research question of our paper deals with the measurement of differences in discounted tax burden in different scenarios, by simulation. Our sample comprises original data of 61 Austrian companies. The median of the difference between book values of IAS/IFRS single accounts and tax accounts for specific balance sheet items is determined. We then apply the result on the items of a typical corporate account derived from an Austrian database. As a result, depending on the term of items, we can calculate the discounted tax effects for different scenarios. It must be underlined that such highly confidential and detailed tax data is usually not available to researchers. The main preliminary finding of our empirical survey is that only in few cases we find essential differences between IAS/IFRS and tax accounts. Our evidence suggests that no dramatic change in the tax base has to be expected. Our study provides not only new empirical evidence but also a basis for further research on a possible common consolidated corporate tax base from an academic perspective. (author's abstract)Series: Working Papers / Institut für Revisions-, Treuhand- und Rechnungswese

Cross-border Intra-group Hybrid Finance and International Taxation

In intra-group finance hybrid instruments allow for tailor-made form of finance. Hence hybrid finance is often used for international tax planning in multinational groups. Due to a lack of international tax harmonization or tax coordination qualification conflict can arise. A specific hybrid instrument is classified as debt in one country, and as equity in the other country. This may lead to double taxation. In the reverse case, double non-taxation can arise. Against this legal background one might expect that cross-border hybrid intra-group finance is advantageous in comparison to classical debt finance in case of double-non-taxation while it can be expected to be disadvantageous in the case of double taxation of the yield. Previous studies do not include qualification conflicts. Thus the question arises how qualification conflicts are affecting an intra-group finance decision. We examine effects of such qualification conflicts, resulting from the use of cross-border, intra-group hybrid finance, on the tax-advantageousness as compared to classical debt finance. The analysis is based on a binomial simulation model including economic and legal uncertainty. We show that the results of our analysis under uncertainty vary significantly when compared to the more obvious results under economic and legal certainty. (author´s abstract)Series: Discussion Papers SFB International Tax Coordinatio

Banks’ tax disclosure, financial secrecy, and tax haven heterogeneity

This study investigates the effect of mandatory public Country-by-Country Reporting (CbCR) for European banks on their presence in tax and regulatory havens. We find that the number of subsidiaries of European banks in tax havens declines significantly after the introduction of mandatory public CbCR in contrast to insurance firms that need not disclose. We document that this decline is mainly driven by a reduction of subsidiaries in small countries with little economic substance (“dot havens”) and in tax havens that are regulatory havens at the same time, i.e., with high financial secrecy. Further, we find that high exposure to reputational risk is a major amplifier of reorganizational activities. Our results explain prior mixed evidence and document that CbCR effectively curbs tax haven presence only under specific circumstances, i.e., in countries offering both tax shelter and financial secrecy, and more strongly for banks with high reputational risk. These findings suggest that increased tax disclosure on banks does not effectively attenuate tax haven presence per se, but only for a subset of havens and banks. Policymakers need to be aware of these limitations, especially during the current discussion of extending public CbCR to all large multinationals.Series: WU International Taxation Research Paper Serie

Practicing Experts' Views on BEPS: A Critical Analysis

In July 2013 the OECD, to tackle multinational tax avoidance, published its Action Plan against base erosion and profit shifting. The Action Plan suggests a variety of legislative and administrative measures to eliminate frictions from interactions between domestic tax laws and international tax treaties, including potential double non-taxation of businesses operating in several countries. By virtue of the OECD's structure, the proposed measures have been designed and developed predominantly by representatives from the tax administrations of OECD member countries. Our research investigates the views and opinions of other stakeholders in this process, namely tax experts from practice. We conduct a conjoint analysis, surveying experts in international taxation regarding their perceptions and beliefs on the effectiveness of the proposed actions. We find that experts rank actions that are aimed at enhancing international coordination and cooperation, as well as actions that reduce legal uncertainty, higher than other actions. Of lesser importance are antitreaty-abuse measures, further transparency at the taxpayer level and amendments to the definition of permanent establishment. (authors' abstract)Series: WU International Taxation Research Paper Serie

Tax-Rate Biases in Tax Decisions: Experimental Evidence

This paper investigates how decision biases affect individuals’ tax decisions. We conduct four laboratory experiments with 303 students and 62 experienced tax professionals and find a systematic tax-rate bias in decisions under time constraints. More specifically, decision makers overestimate the relevance of less complex tax-rate information compared to more complex tax-base information, leading to suboptimal decision-making. We also find support for the theory of rational inattention as increasing the size of the tax-base effect mitigates the decision bias. However, we find that tax decisions are unaffected by participants’ professional experience: Students and highly experienced tax professionals are similarly prone to biased decision-making. Overall, our findings suggest that time constraints impede the use of complex information which can result in suboptimal tax planning.Series: WU International Taxation Research Paper Serie

Financial Transaction Tax and Investment Funds: An Analysis of Key Factors and Their Impact on Performance

Using retrospective data analysis, this paper looks at the potential effects that the EU financial transaction tax would have on registered Austrian funds. We use original data for 927 investment funds over a 12-month trading period covering the 2014 calendar year. We analyse its effect on total net assets and on performance. We find that the cost of FTT on Austrian funds for 2014 would be Euro 89.5 million. The effect of FTT differs between funds and is influenced by fund category, gilt-edged securities held, risk and investment strategy. Behavioural changes in the market would likely arise in these areas if FTT were to be introduced. (authors' abstract)Series: WU International Taxation Research Paper Serie

Practitioners' Judgment and Deferred Tax Disclosure: A Case for Materiality

Against the background of increasing tension between the need for additional disclosure and an information overload in financial statements, this study investigates the relevance of specific tax accounting information in an experimental setting. Participants make judgments on the financial performance, investment attractiveness and tax position of the firm, in absence or in presence of detailed tax information in the other comprehensive income statement. Our results do not support the notion that such deferred tax information has an effect on the judgment of experts, as long as the amounts of deferred tax are normal. However, when the detailed amounts of deferred tax are abnormally high, judgment differs significantly. Our result is important for standard setters, as they may consider further developing guidance in standards (such as IAS 1 and IAS 12) and in the Practice Statement for how to judge materiality of information, in accordance with the materiality principle set forth in IAS 1.31. By doing so, the risk of information overload can be reduced. Our study thus contributes to the current debate on the extent of disclosure. Our results are novel and the method used allows for the isolation of effects and the identification of causal relationships.Series: WU International Taxation Research Paper Serie

Monitoring and Tax Planning – Evidence from State-Owned Enterprises

This study provides new evidence on the association of state ownership and tax planning by showing that a shareholder’s monitoring incentives affect a firm’s tax planning. Using the unique setting of the German fiscal federalism, where both the federal and local governments levy a significant corporate income tax, we distinguish between state owners that directly benefit from state-owned enterprises’ (SOEs’) income tax payments and those that do not. Our results indicate that state ownership is associated with less tax planning, but only for SOEs where the state owner directly benefits from higher tax payments. These results are robust to various specifications and suggest that shareholders’ monitoring incentives are a determinant of a firm’s tax planning activities. Our findings provide timely evidence on the current debate of the potential tax effects stemming from increases in state ownership around the world due to the COVID-19 pandemic.Series: WU International Taxation Research Paper Serie

The Effects of Cooperative Compliance on Firms’ Tax Risk, Tax Risk Management and Compliance Costs

In cooperative compliance programs, firms and tax administrations agree on cooperation instead of confrontation. Firms provide full transparency and advanced tax control frameworks. Tax administrations, in turn, offer certainty as to the tax treatment of complex transactions. In this study, we test how firms’ perceptions of tax risk, the quality of tax risk management, and compliance costs are related to cooperative compliance. To our knowledge, this is the first study that attempts to analyze both reasons for and consequences of participation in cooperative compliance programs. We examine the Austrian cooperative compliance pilot project known as horizontal monitoring that was aimed at large businesses and launched in 2011. We use survey data from representatives of firms participating in the pilot project and a sample of comparable firms under a traditional ex-post audit regime. We conduct group comparisons to test differences between these groups, as well as mediation analyses to shed light on more complex relationships between variables. Results show that horizontal monitoring firms perceive a significantly higher increase in tax certainty, which is associated with significant relative decreases in tax risk and compliance costs. Furthermore, while the quality of tax risk management upon entering the pilot project appears significantly higher for horizontal monitoring firms, they do not report greater improvement in tax risk management compared to the control group. These results are relevant for the development of cooperative compliance programs and the decision to participate in them.Series: WU International Taxation Research Paper Serie

The Future of Tax Audits? The Acceptance of Online-Based, Automated Tax Audits and their Effects on Trust and Power

In this paper, we investigate the acceptance by taxpayers and tax auditors of voluntary e-audits, i.e., online-based, automated tax audits. Further, we analyze the effects of e-audits on trust in and power of tax authorities. Perceived benefits and shortcomings of e-audits for taxpayers and tax auditors may depend on the specific features of e-audits, which may not only affect adoption and endorsement but also influence the trust-power balance between taxpayers and tax authorities, ultimately affecting tax compliance. In an experimental survey among taxpayers and tax auditors, we focus on four specific features: data privacy, audit certainty, transparency, and independence from tax intermediaries. Results from multilevel models suggest that taxpayers’ acceptance indeed depends on these features, particularly on audit certainty, i.e., that an e-audit cannot be followed by a subsequent conventional tax audit of the same period. While these features appear to increase acceptance and trust by taxpayers, the same features cause concerns of tax auditors, who react with less support for e-audits and a perceived loss in power. These results indicate a mismatch between taxpayers’ and tax auditors’ perceptions about e-audits and tax compliance. Our study is among the first to investigate the effects of digitalization in tax administration and to include tax auditors’ views. Results are relevant to policymakers who wish to promote digitalization to foster tax compliance. Specifically, our study suggests that tax authorities should incorporate safeguards into e-audits and educate about the importance of a trusting relationship between taxpayers and tax auditors.Series: WU International Taxation Research Paper Serie