Asymmetric Taxation and Cross-Border Investment Decisions

This paper analyzes the impact of particular loss offset limitations on intrastate and cross-border investment decisions. Investment can be realized in the investor’s domestic business, in a foreign branch or in a foreign subsidiary. The relative impact on the optimal real investment alternative compared to the optimal financial investment alternative indicates the investment incentives of tax law asymmetries. Integrating an initial loss carryforward at the time of investment creates a special decision situation. Varying loss offset parameters typically induces ambiguous effects that depend on the combination of all parameters under consideration. On average, a domestic minimum tax and a time limit on loss carryforwards tend to depress real investment. However, it is possible to find counter-examples. Real investment projects with decreasing cash flows and expected infra-marginal projects are less likely to be discriminated against than projects with increasing cash flows and expected marginal projects, respectively. An initial loss carryforward generates a domestic lock-in effect that may be intensified by loss offset limitations. Depending on the parameter setting, the opposite – a push-out effect – may occur as well.investment, asymmetric taxation, loss offset, loss carryforward, minimum tax

Asymmetric Taxation and Performance-Based Incentive Contracts

This paper analyzes the effects of symmetric and asymmetric taxation on performance-based versus fixed remuneration contracts. I integrate a proportional corporation tax and a proportional wage tax into a binary principal-agent model. The wage tax increases the remuneration costs and makes the agent's employment less attractive. Thus, the principal tends to demand lower rather than higher effort or does not offer a contract at all. In contrast to the wage tax, the corporate tax is irrelevant for the optimal remuneration contract. Under asymmetric corporate taxation, the principal tends to offer contracts less frequently. Fixed remuneration contracts are penalized more heavily by asymmetric taxation than performance-based remuneration contracts.asymmetric taxation, loss-offset, principal-agent theory, corporate taxation, wage taxation

The impact of tax uncertainty on irreversible investment

Traditional models of capital budgeting including taxes are based on deterministic tax rates and tax bases. In reality, however, there are multiple sources of tax uncertainty. Tax reforms induce frequent changes in both tax rates and tax bases, making future taxation of investments a stochastic process. Fiscal authorities and tax courts create additional tax uncertainty by interpreting current tax laws differently. Apart from fiscal tax uncertainty, there is modelspecific tax uncertainty, because investors use simplified models for computing an investment project's tax base and anticipate the actual tax base incorrectly. I analyze the effects of stochastic taxation on investment behaviour in a real options model. The potential investor holds an option to invest in an irreversible project with stochastic cash flows. To cover the combined effects of tax base and tax rate uncertainty, the investment's tax payment is modelled as a stochastic process that may be correlated with the project's cash flows. I show that increased uncertainty of tax payments has an ambiguous impact on investment timing. Thus, the popular view that tax uncertainty depresses real investment can be rejected. For low tax uncertainty, high cash flow uncertainty and high correlation of cash flows and tax payment, increased tax uncertainty may even accelerate investment. A higher expected tax payment delays investment. Surprisingly, a higher tax rate on interest income affects investment timing ambiguously. --

The Impact of Tax Uncertainty on Irreversible Investment

Tax legislation, fiscal authorities, and tax courts create tax uncertainty by frequent tax reforms and various different interpretations of the tax law. Moreover, investors generate model-specific tax uncertainty by using simplified models that anticipate the actual tax base incorrectly. I analyze the effects of stochastic taxation on investment behavior in a real options model. The investor holds an option to invest in an irreversible project with stochastic cash flows. To cover the effects of both tax base and tax rate uncertainty, the investment’s tax payment is modelled as a stochastic process. Increased tax uncertainty has an ambiguous impact on investment timing. The view that tax uncertainty depresses real investment is rejected. A higher expected tax payment delays investment. A higher tax rate on interest income affects investment timing ambiguously.tax uncertainty, capital budgeting, real options, investment incentives

Neutral and Equitable Taxation of Pensions as Capital Income

We derive an ex post neutral comprehensive income tax on pension schemes equivalent to a Johansson-Samuelson tax that guarantees non-discriminatory treatment of lifetime-dependent and other investments. By separately taxing contributions and benefits, our concept does not require any assumptions on the return of a pension scheme and, therefore, is of special interest for taxing public PAYGO schemes. Assuming constant tax and interest rates, the system is characterized by constant fractions of deductible contributions and taxable pensions. The tax base from neutral pension taxation considerably exceeds the one under existing legislation, e.g. in Germany or in the U.S.

Costs, Benefits, and Tax-induced Distortions of Stock Option Plans

In recent years stock option plans (SOPs) have become an important component of managerial remuneration in most industrialized countries. Commonly accepted, corporate as well as individual taxes have a major impact on the costs of a SOP. In contrast, the tax influence on the benefits of a SOP remains widely unperceived. This article deals with both –cost and benefit– aspects simultaneously by integrating taxation into a principalagent model, where the agent is compensated in options. Deriving the optimal quantity of options to be granted and the optimal exercise price to be set, resulting profits for managers and shareholders can be quantified. Comparing the results in a tax-free world to the results taking into account different levels of taxation several tax-induced incentive distortions can be identified.stock options, principal-agent, taxation

Reconstruction of tax balance sheets based on IFRS information: A case study of listed companies within Austria, Germany, and the Netherlands

The internationalisation of financial accounting and the European Commission's ambition to harmonise corporate taxation have raised the question whether IFRS accounts could be used for tax purposes. In order to quantify the effect of an IFRS-based taxation on corporate tax burdens in different EU member states, we estimate firms' tax equity using notes on income taxes in IFRS financial statements of companies listed in Austria, Germany, and the Netherlands. The difference between estimated tax equity and IFRS-equity, adjusted for the effect resulting from the recognition of deferred taxes, indicates the effect of using IFRS as a tax base on corporate tax burden. We find that estimated tax equity is mostly lower than IFRSequity, indicating that an IFRS-based taxation would often increase the corporate tax burden. The median of estimated tax equity is 5.6% (Austria), 6.4% (Germany) and 9.0% (the Netherlands) below IFRS-equity. Our results suggest that using IFRS for the determination of taxable income would often increase corporate tax burden. However, an IFRS-based taxation does not always induce higher equity as often argued in the literature. In 307 of 1.113 totally analysed firm-years, estimated tax equity exceeds IFRS-equity. Analysing IFRS-tax differences on a balance sheet caption level, we find that the most important differences can be observed for intangibles and provisions. We find for all three analysed countries that IFRS-tax differences relating to inventories, receivables, and liabilities are typically small. We also approximate the total stock of unused tax losses and the amount of useable tax losses which can provide additional information about the management's estimates of future earnings. We find that deferred tax assets for unused tax losses are depreciated to a substantial extent, indicating that companies often assume insufficient future taxable income to utilise the total stock of tax loss carry-forwards. --

Group Taxation, Asymmetric Taxation and Cross-Border Investment Incentives in Austria

In 2005, Austria modified its group taxation regime and now provides an option for cross-border loss-offset. We analyse the combined impact of Austria's new group taxation and loss-offset limitations on cross-border investment decisions of domestic corporations. Monte Carlo simulations in an inter-temporal setting reveal that the impact on foreign real investment induced by the new group taxation is ambiguous. Whereas marginal investment projects with decreasing cash flows tend to benefit from group taxation, innovative projects with initial losses and increasing cash flows may be discriminated against. Investors should consider domestic income and repatriation policy simultaneously before opting for group taxation.group taxation, investment decisions, Monte Carlo simulations, international taxation, loss-offset rules

Limited Liability, Asymmetric Taxation, and Risk Taking - Why Partial Tax Neutralities can be Harmful

We examine the combined effects of asymmetric taxation and limited liability on optimal risk taking of investors. Given an optimal risk level in the pre-tax case under full liability, loss-offset restrictions reduce, and limited liability enhances the incentives for taking risk. For every degree of limited liability we can find corresponding loss-offset limitations inducing the same optimal risk level as in the reference case. Thereby we get tax neutrality with respect to risk taking. We show that tax neutrality with respect to risk taking is incompatible with tax neutrality with respect to the choice of the legal form. In our model, full liability requires symmetric taxation and limited liability requires asymmetric taxation of profits and losses.limited liability, loss-offset, tax neutrality, risk taking

The Impact of Differential Capital Income Taxation on the Value of Risky Projects

We analyze the impact of differential capital income taxation on the value of risky investment under irreversibility. Under a uniform tax rate, raising the tax rate can either increase or reduce the value of a risky project. Many countries have introduced a separate flat tax on capital income. In contrast to uniform taxation, differential capital income taxation crowds out risky real investment. This dysfunctional effect can neither be corrected by generous depreciation schedules nor by increasing the flat tax rate. This tax discrimination of risky real investment might have contributed to the current crisis.Capital Income Taxation, Flat tax, Risk-taking, Investment decisions, Uncertainty