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In praise of tax havens:International tax planning and foreign direct investment

2010-11-16T02:02:00.000-08:00

Title : In praise of tax havens:International tax planning and foreign direct investment
Author(s) : Qing Hong, Michael Smart
European Economic Review 54(2010)82–95

Abstract:
The multinationalization of corporate investment in recent years has given rise to a
number of international tax avoidance schemes that may be eroding tax revenues in
industrialized countries, but which may also reduce tax burdens on mobile capital and
so facilitate investment.Both the welfare effects of and the optimal response to
international tax planning are therefore ambiguous. Evaluating these factors in a simple general equilibrium model, we find that citizens of high-tax countries benefit from some tax planning.Paradoxically,if tax rates are not too high, an increase in tax planning activity causes arise in optimal corporate tax rates, and a decline in multinational investment. Thus fears of a‘‘race to the bottom’’in corporate tax rates may be misplaced.

Tax risk management and the multinational enterprise

2010-11-16T01:54:00.000-08:00

Title : Tax risk management and the multinational enterprise
Author(s) : Haroldene F.Wunder
Journal of International Accounting, Auditing and Taxation 18 (2009) 14–28

Abstract:
The financial scandals in theUnited States and other countries ushered in financial reporting and corporate governance reforms that extend beyond the U.S. Sarbanes-Oxley Act of 2002 (SOX). These initiatives have increased the international financial community’s awareness of the importance of risk management and internal controls. Tax risk management and related internal controls have been accorded less focus than risk management generally. The purpose of this research is to describe the current state of tax risk management of multinational enterprises (MNEs) by reporting survey responses fromchief financial officers (CFOs) of U.S. and non-U.S. MNEs. The research shows that significant progress has been madeby largeMNEsin developing andimplementing both general and tax risk management policies. The results provide guidance in identifying the loci and impact of organizational tax risk and indicate that respondents do not perceive alarming degrees of tax risk in their organizations. The study reveals a remarkable degree of similarity in U.S. and foreign firm responses and demonstrates, unexpectedly, that existing reporting structures enable CFOs to shift a significant degree of tax risk management to heads of tax.

Transfer Pricing Regulation In Indonesia: Some Thoughts For Reform

2010-11-13T22:48:00.000-08:00

Title : TRANSFER PRICING REGULATIONS IN INDONESIA: SOME THOUGHTS FOR REFORM
Author(s) : Kristian Agung Prasetyo, Bambang Widjajarso
JURNAL AKUNTANSI PEMERINTAH Vol. 3, No. 1, Oktober 2008 Hal 13-44

Abstract:
The twenty first century has witnessed an ever increasing rate of international trade as a result of globalisation and especially, the development of advanced information technologies. As a result, transfer pricing policy plays a significant role, particularly in many multinational enterprises (MNEs). The term transfer pricing itself refers to the pricing policies in relation to goods or services exchanged between related business units. As part of their domestic anti-avoidance provisions, most revenue authorities have transfer pricing regulations in place to prevent the price manipulation and profit shifting to avoid taxation. The Organisation for Economic Co-operation and Development (OECD) has been involved in setting out guidelines and principles in addressing transfer pricing issues, which have been adopted widely.
Like other countries, Indonesia is also faced with the ever increasing rate of global trade. However – unlike others – the Indonesian taxation authority does not seem to have adequate provisions to tackle international transfer pricing abuse. Even though the principles of related-party transactions regulations are set out in the income tax legislation (currently being amended), they are broad and simple in nature and are not accompanied by detailed and up-to-date guidelines for taxpayers and its field auditors.
This fact seems peculiar as companies are taxed progressively with the highest marginal rate of 30% (it has been proposed that it will be changed into a flat rate of 30%). In relation to this, concerns regarding the lack of transfer pricing guidelines have been raised by members of parliament involved in the amendment process.
This paper is intended to show that transfer pricing has become an important issue
worldwide and it is likely that it will stay that way. Consequently, it is crucial for Indonesia to have strong transfer pricing regulations, especially as the Indonesian taxation authority is responsible for more than 70% of total government expenditure. The OECD transfer pricing guidelines will be used as a point of reference along with its application in Australia. In the end, it is expected that this paper will:
1. Show the importance of international transfer pricing and present some basic principles necessary to address its abuse;
2. Demonstrate that the Indonesian taxation authority does not have an adequate arsenal to deal with transfer pricing issues. Some possible suggestions will also be presented based on the OECD guidelines and Australia’s experience.

Advanced Pricing Agreement Dalam Kaitannya Dengan Upaya Meminimalisasi Potential Tax Risk

2010-11-13T22:37:00.000-08:00

Title : Advanced Pricing Agreement Dalam Kaitannya Dengan Upaya Meminimalisasi Potential Tax Risk
Author(s) : Mardiasmo
JURNAL AKUNTANSI PEMERINTAH Vol. 3, No. 1, Oktober 2008 Hal 1 – 12

Abstract:
Transfer pricing has been discussed as a serious problem in multinational company
business. It is not only related with the price determination among members of groups, but also includes the obligation on taxation. Transactions commited within members of multinational corporation involve cross border transaction. Thus, these transactions might create an opportunity to shift the tax burden from one country to another.
In such way, potential losses on national revenues from corporate tax might be existed. To overcome the problem, the government has attempted to minimize the potential tax risk by introducing an Advance Pricing Agreement (APA). The APA gives authority to tax officials to redetermine arm’s length prices over the transactions made among related parties. Therefore, there is certainty in assessing tax liability for each transaction made by groups of multinational company.
To what extent that the APA will be effective to minimize potential losses on revenue
collection, and what kind of risks that might be faced by the companies if they do not make any contract arrangement with the tax authority? To answer these questions, this paper tries to develop a tax planning with the study case on PT XYZ.

Auditing standards, increased accounting disclosure, and information asymmetry: Evidence from an emerging market

2010-11-13T21:33:00.000-08:00

Title : Auditing standards, increased accounting disclosure, and information asymmetry: Evidence from an emerging market
Author(s) : Haiyan Zhou
Journal of Accounting and Public Policy 26 (2007) 584–620

Abstract:
We survey recent research in accounting anomalies and fundamental analysis.We use
forecasting of future earnings and returns as our organizing framework and suggest a
roadmap for research aiming to document the forecasting benefits of accounting
information.We combine this with opinions from the academic and practitioner
communities to critically evaluate key clusters of papers about accounting anomalies
and fundamental analysis disseminated over the last decade.Finally,we provide a new
analysis on how an ex ante and ex post treatment of risk and transaction costs affects the accrual and PEAD anomalies,and offer suggestions for future research.

New Focus for the International Standards on Auditing

2010-11-13T21:25:00.000-08:00

Title : New Focus for the International Standards on Auditing
Author(s) : Robert S. Roussey
Journal of International Accounting & Taxation, 5( 1): 133- 146, 1996

Abstract:
The increase in the number of securityfilings for cross-borderfinancing over the last decade has placed new emphasis on the use of international accounting and auditing standards. This article discusses some of the major changes that have occurred over the last several years in the development of international auditing standards and the effect on the auditor performing audits in accordance with these standards for national or for cross-border financing purposes.

Audit committee characteristics and investment in internal auditing

2010-11-13T21:21:00.000-08:00

Title : Audit committee characteristics and investment in internal auditing
Author(s) : Abhijit Barua, Dasaratha V Rama, Vineeta Sharma
J. Account. Public Policy 29 (2010) 503–513

Abstract:
Regulators and others recently highlighted the increasingly important role of internal auditing in supporting and interacting with the audit committee to ensure the integrity and quality of financial reporting. Likewise, one of the roles of the audit committee is to oversee the quality of monitoring mechanisms implemented by the firm, which includes the internal audit function. However, our understanding of the relationship between the audit committee and internal auditing is limited. We fill this void by providing the first empirical evidence of the association between audit committee characteristics and the investment in internal auditing. Our analyses, from a sample of 181 SEC registrants, suggest that the investment in internal auditing (internal audit budget) is negatively related to the presence of auditing experts on the committee and the average tenure of audit committee members, but positively related to the number of audit committee meetings (a proxy for audit committee diligence). These observations suggest potential complementary and substitution effects between the audit committee and internal auditing, and thus raise important implications for future research.

Sourcing of internal auditing: An empirical study

2010-11-13T21:16:00.000-08:00

Title : Sourcing of internal auditing: An empirical study
Author(s) : Roland F. Spekl´e ∗, Hilco J. van Elten, Anne-Marie Kruis
Management Accounting Research 18 (2007) 102–124

Abstract:
This paper studies the factors associated with organizations’ internal audit sourcing decisions, building from a previous study by Widener and Selto (henceforth W&S) [Widener, S.K., Selto, F.H., 1999. Management control systems and boundaries of the firm: why do firms outsource internal audit activities? J. Manage. Account. Res. 11, 45–73]. In their study, W&S used Transaction Cost Economics (TCE) to explain the governance of internal auditing. Our study seeks to replicate their results, using newly collected data from 66 companies headquartered in the Netherlands. Our findings are supportive of W&S. Like W&S, we find asset specificity and frequency (both individually and in interaction) to be significantly associated with sourcing decisions. These findings are robust against different model specifications, and they hold across variously defined samples.We conclude that the W&S results are reproducible in different conditions, enhancing the credibility of the TCE-based explanation of organizations’ internal audit sourcing practices.

Analysis of professional standards and research findings to develop decision aids for reliance on internal auditing

2010-11-13T21:12:00.000-08:00

Title : Analysis of professional standards and research findings to develop decision aids for reliance on internal auditing
Author(s) : Arnold Schneider
Research in Accounting Regulation 22 (2010) 96–106

Abstract:
This paper analyzes professional standards and research findings pertaining to external auditors’ reliance on internal auditing and develops decision aids for reliance. The paper obtains various characteristics relating to the evaluation of internal audit competence, objectivity, and work performed, as well as other non-internal audit factors that impact reliance. These characteristics and factors are integrated into decision aids for reliance on internal auditing.

Accounting anomalies and fundamental analysis: A review of recent research advances

2010-11-13T20:22:00.000-08:00

Title : Accounting anomalies and fundamental analysis: A review of recent research advances
Author(s) : Scott Richardson, _Irem Tuna, Peter Wysocki
Journal of Accounting and Economics (2010)

Abstract:
We survey recent research in accounting anomalies and fundamental analysis.We use
forecasting of future earnings and returns as our organizing framework and suggest a
roadmap for research aiming to document the forecasting benefits of accounting
information.We combine this with opinions from the academic and practitioner
communities to critically evaluate key clusters of papers about accounting anomalies
and fundamental analysis disseminated over the last decade.Finally,we provide a new
analysis on how an ex ante and ex post treatment of risk and transaction costs affects the accrual and PEAD anomalies,and offer suggestions for future research.

Are Asian stock markets efficient? Evidence from new multiple variance ratio tests

2010-11-12T17:57:00.000-08:00

Title : Are Asian stock markets efficient? Evidence from new multiple variance ratio tests
Author(s) : Jae H. Kim, Abul Shamsuddin
Journal of Empirical Finance 15 (2008) 518–532

Abstract:
This paper tests for the martingale hypothesis in the stock prices of a group of Asian markets. We use new multiple variance ratio tests based on the wild bootstrap and signs. These are non-parametric finite sample tests, which do not rely on large sample theories for statistical inference. This paper also presents Monte Carlo results that these non-parametric tests show superior small sample properties to those of the conventional Chow–Denning test. Both weekly and daily data from 1990 are considered, while moving sub-sample windows are used for the latter to control the sensitivity of the results to a particular sample period. It is found that the Hong Kong, Japanese, Korean and Taiwanese markets have been efficient in the weak-form. The markets of Indonesia, Malaysia and Philippines have shown no sign of market efficiency, despite financial liberalization measures implemented since the eighties. We have also found evidence that the Singaporean and Thai markets have become efficient after the Asian crisis. In general, the results point toward the notion that the pricing efficiency of a market depends on the level of equity market development as well as the regulatory framework conducive of transparent corporate governance.

Accounting fundamentals and CEO bonus compensation

2010-11-12T04:16:00.000-08:00

Title : Accounting fundamentals and CEO bonus compensation
Author(s) : Scott B. Jackson, Thomas J. Lopez, Austin L. Reitenga
J. Account. Public Policy 27 (2008) 374–393

Abstract:
Research indicates that there is a positive association between accounting earnings and chief executive officer (CEO) cash compensation; however, evidence also suggests that this positive association ceases to exist when earnings performance is poor or declining. This latter result has led some critics of corporate compensation policies to conclude that CEOs are not penalized for poor or declining firm performance. The purpose of this study is to further illuminate the pay-performance debate by expanding the traditional executive bonus compensation model to include a set of accounting fundamentals that prior research indicates are related to both current and future firm performance. Our results indicate that there is a highly significant relationship between accounting fundamentals and the level of and change in CEO bonus compensation. Moreover, we find a highly significant relationship between accounting fundamentals and both bonus omissions and bonus reductions. When earnings are negative or declining, we find that the above relationships remain intact. In contrast, when earnings are negative or declining, we find that the relationship between aggregate earnings and bonus compensation is weak or insignificant in most of our analyses. Taken together, our results suggest that the apparently weak relationship between accounting earnings and CEO bonus compensation (particularly when earnings are negative or declining) is partly due to the fact that the bonus compensation model excludes accounting fundamentals which are strongly associated with bonus compensation. Thus, we conclude that (i) bonus compensation is more closely tied to firm performance than critics sometimes claim and (ii) bonus compensation awarded to CEOs when earnings performance is poor is at least partially explained by the presence of favorable accounting fundamentals

Examination of the efficient market hypothesis—the case of post-crisis Asia Pacific countries

2010-11-12T02:04:00.000-08:00

Title : Examination of the efficient market hypothesis—the case of post-crisis Asia Pacific countries
Author(s) : Denis Kan, B. Andreosso-O’Callaghan
Journal of Asian Economics 18 (2007) 294–313

Abstract:
This paper applies the foreign exchange market efficiency argument to post 1997 Asian (Korea, Taiwan, Thailand, Indonesia, Malaysia, Philippines, Japan, Singapore) and Australasian (Australia, New Zealand) countries by employing a VAR based Johansen co-integration approach. The regression tests are carried out for a full sample panel data, covering the 31 December 1996 to 15 May 2003 time span, of 1649 observations for spot (conversely forward) nominal exchange rates. Moreover, a Malaysian pre-peg sub-period (31 December 1996 to 2 September 1998) was also used for comparative purposes. The paper includes different testing procedures. In addition to the evidence obtained from the across-country study, cointegration tests were performed in order to re-examine within-country co-movements between forward and future spot exchange rates. The test results generally support the market efficiency hypothesis.

Efficient market hypothesis and forecasting

2010-11-12T01:45:00.000-08:00

Title : Efficient market hypothesis and forecasting
Author(s) : Allan Timmermann, Clive W.J. Granger
International Journal of Forecasting 20 (2004) 15– 27

Abstract:
The efficient market hypothesis gives rise to forecasting tests that mirror those adopted when testing the optimality of a forecast in the context of a given information set. However, there are also important differences arising from the fact that market efficiency tests rely on establishing profitable trading opportunities in ‘real time’. Forecasters constantly search for predictable patterns and affect prices when they attempt to exploit trading opportunities. Stable forecasting patterns are therefore unlikely to persist for long periods of time and will self-destruct when discovered by a large number of investors. This gives rise to nonstationarities in the time series of financial returns and complicates both formal tests of market efficiency and the search for successful forecasting approaches.

Market eficiency, long-term returns, and behavioral finance

2010-11-12T01:28:00.000-08:00

Title : Market eficiency, long-term returns, and behavioral finance
Author(s) : Eugene F. Fama
Journal of Financial Economics 49 (1998) 283-306

Abstract:
Market e¦ciency survives the challenge from the literature on long-term return anomalies. Consistent with the market e¦ciency hypothesis that the anomalies are chance results, apparent overreaction to information is about as common as underreaction, and post-event continuation of pre-event abnormal returns is about as frequent as post-event reversal. Most important, consistent with the market efficiency prediction that apparent anomalies can be due to methodology, most long-term return anomalies tend to disappear with reasonable changes in technique.

Tax-motivated transfer pricing and US intrafirm trade prices

2010-11-10T23:14:00.000-08:00

Title : Tax-motivated transfer pricing and US intrafirm trade prices
Author(s) : Kimberly A. Clausing
Journal of Public Economics 87 (2003) 2207–2223

Abstract:
This paper analyzes monthly data on US international trade prices between 1997 and 1999 in order to investigate the impact of tax influences on intrafirm trade prices. Results indicate that there is substantial evidence of tax-motivated transfer pricing in US intrafirm trade prices. There is a strong and statistically significant relationship between countries’ tax rates and the prices of intrafirm transactions. Controlling for other variables that affect trade prices, as country tax rates are lower, US intrafirm export prices are lower, and US intrafirm import prices are higher. This finding is consistent with theoretical predictions regarding tax-motivated income shifting behavior.

The history of PATA and its effect on advance pricing arrangements and mutual agreement procedures

2010-11-10T23:11:00.000-08:00

Title : The history of PATA and its effect on advance pricing arrangements and mutual agreement procedures
Author(s) : Susan C. Borkowski
Journal of International Accounting, Auditing and Taxation 17 (2008) 31–50

Abstract:
In its 25 years of existence, the Pacific Association of Tax Administrators (PATA) has attempted to protect tax revenues and combat tax evasion techniques (including transfer pricing) by transnational corporations (TNCs). To that end, the tax authorities of its four member countries (Australia, Canada, Japan and the United States) have met at least annually to exchange information and identify specific deterrents to tax evasion activities that could be implemented quickly. Recently, PATA has released several documents to assist both tax authorities and TNCs in the area of advance pricing agreements, mutual agreement procedures, and transfer-pricing documentation. The study looks at the PATA’s influence on tax authorities and TNC behavior in these and other areas.

Factors Motivating Transfer Pricing Choices of Japanese and United States Transnational Corporations

2010-11-10T22:41:00.000-08:00

Title : Factors Motivating Transfer Pricing Choices of Japanese and United States Transnational Corporations
Author(s) : Susan C. Borkowski
Journal of International Accounting, Auditing & Taxation, 6(1):25-47, 1997

Abstract:
Contrary to prior findings, Japanese transnational corporations (TNCs) seem to have changed their preferences for international transfer pricing methods from cost-based to market-based and negotiated methods. Use of negotiated methods is supported by the Japanese preference for collectivism and consensus.
The significant risk of an audit of U.S. TNCs by both the U.S. Internal Revenue Service and the Japanese National Tax Administration is at odds with both tax authorities’ official policies, which theoretically accord cost-based methods equal standing with market methods. In practice, however, cost-based methods trigger IRS audits more than twice as often as other methods, suggesting that the IRS acceptance of the “best method” in reality is acceptance of market methods and negotiated methods based on market prices. Japanese TNCs consider segment profit to be more important than all other measures when evaluating managers, regardless of station. When choosing a pricing method, performance evaluation concerns are significantly more important to Japanese TNCs than to U.S. TNCs. U.S. TNCs employ various practices to counter the internal distorting effects of transfer pricing practices but use pricing transfer methods that provide distorted results and increase audit risk. Finally, it appears that effective, rather than statutory tax rates, might guide TNC behavior on income shifting. Increased disclosure seems necessary to deter these and other transfer pricing manipulations.

Transfer pricing of intangible property Harmony and discord across five countries

2010-11-10T20:36:00.000-08:00

Title : Transfer pricing of intangible property Harmony and discord across five countries
Author(s) : Susan C. Borkowski
The International Journal of Accounting 36 (2001) 349–374

Abstract:
Transnational corporations (TNCs) regard transfer pricing as the most important tax issue confronting them in the immediate future. Coupled with the increase in the number and type of cross-border transfers of intangible property, concerns arise about the adequacy of current transfer pricing regulations, and the harmony, or lack thereof, of such regulations when a TNC must address both host- and home-country tax authorities. This study of TNCs domiciled in Canada, Germany, Japan, the United Kingdom, and the United States (US) reveals a similarity in corporation approaches to valuing intangible property that transcends national borders. This is in stark contrast to current practices regarding the transfer of tangible goods, which vary by country, rather than by industry or nature of the transferred good. However, in many cases, this agreement is reached because TNCs are using transfer pricing methods for intangible transfers that do not follow the Organization for Economic Cooperation and Development (OECD) and/ or US Internal Revenue Service (IRS) guidelines.

The Transfer Pricing Concerns of Developed and Developing Countries

2010-11-10T20:19:00.000-08:00

Title : The Transfer Pricing Concerns of Developed and Developing Countries
Author(s) : Susan C. Borkowski
The International Journal of Accounting, Vol. 32, No. 3, pp. 321-336 1997

Abstract:
Are concerns about transfer pricing, income shifting, and inequitable tax allocations
exaggerated in recent accounting and tax lirerature? A survey of 47 countries provides evidence that transfer pricing issues are of genuine and increasing concern to the governments of both developed and developing countries. One recommendation to curtail transfer pricing manipulations is to develop standardized transfer pricing policy and procedures to be implemented globally. A second suggestion is to mandate increased disclosures about the magnitude and eflects of transfer pricing on subsidiary income and ta.x liabilities in the financial reports of transnational corporations engaging in cross-border transactions. However, as long as some countries continue to operate as tax havens, income shifting by TNCs is tacitly encouraged and will continue unabated. Concurrent with globally acceptable standards must be the gradual elimination of tax rate differentials that contribute to income shifting and the inevitable misallocation of tax revenues.

Transfer pricing practices of transnational corporations in PATA countries

2010-11-10T20:14:00.000-08:00

Title : Transfer pricing practices of transnational corporations in PATA countries
Author(s) : Susan C. Borkowski
Journal of International Accounting, Auditing and Taxation 19 (2010) 35–54

Abstract:
The tax authorities of Australia, Canada, Japan and the United States formed the Pacific Association of Tax Administrators (PATA) in 1980 to combat income shifting, improve crossborder information flows, and develop conciliatory relationships among themselves. One of their specific concerns was to identify and stop the improper transfer pricing used by transnational corporations (TNCs) to facilitate income shifting and obfuscation of financial data.
The purpose of this study is to determine: (1) what PATA membership means for TNCs,
and (2) whether or not transfer pricing audits have increased due to information sharing or decreased due to PATA’s various transfer pricing guides. A survey of tax executives in Australian, Canadian, Japanese, and U.S. TNCs was undertaken to determine the answers to these questions, and to develop policy and procedure recommendations for both the TNCs and their respective tax authorities. Unexpected findings emerged about the relationship between transfer pricing behaviors and audit frequency, and between audit risk and advance pricing agreement status.

Factors Affecting Transfer Pricing and Income Shifting Between Canadian and U.S. Transnational Corporations countries multinational enterprise

2010-11-10T20:09:00.000-08:00

Title : Factors Affecting Transfer Pricing and Income Shifting Between Canadian and U.S. Transnational Corporations countries multinational enterprise
Author(s) : Susan C. Borkowski
The International Journal of Accounting, Vol. 32, No. 4, pp. 391-415 1997

Abstract:
An analysis of organizational, environmental, and financial factors indicates that income shifting may occur among TNCs in the United States and Canada. Some differences in rates of return are partially explained by the larger U.S. TNCs, which experience higher rates of return and prefer non-market methods. Smaller Canadian TNCs, with lower rates of return, prefer market methods.

Why pay more? Corporate tax avoidance through transfer pricing in OECD countries multinational enterprise

2010-11-10T20:01:00.000-08:00

Title : Why pay more? Corporate tax avoidance through transfer pricing in OECD countries multinational enterprise
Author(s) : Eric J. Bartelsman; Roel M.W.J. Beetsma
Journal of Public Economics 87 (2003) 2225–2252

Abstract:
This paper presents suggestive evidence of income shifting in response to differences in corporate tax rates for a large selection of OECD countries. We use a new method to disentangle the income shifting effects from the effects of tax rates on real activity. Our baseline estimates suggest that a substantial share of the revenues from a unilateral increase in the corporate tax rate is lost because of a decline in reported income.

Overhead cost allocation changes in a transfer pricing tax compliant multinational enterprise

2010-11-10T19:57:00.000-08:00

Title : Overhead cost allocation changes in a transfer pricing tax compliant multinational enterprise
Author(s) : Christian Plesner Rossing; Carsten Rohde
Management Accounting Research 21 (2010) 199–216

Abstract:
This paper addresses how overhead cost allocation system design in multinational enterprises (MNEs) is affected by transfer pricing tax regulation. Using a case study research strategy we find that the implementation of a transfer pricing tax compliance strategy gives rise to a number of changes to the overhead cost allocation system design. Findings suggests that a contingent relationship exists between overhead cost allocation and transfer pricing tax compliance. We argue that when seeking to understand and explain MNEs’ overhead cost allocation system design for intra-company services, the MNEs’ response to its tax regulatory environment is a significant explanatory variable.

Examining the Role of Transfer Pricing as a Strategy for Multinational Firms

2010-11-10T19:30:00.000-08:00

Title : Examining the Role of Transfer Pricing as a Strategy for Multinational Firms
Author(s) : Karen S. Cravens
btternational Business Review Vol. 6, No. 2, pp. 127-145, 1997

Abstract:
In contrast to a purely tax-driven mechanism, international transfer pricing can be considered as a means to accomplish corporate objectives and thus create strategic consequences. This paper examines the results of a survey of executives of US-based multinational firms who describe the international transfer pricing objectives and strategies of their firms. Results indicate that executives are not solely focused on taxation issues as the primary objective of international transfer pricing. Multinationals employ transfer pricing to assist in achieving competitive advantage and other corporate objectives as well. This study investigates the influence of transfer pricing on corporate performance and the link involving the effectiveness of transfer pricing in accomplishing objectives. In general, executives perceive that transfer pricing does influence measures of corporate performance. This is supported by the finding that transfer pricing also contributes toward achieving objectives.

Management control in the transfer pricing tax compliant multinational enterprise

2010-11-10T00:48:00.000-08:00

Title : Management control in the transfer pricing tax compliant multinational enterprise
Author(s) : Martine Cools; Clive Emmanuel; Ann Jorissen
Accounting, Organizations and Society 33 (2008) 603–628

Abstract:
This paper studies the impact of transfer pricing tax compliance on management control system (MCS) design and use within one multinational enterprise (MNE) which employed the same transfer prices for tax compliance and internal management purposes. Our analysis shows immediate effects of tax compliance on the design of organising controls with subsequent effects on planning, evaluating and rewarding controls which reveal a more coercive use of the MCS overall. We argue that modifications to the MCS cannot be understood without an appreciation of the MNEs’ fiscal transfer pricing compliance process.

A Further Examination of Income Shifting Through Transfer Pricing Considering Firm Size and/or Distress

2010-11-10T00:31:00.000-08:00

Title : A Further Examination of Income Shifting Through Transfer Pricing Considering Firm Size and/or Distress
Author(s) : Teresa L. Conover; Nancy B. Nichols
The International Journal of Accounting, Vol. 35, No. 2, pp. 189±211 2000

Abstract:
This study evaluates the effect of firm size on income shifting between tax jurisdictions through the use of transfer prices both before and after the passage of the Tax Reform Act of 1986 (TRA86). Prior research addressing income shifting through transfer pricing analyzes larger, financially sound firms. This empirical study extends the transfer pricing literature by including smaller and in some cases financially distressed firms in the sample and testing the effect by firm size on income shifting. Our findings suggest that smaller and/or distressed firms are less likely to shift income through transfer pricing than larger firms.

International Transfer Pricing: Searching for Patterns

2010-11-10T00:26:00.000-08:00

Title : International Transfer Pricing: Searching for Patterns

Author(s) : JAMIE ELLIOTT; CLIVE EMMANUEL
European Management Journal Vol. 18, No. 2, pp. 216–222, 2000

Abstract:
International transfer pricing is pervasive in that it can apply to all manner of goods, services, finance and intangible assets which flow between members of a group located in different parts of the world. Fiscal authorities in many countries are modernising their legislation to ensure they collect a fair amount of corporate tax revenue from companies operating within their jurisdiction. However, draconian tax rules may adversely affect world trade and reduce foreign direct investment.
Jamie Elliott and Clive Emmanuel report on an exploratory fieldwork study of 12 multinational enterprises based in the UK which attempts to place current practices of international transfer pricing in the organisational and fiscal context. One emerging pattern appears to associate industry sector affiliation with preferred transfer pricing method.

Transfer pricing rules and corporate tax competition

2010-11-10T00:06:00.000-08:00

Title : Transfer pricing rules and corporate tax competition

Author(s) : Ramy Elitzur; Jack Mintz
Journal of Public Economics 60 (1996) 401-422

Abstract:
A multinational parent sells a non-marketed commodity to a foreign subsidiary that uses the product as an input to produce a product it then sells. The subsidiary is controlled by a local managing partner whose compensation consists of a lump-sum payment plus a share of the subsidiary's profit. The parent chooses an optimal transfer price taking into account incentives for the subsidiary's managing partner and taxes. Home and host governments impose corporate income taxes on the parent and subsidiary's respective profits subject to a transfer pricing rule (e.g. cost plus price method or comparable profit method). A Nash equilibrium is derived for effective tax rates chosen by home and host governments. We then examine harmonization and suggest that tax rates would be reduced.

The dark side of transfer pricing: Its role in tax avoidance and wealth retentiveness

2010-11-10T00:00:00.000-08:00

Title : The dark side of transfer pricing: Its role in tax avoidance and wealth retentiveness

Author(s) : Prem Sikka; Hugh Willmott
Critical Perspectives on Accounting 21 (2010) 342–356

Abstract:
In conventional accounting literature, ‘transfer pricing’ is portrayed as a technique for optimal allocation of costs and revenues among divisions, subsidiaries and joint ventures within a group of related entities. Such representations of transfer pricing simultaneously acknowledge and occlude how it is deeply implicated in processes of wealth retentiveness that enable companies to avoid taxes and facilitate the flight of capital. A purely technical conception of transfer pricing calculations abstracts them from the politico-economic contexts of their development and use. The context is the modern corporation in an era of globalized trade and its relationship to state tax authorities, shareholders and other possible stakeholders. Transfer pricing practices are responsive to opportunities for determining values in ways that are consequential for enhancing private gains, and thereby contributing to relative social impoverishment, by avoiding the payment of public taxes. Evidence is provided by examining some of the transfer prices practices used by corporations to avoid taxes in developing and developed economies.

Multinational taxation and international emissions trading

2010-11-09T23:43:00.000-08:00

Title : Multinational taxation and international emissions trading

Author(s) : Carolyn Fischer
Resource and Energy Economics 28 (2006) 139–159

Abstract:
Many studies have shown that the activities of multinational corporations are quite sensitive to differences in income tax rates across countries. In this paper I explore the interaction between multinational taxation and abatement activities under an international emissions permit trading scheme. Four types of plans are considered: (1) a single domestic permit system with international offsets; (2) separate national permit systems without trade; (3) separate national permit systems with limited offsets; and (4) an international permit trading system. For each plan, I model the incentives for the multinational firm to choose abatement activities at home and abroad and to transfer emissions credits between parent and subsidiary. Limits on trading across countries restrict efficiency gains from abatement, as is well known. But if available offset opportunities are limited to actual abatement activities, those activities are also more susceptible to distortions from incentives to shift taxable income. Transfer-pricing rules can limit but not always eliminate these distortions. In a system of unlimited international trading, abatement is efficiently allocated across countries, but tax shifting can still be achieved through intra-firm transfer pricing. From the basis of efficiency for both environmental and tax policies, the best design is an international permit trading system with transparent, enforceable transfer-pricing rules.

The Value Relevance of Fixed Asset Revaluation Reserves in International Accounting

2010-11-09T20:41:00.000-08:00

Title : The Value Relevance of Fixed Asset Revaluation Reserves in International Accounting

Author(s) : Gyung Paik
Issued : 2009
International Management Review Vol. 5 No. 2 2009

Abstract:
The Securities and Exchange Commission (SEC) of the U.S. has recently proposed that all U.S. firms be required to issue financial statements in accordance with IFRS by 2014. Under IFRS, the rules for measurement of fixed assets are presented in IAS 16, which allows firms to choose either the cost model or the revaluation model. In this study, I investigate the effect of adopting the IFRS standard for fixed asset revaluation by examining the relationship between changes in revaluation reserves and stock prices. Out of the 15 countries used for the analyses, five countries have revaluation reserves that are statistically significant in explaining the market value of equity, suggesting that revaluation reserves are value relevant for those countries. I further break down the sample countries and categorize them based on the legal system to which they are subject, whether common law or code law. The results suggest that revaluation reserves of common law countries are value relevant, while those of code law countries are not. This study contributes to the international accounting literature by suggesting that the effect of adopting new IFRS rules, such as IAS 16, may differ in each country due to various legal, economic, cultural, and social forces

Earnings Management Using Pension Rate Estimas and The Timing of Adoption of SFAS 87

2010-11-09T20:16:00.000-08:00

Title : Earnings Management Using Pension Rate Estimas and The Timing of Adoption of SFAS 87

Author(s) : Marianne L. James
Issued : 2001
Academy of Accounting and Financial Studies Journal, Volume 5, Number 2

Abstract:
Concerns about earnings management and its effect on the usefulness of financial reporting continue to be pervasive and have prompted the Securities and Exchange Commission (SEC) to increase its enforcement activities. Flexibility in applying accounting provisions frequently provides opportunities for earnings management. Statement of Financial Accounting Standards No. 87, Employers’ Accounting for Pensions, (SFAS 87), provides extensive flexibility in choosing required pension estimates, and in timing the adoption of the standard. Several studies suggested that early adopters of SFAS 87 were motivated by its positive income effect.
This study investigated the relationship between the timing of adoption of SFAS 87 and earnings management using pension rate estimates subsequent to adoption. Study of 1,035 firms found that early adopters tended to use higher estimates of the rate-of-return on pension plan assets (ROR) subsequent to adoption, than on-time adopters. In the absence of higher actual returns, these findings suggest that early adopters were using the ROR estimates to facilitate earnings management subsequent to adoption. This may provide important information for the Financial Accounting Standards Board in assessing the effect of multi-year transition periods on earnings
management.

Compensation of Investment Company Advisor: An Empirical Investigation

2010-11-09T19:59:00.000-08:00

Title : Compensation of Investment Company Advisor: An Empirical Investigation

Author(s) : Denise Woodbury, Kyle Mattson
Issued : 2001
Academy of Accounting and Financial Studies Journal, Volume 5, Number 2

Abstract:
Data about the compensation contracts of open-end investment companies is collected and empirically examined. As expected, compensation is always a function of the NAV of the investment company and, in general, compensation is (weakly) monotonically decreasing in the marginal rate paid on increasing levels of NAV. Less often, the compensation contract is also contingent on the income of the company. In the cases where the method of calculating the income proportion of compensation is identifiable, the compensation is (weakly) monotonically decreasing in the marginal rate paid on increasing levels of income. Interestingly, however, the definition of "cash income" varies across investment companies. In addition, open-end investment companies pay additional compensation (or reduce the compensation paid) as a function of excess expenses, a group fee, and/or performance relative to a benchmark component.
As expected, compensation is contingent (either explicitly or implicitly) on performance. Counter to intuition and the agency framework model developed, the less risky the portfolio measured by purpose, composition, or size), the more sensitive is the compensation contract to performance.

The Usefulness of Accounting Information in Assessing Systematic Risk: A Re-Examination

2010-11-09T18:53:00.000-08:00

Title : The Usefulness of Accounting Information in Assessing Systematic Risk:
A Re-Examination
Author(s) : Ronald J. Woan
Issued : 2001
Academy of Accounting and Financial Studies Journal, Volume 5, Number 2

Abstract:
This study documents the potential statistical problems in using accounting risk measures in assessing a firm's systematic risk. It is found that all three problems: measurement error, omission of variables and multicollinearity exist in this area of research. To underscore the serious nature of the problems, two most important empirical studies in this area of research are replicated with new data: the Beaver, Kettler and Scholes' study and the Eskew's study. In both cases, the results are inconsistent with their findings. An alternative model, LISREL, is recommended for this area of research.

Auditor Concentration Within Client Industries

2010-11-09T17:49:00.000-08:00

Title : Auditor Concentration Within Client Industries
Author(s) : James H. Scheiner; Clark M. Wheatley
Issued : 2001
Academy of Accounting and Financial Studies Journal, Volume 5, Number 2

Abstract:
Auditors have increasingly emphasized industry specialization in their audit, management advisory, tax, and litigation services as a tool for obtaining new clients and serving existing ones. This research explores auditor concentration within industries over a twenty-year period. We find that increases in concentration came at the expense of non Big-6 auditors. In contrast to previous studies, however, our results demonstrate that firms with the largest market share in a particular industry at the beginning of the period, did not necessarily maintain or increase that market share through the end of the period. Furthermore, this study indicates that auditor concentration research, which relies solely upon metrics such as the "four-firm concentration ratio," may provide biased or misleading results.

Classification of Financial Instruments With Characteristics of Both Debt and Equity

2010-11-09T17:18:00.000-08:00

Title : Classification of Financial Instruments With Characteristics of Both Debt and Equity: Evidence Concerning Convertible Redeemable Preferred Stock
Author(s) : Mark G. McCarthy; Douglas K. Schneider
Issued : 2001
Academy of Accounting and Financial Studies Journal, Volume 5, Number 2

Abstract:
This study examines the market perception of a compound financial instrument, convertible redeemable preferred stock (CRPS). CRPS has the form of preferred stock, but also possesses a redemption feature and a conversion feature. Accounting for such instruments is the subject of a pending exposure draft by the Financial Accounting Standards Board. Current accounting rules for CRPS require that it be excluded from equity, but not classified as debt. A sample of firms reporting CRPS for fiscal years 1991 through 1995 is examined using a levels approach. The findings suggest that the market perceives CRPS as debt in two out of the five years under study. In the other three years the evidence is less convincing, raising the question as to whether current accounting rules classify CRPS according to how it is perceived by investors. The results would appear to support the FASB's decision to consider a new accounting standard for instruments with characteristics of both debt and equity. This study is timely and sheds light on an issue under deliberation by accounting standard setters.

The conservatism principle and the asymmetric timeliness of earnings

2010-11-09T00:15:00.000-08:00

Title : The conservatism principle and the asymmetric timeliness of earnings
Author(s) : Sudipta Basu
Journal of Accounting and Economics, Volume 24,
Issued : December 1997, Pages 3-37

Abstract:
I interpret conservatism as resulting in earnings reflecting 'bad news' more quickly than 'good news'. This interpretation implies systematic differences between bad news and good news periods in the timeliness and persistence of earnings. Using firms' stock returns to measure news, the contemporaneous sensitivity of earnings to negative returns is two to six times that of earnings to positive returns. I also predict and find that negative earnings changes are less persistent than positive earnings changes. Earnings response coefficients (ERCs) are higher for positive earnings changes than for negative earnings changes, consistent with this asymmetric persistence.