scholarly journals Tax Code Change Impacts on the Practice of Corporate Finance

2020 ◽  
Vol 5 (3) ◽  
pp. p21
Author(s):  
Rakesh Duggal ◽  
Michael C. Budden
Keyword(s):  
Corporate Finance ◽  
Capital Budgeting ◽  
Public Law ◽  
Corporate Tax ◽  
Tax Rate ◽  
Tax Shield ◽  
Code Change ◽  
Financial Decision ◽  
Jobs Act ◽  
Interest Expense

Public Law No. 115-97 (initially introduced in the house as the Tax Cuts and Jobs Act or TCJA) passed by Congress in 2017 has significantly revised the Internal Revenue Code of 1986. Since taxes play an important role in financial decision-making, the TCJA will impact decisions in many areas of corporate finance, including capital structure and capital budgeting. By using S&P 500 data, this paper attempts to broadly estimate these impacts. The lower corporate tax rate under the new law reduces the corporate incentive to borrow to benefit from the interest expense tax shield. The lower tax rate also reduces the depreciation tax shield and marginally raises the average cost of capital. However, an S&P 500 firm on average will receive an estimated $239 million per year in tax-related benefits, based on 2017 financial data. This annual benefit will decrease after five years as the 100% expensing of investments is gradually withdrawn after 2023.

Corporate Behavioral Responses to the TCJA for Tax Years 2017-2018

2020 ◽  
Vol 73 (4) ◽  
pp. 1109-1134
Author(s):  
Tim Dowd ◽  
Christopher Giosa ◽  
Thomas Willingham
Keyword(s):  
Behavioral Responses ◽  
Corporate Tax ◽  
Corporate Response ◽  
Tax Rate ◽  
Tax Returns ◽  
Large Corporations ◽  
Jobs Act ◽  
Statutory Tax Rate ◽  
Tax Cuts

We analyze the initial corporate response to the 2017 enactment of the “Tax Cuts and Jobs Act” (TCJA). The TCJA changed many corporate tax provisions, including a reduction of the corporate statutory tax rate from 35 percent to 21 percent effective in 2018 and sweeping changes to the taxation of income earned abroad by U.S. corporations. Based on a sample of U.S. corporate tax returns, we find that corporations accelerated deductions into 2017 and delayed income into 2018, thereby minimizing their taxes. We estimate an income and deduction shifting tax elasticity of -0.11 and 0.08, respectively. Additionally, we study detailed tax returns of 81 large corporations to understand how those changes impacted them.

Purifying Islamic equities: the interest tax shield

2014 ◽  
Vol 7 (4) ◽  
pp. 473-484 ◽  
Author(s):  
Mark Brendan Mulcahy
Keyword(s):  
Corporate Finance ◽  
Design Methodology ◽  
Content Type ◽  
Tax Shield ◽  
Islamic Financial Institutions ◽  
Investment Process ◽  
Practical Implications ◽  
Interest Expense ◽  
Islamic Investment ◽  
Specific Contribution

Purpose – This paper aims to add to the debate regarding the appropriate methodology to purify tainted components from shari’ah-compliant equities. Design/methodology/approach – Based on the Qur’anical prohibition against riba and an analysis of the purification methodology recommended by Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) shari’ah Standard 21, this paper highlights the shortcomings in Standard 21 and references the corporate finance literature to argue for the need to also purify the interest tax shield from debt. Findings – Purification is a pivotal element of the Islamic investment process, yet Standard 21 permits a loose interpretation which causes portfolios to be under-purified. Standard 21 also makes no mention of the interest tax shield from debt even though the benefits are at odds with the principles of social justice in Islam. That there is no mention of the interest tax shield from debt in the (limited) literature on the purification of Islamic equities is puzzling. Practical implications – This paper has implications for the Islamic funds industry and for devout Muslim investors. Originality/value – The specific contribution of this paper is the identification of the interest expense tax shield (well-established in the corporate finance literature) as a significant non-compliant riba-related component that needs to be considered in the purification process.

scholarly journals Tax Code Revision and The Value of Tax-Deductible Debt

1970 ◽  
Vol 14 (1) ◽  
pp. 19-31
Author(s):  
William Randolph
Keyword(s):  
Cost Of Capital ◽  
Weighted Average ◽  
Competitive Environment ◽  
Tax Revenue ◽  
Present Value ◽  
Corporate Tax ◽  
Tax Shield ◽  
Maximum Value ◽  
Interest Expense ◽  
Theoretical Amount

This paper examines a tax policy change that would eliminate the interest expense as a tax-deductible item for businesses. We analyze this change using a tax revenue neutral setting in a Modigliani-Miller world. The analysis uses two scenarios to compare the change to the present U.S. Tax Code. Scenario one assumes a non-competitive environment with sticky prices. Scenario two assumes that companies or industries with low leverage would cut prices instead of realizing excess profits. The reduction in prices will redistribute the present value of the corporate tax shield from the stockholder to the consumer. Using the Modigliani-Miller methodology for valuation, the maximum value (equivalent to theoretical value in this case) of the tax shield is approximately $712 billion. The actual value is probably less than half the theoretical amount. Under either scenario, the weighted average cost of capital increases for levered firms.

scholarly journals PENGARUH ASPEK PAJAK DAN ASPEK LAINNYA TERHADAP TINGKAT HUTANG

2020 ◽  
Vol 28 (2) ◽  
pp. 143
Author(s):  
Stephanie Soerodjo
Keyword(s):  
Financial Distress ◽  
Investment Opportunity ◽  
Corporate Tax ◽  
Significance Level ◽  
Tax Rate ◽  
Tax Shield ◽  
Factors Influencing ◽  
Investment Opportunity Set ◽  
Fixed Assets ◽  
Debt Tax Shield

As a developing country, Indonesia shows a quite interesting phenomenon, which is the high rate of debt of many companies in Indonesia. This fact shows that the policy of leverage plays an important role for the viability of the company. The main purpose of this research was to test empirically factors influencing leverage, for there are still inconsistencies in research results from the prior studies. Based on the data of the mining companies listed on BEI for period 2009-2011, in addition of using tax factors that consisted of Corporate tax rate and Non-debt tax shield, influencing the leverage, there are also another factors influencing leverage, which are Investment opportunity set, Profitability, Past debt, Tangibility of fixed assets, Firm size, and Cost of financial distress. The analyzed data are the combination of time series and cross-section data or, panel data, utilizing the regression model supported by the software SPSS 20 on 0,05 or 5% of significance level. The result of the study shows that at the significance level of 0,05 Corporate Tax Rate (0,543), Non–debt Tax Shield (0,518), Investment Opportunity Set (0,442), Tangibility of Fixed Assets (0,544), Firm Size (0,500), and Cost of Financial Distress (0,380) have no significant effect for the leverage. While Profitability (0,028) negatively has significance effect for the leverage at the significance of 0,05. While Past Debt (0,000) has significant positive effect on the leverage at the significance of 0,05.

scholarly journals ANALISIS FAKTOR-FAKTOR YANG MEMPENGARUHI TARIF PAJAK EFEKTIF

2018 ◽  
Vol 10 (2) ◽  
Author(s):  
Yanuar Nanok Soenarno
Keyword(s):  
Market Share ◽  
Cash Flow ◽  
Stock Exchange ◽  
Font Size ◽  
Corporate Tax ◽  
Tax Rate ◽  
Tax Shield ◽  
Financial Factors ◽  
Tax Payments

<p><em><span style="font-family: Times New Roman; font-size: medium;">This research wanted to see whether financial factors such as profitability, leverage, liquidity, market share and cash flow affects the company in paying taxes. This study uses all non-financial companies listed on the Indonesia Stock Exchange listing in 2012. From this research resulted that profitability, leverage and liquidity factors affect the level of corporate tax payments. However, shareholder and cash flow factors whose expectations are influential, have no effect. Tax payment strategies that still rely on tax shield to reduce tax payments, making many companies more borrowed to get the funds.</span></em></p><p><em><span style="font-family: Times New Roman; font-size: medium;"> </span></em></p><strong>Keywords: </strong><em>efective tax rate, profitability, leverage, liquidity, cash flow, Indonesia stock exchange.</em>

scholarly journals Investment In An Unstable Tax Environment

2011 ◽  
Vol 5 (12) ◽  
Author(s):  
Sam N. Basu ◽  
Franklin Lowenthal ◽  
Christopher Lubwama
Keyword(s):  
Capital Budgeting ◽  
Font Size ◽  
Corporate Tax ◽  
Capital Projects ◽  
Policy Makers ◽  
Tax Rate ◽  
Acceptance Criterion ◽  
Micro Level ◽  
Insight Into

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-family: Times New Roman; font-size: x-small;">While most of the capital budgeting situations are typically micro level problems, the introduction of this dual impact of the corporate tax rate on the project acceptance criterion provides an insight into potential tax regime decisions on long term investments in a given tax jurisdiction.<span style="mso-spacerun: yes;">&nbsp; </span>If we understand this dual behavior well enough, it might be possible for a tax regime to manipulate its corporate tax rate without necessarily jeopardizing acceptability status of capital projects to providers of capital. The present paper is an attempt to model this dual impact of the corporate tax rate on the NPV of projects within the tax regime, and study the implications of the results for policy makers and for corporations facing such policy makers.</span></p>

scholarly journals Policy Forum: Is Accelerated Depreciation Good or Misguided Tax Policy?

2019 ◽  
Vol 67 (1) ◽  
pp. 41-55
Author(s):  
Philip Bazel ◽  
Jack Mintz
Keyword(s):  
United States ◽  
Tax Reform ◽  
The United States ◽  
Tax Rates ◽  
Corporate Tax ◽  
Tax Base ◽  
Tax Rate ◽  
Accelerated Depreciation ◽  
The Government ◽  
Jobs Act

The authors examine the implications of Canada's response to the 2017 US tax reform. Canada's focus on accelerated tax depreciation will achieve lower marginal effective tax rates on capital for taxpaying companies, well below the US levels achieved with the Tax Cuts and Jobs Act that came into effect on January 1, 2018. By ignoring neutrality, the government offsets some of the potential gains by reducing the tax burden on capital, thereby failing to maximize efficiency gains from a better corporate tax system. Further, Canada's approach fails to respond to competitiveness effects of US reforms on corporate tax base erosion in Canada as companies shift profits to the United States. The low US tax rate on intangible income will draw certain functions to the United States. A more comprehensive approach to corporate tax reform, including some reduction in corporate income tax rates, would have been a preferable response.

Transocean and the History of Tax Inversions

2018 ◽  
Vol 34 (1) ◽  
pp. 1-12
Author(s):  
Susan M. Albring ◽  
Randal J. Elder ◽  
Mitchell A. Franklin
Keyword(s):  
Multinational Corporations ◽  
Economic Impacts ◽  
Income Taxes ◽  
Tax Rates ◽  
Corporate Tax ◽  
Corporate Income Taxes ◽  
History Of ◽  
Jobs Act ◽  
The U.S ◽  
Over Time

ABSTRACT The first tax inversion in 1983 was followed by small waves of subsequent inversion activity, including two inversions completed by Transocean. Significant media and political attention focused on transactions made by U.S. multinational corporations that were primarily designed to reduce U.S. corporate income taxes. As a result, the U.S. government took several actions to limit inversion activity. The Tax Cuts and Jobs Act of 2017 (TCJA) significantly lowered U.S. corporate tax rates and one expected impact of TCJA is a reduction of inversion activity. Students use the Transocean inversions to understand the reasons why companies complete a tax inversion and how the U.S. tax code affects inversion activity. Students also learn about the structure of inversion transactions and how they have changed over time as the U.S. government attempted to limit them. Students also assess the tax and economic impacts of inversion transactions to evaluate tax policy.

Ireland faces economic uncertainty with OECD reforms

2021 ◽  
Keyword(s):  
Tax Revenue ◽  
Economic Uncertainty ◽  
Corporate Tax ◽  
Content Type ◽  
Tax Rate ◽  
Sinn Fein ◽  
Fiscal Spending

Significance This framework laid out two pillars of reform. Pillar One would see large companies liable for tax in the end-market jurisdiction where their goods or services are used or consumed. Pillar Two would set a minimum tax rate of 15%. Impacts Ireland will probably support the reforms by October, and in return it may get some concessions over implementation or sectoral coverage. Reduced corporate tax revenue may result in tighter fiscal spending, which would play into the hands of the opposition Sinn Fein. The corporate tax proposals come at a particularly bad time for the Irish economy, which is already facing the consequences of Brexit.

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