American Taxation Association

JATA abstracts - Fall 2006

JATA - Fall 2006

Volume 28, No. 2

Managerial Autonomy and Tax Compliance: An Empirical Study on International Transfer Pricing
K. Hung Chan, Agnes W. Y. Lo and Phyllis Lai Lan Mo

Ticks and Tax: The Effects of Price Discreteness and Taxation on Ex-Dividend Day Returns
C. Bryan Cloyd, Oliver Zhen Li and Connie D. Weaver

An Examination of the Relations among Tax Preferences, Implicit Taxes, and Market Power in a Noncompetitive Market
Debra A. Salbador and Valaria P. Vendrzyk

Experimental Evidence on the Role of Tax Complexity in Investment Decisions
Scott J. Boylan and Peter J. Frischmann


Managerial Autonomy and Tax Compliance: An Empirical Study on International Transfer Pricing

K. Hung Chan, Agnes W. Y. Lo and Phyllis Lai Lan Mo

Abstract

This paper examines the impact of managerial autonomy on tax compliance in an international transfer pricing context. Specifically, we study whether foreign subsidiaries' autonomy in making pricing and sourcing decisions on intrafirm transfers affect their profit shifting through international transfer pricing. We measure transfer pricing noncompliance in terms of tax audit adjustments made by tax authorities. Based on a sample of 163 transfer pricing audits on foreign investment enterprises (FIEs) in China, we find that tax audit adjustments for FIEs that have autonomy in setting transfer prices or sourcing from outsiders are smaller than those that have their transfer transactions dictated by parent companies.  Top


Ticks and Tax: The Effects of Price Discreteness and Taxation on Ex-Dividend Day Returns

C. Bryan Cloyd, Oliver Zhen Li and Connie D. Weaver

Abstract

We investigate changes in the relation between dividend yield and exdividend day stock returns across four regimes, defined by two reductions in share price discreteness and two changes in differential tax rates on dividend versus longterm capital gain income of individual investors. Our research design enables us to examine the effect of changing price discreteness (1 /16 to decimals) in early 2001 while holding tax rates constant, as well as the effect of changing tax rates in May 2003, while holding price discreteness constant. Changes in the relation between dividend yield and ex-dividend day abnormal returns across these regimes suggest that differential taxation is primarily responsible for the relation between dividend yield and ex-dividend day returns, although we find weak evidence that price discreteness also affects this relation.  Top


An Examination of the Relations among Tax Preferences, Implicit Taxes, and Market Power in a Noncompetitive Market

Debra A. Salbador and Valaria P. Vendrzyk

Abstract

We examine whether market power within a noncompetitive industry is related to a firm's ability to retain the benefits received from statutory tax preferences. Using both a market-based measure and an accounting-based measure proposed by Dunbar and Sansing (2002), we estimate tax preferences for a sample of 60 defense contractors for the three years preceding (1984–1986) and immediately following (1988–1990) the passage of the Tax Reform Act of 1986 (TRA86). We confirm that defense contractors enjoyed positive tax preferences in 1984–1986, which decreased significantly with the passage of TRA86. We find a negative and significant relation between changes in tax preferences and changes in pre-tax returns, which is consistent with implicit tax theory and supported by prior empirical work. We also find that this relation is significantly less negative for firms ranked among the Top 100 defense contractors than for unranked contractors. We conclude that market power is positively related to a firm's ability to retain the benefits of tax preferences, where market power is defined as relative position within the noncompetitive defense contracting market.  Top


Experimental Evidence on the Role of Tax Complexity in Investment Decisions

Scott J. Boylan and Peter J. Frischmann

Abstract

Past behavioral research has demonstrated that complexity in determining one's marginal tax rate can produce systematic decision errors in single-person investment settings in which individuals must choose between investments with different after-tax returns. In this paper, we examine the degree to which such a phenomenon exists when investments are made in competitive markets. More specifically, we conduct a series of oral double-auctions in which buyer profits are taxed and in which we manipulate the complexity required for buyers to arrive at their marginal tax rates. Our two main results are as follows. First, tax complexity leads to systematically (and inefficiently) high trading prices and quantities in these markets, which jointly limits the amount of wealth created, and leads to systematic wealth transfers between market participants and to the taxing authority. Second, these effects generally diminish over the course of the experiment, but do not disappear entirely. The latter result suggests that competitive markets can be effective at mitigating, although not necessarily eliminating, the negative effects of tax complexity on investment decisions.  Top

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