1998 JATA Conference
Multijurisdictional Tax Issues
Volume 20, Supplement
The Impact of State Taxation
on the Investment Portfolio of Banks
Roby B. Sawyers and Mark S Beasley
Taxes as a Determinant of Foreign-Owned
Property-Liability Insurers’ Investment Strategies in the United
States
Bin Ke, Edmund Outslay and Kathy R. Petroni
Distortion Caused by the Use
of Arm’s-Length Transfer Prices
David G. Harris and Richard C. Sansing
The Effects of Alternative State
Tax Regimes of Firm’s Accounting and Financing Decisions
Susan L. Porter
The Impact of State Taxation
on the Investment Portfolio of Banks
Roby B. Sawyers and Mark S Beasley
Abstract
This study examines the relation between state corporate tax provisions
and the investment portfolios of banks. Consistent with federal
tax laws, certain states disallow state tax deductions for interest
expense incurred in generating tax-exempt income. However, three
states have tax-law provisions allowing banks to deduct the interest
expense incurred to earn tax-exempt interest on U.S. government
and municipal securities. Recently, the effects of this difference
in state tax policy and its impact on state income taxes paid by
banks and their investment portfolios have been debated. Critics
argue that this provision encourages banks in deduction states to
invest more heavily in tax-exempt securities than banks in states
without the deduction provision. This study provides insight to
the debate by empirically finding that the impact of the deduction
provision is contingent on the bank’s state marginal income tax
rate. As banks face higher marginal state income tax rates in deduction
states, they are significantly more likely to invest a greater percentage
of their assets in U.S. government securities than banks facing
low tax rates in deduction states or banks in states not allowing
the interest expense deduction. These results should be relevant
to state tax policy makers and banking industry officials who have
a vested interest in the debate of this provision. Top
Taxes as a Determinant of Foreign-Owned
Property-Liability Insurers’ Investment Strategies in the United
States
Bin Ke, Edmund Outslay and Kathy R. Petroni
Abstract
This research investigates the influence of home-country tax systems
on foreign-owned property-liability insurance company investment
strategies in the United States. Specifically, we compare the investment
strategies of foreign insurers subject to home-country territorial
and worldwide tax regimes. We predict that U.S. subsidiaries and
branches of foreign insurers domiciled in territorial tax countries
will hold more U.S. tax-favored assets than their counterparts subject
to a worldwide tax regime. We also predict that U.S. subsidiaries
of foreign-owned insurers domiciled in worldwide tax countries will
hold more U.S. tax-favored assets than branches of such companies.
Consistent with our prediction, we find that worldwide branches
invest a significantly smaller proportion of their asset in U.S.
tax-exempt bonds than do territorial insurers (both branches and
subsidiaries). However, we find no statistically significant difference
in the investment practices of worldwide subsidiaries and territorial
subsidiaries. These results indicate that tax deferral available
to worldwide subsidiaries may be the equivalent of tax exemption
for investment in U.S. tax-exempt bonds. The results contribute
to a stream of research that investigates how alternative tax regimes
affect direct foreign investment in the United States (e.g., Collins
et al. 1995; Hines 1996, 1997; Scholes and Wolfson 1990).
Top
Distortion Caused by the
Use of Arm’s-Length Transfer Prices
David G. Harris and Richard C. Sansing
Abstract
This paper examines the effects of using an arm’s-length transfer
price, such as the Comparable Uncontrolled Price (CUP) method, to
allocate income for tax purposes between a manufacturing entity
and a selling entity within a multinational enterprise (MNE). The
CUP method allocates disproportionately high levels of income earned
by the MNE to the manufacturer in our model. This result is consistent
with the anomaly identified in Grubert et al. (1993) and Collins
et al. (1997), in which U.S. subsidiaries of foreign MNEs frequently
report zero, or near-zero, taxable income. In addition, the CUP
method distorts decisions regarding production and organizational
structure when the tax rates in the two countries differ.
Top
The Effects of Alternative
State Tax Regimes of Firm’s Accounting and Financing Decisions
Susan L. Porter
Abstract
State taxes as a proportion of total corporate taxes have been
rising over the past decade. As a result, state tax planning is
becoming increasingly important. Prior tax research has examined
the effect of federal taxes on management financing and accounting
decisions. This study expands upon this research by examining the
effects of differing state tax regimes on management decisions.
California’s income tax, Michigan’s value-added tax and Texas’ net
worth tax are examined, and hypotheses are developed about how accounting
and financing decisions are affected by these very different types
of taxes. Test variables include the level of debt and accounting
accrual choices. Results suggest that firms’ levels of discretionary
accruals are differentially affected by different state tax regimes.
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