Corporate tax

avoidance: data
truncation and loss
firms

1. Intan Saras Wati (20171112094)

2. Astri Widya Permata (20171112098)
3. Rosalia Setya Utami (20171112117)
4. Siti Saripah Noviyanti (20171112124)
Purpose

This study is examine the extent to which

inferences about corporate tax avoidance over the
past twenty-seven years (1988-2014) change
when we examine the full population of firms, as
opposed to a profitable and/or taxable subsample.

Your Date Here Your Footer Here 2

Introduction
• These studies primarily
measure the extent to • Focus on the
• To date, our which a firm is tax-
population of
understanding of favored using:
domestic
corporate tax 1) an effective tax rate corporations and
avoidance is limited measure, constructed as the construct one-, five-
to firms with positive ratio of financial statement
and ten-year
pre-tax income tax expense to pretax book
income (GAAP ETR) or measures of Δ/MVA
and/or current tax
cash taxes paid to pretax for both our full
expense because book income (Cash ETR), sample and the
most extant studies
2) a book-tax difference subsample of firms
of tax avoidance
(BTD) measure that with positive income
omit loss firm-year
observations. captures the difference and current tax
between pre-tax book expense.
income and estimated
taxable income.
3
Sample

• U.S. corporations from 1988 to 2014

• One-year tax avoidance measures
• Full sample of 124,514 one-year observations

Your Date Here Your Footer Here 4

Variable

• Dependent • Independent
Variable : Variable :
Corporate tax Data truncation
avoidance and loss firms

Your Date Here Your Footer Here 5

Approach

• The author choose the statutory tax rate as the

benchmark because ETR studies routinely frame
their analyses in terms of why the ETR deviates
from the statutory rate, and we follow the same
approach (e.g., GAO 2016; Dyreng, Hoopes, and
Wilde 2016) .
 Measurement of Tax Avoidance

• If there were no book-tax differences (either permanent or

temporary), no deferral of U.S. tax on foreign earnings (i.e.,
immediate repatriation of foreign earnings), no general
business tax credits, no alternative minimum tax, no state income
tax, and immediate refunds for taxable losses, then Δ would be
zero for all firms.
• If Δ is less than zero, the firm is tax-favoured
• If Δ is greater than zero, the firm is taxdisfavored.

Your Date Here Your Footer Here 7

Limitation

• Corporate tax avoidance is limited to firms with

positive pre-tax income and/or current tax
expense because most extant studies of tax
avoidance omit loss firm-year observations.
• The measure overcomes a significant limitation
of previous measures of tax avoidance but the
author note its shortcomings so that researchers
may carefully consider its use.
Your Date Here Your Footer Here 9
Findings

• Find that domestic firms are more tax-disfavored

than multinationals for every year in our sample
period.
• Domestic firms become more tax-disfavored
over time, while tax avoidance within
multinational firms appears to remain relatively
constant, which is opposite the conclusion
gleaned from the positive PTI and CTE
subsample.
Your Date Here Your Footer Here 10
 Contribution

• Introduce a • Contrary to the • The primary

meaningful tax conventional wisdom, contribution of
the average domestic our measure is
avoidance corporation and many
measure for all that, unlike most
industries thought to
observations.. be aggressive tax measures of
avoiders are actually corporate tax
tax-disfavored due to avoidance, it is
the tax system’s defined for the
asymmetric treatment full population of
of profits and losses.
publicly traded
firms.

Your Date Here Your Footer Here 11

 Result

• This result is further supported by a significant negative

association between the linear time trend variable (TIME) and
both CETR1 and Δ/MVA1 in the positive PTI and CTE
subsample.
• The literature excludes the effect of company losses on the
level of corporate tax avoidance.

Your Date Here Your Footer Here 12