Debt/asset ratio as evidence of profit-shifting behaviour in the Slovak Republic
Abstract
Companies use different methods and techniques to transfer taxable profits to tax havens. The paper aims at analysing the influence of the relocation of the registered office of Slovak companies in tax havens in relation to the leverage ratio and the ratio of debt per sales and to verify the use of debt by Slovak firms in the transfer of profits. In evaluating these indicators, we chose two approaches. We first analysed the change of indicators only for those firms that transferred their seat to lower tax jurisdiction. The analysis is complemented by a different view, when the selected indicators are compared to a group of businesses with a link to tax havens and with no link to tax havens. Our empirical results clearly indicate the tendency that firms in Slovakia benefit from the possibility of transferring profits to lower tax jurisdictions via debt channels. The median values of debt ratio after the transfer of the registered office to tax havens increased by 7.8%. The median value of the tracking indicator is 1.2 times higher for firms with tax haven links than for companies without links to tax havens.
Keyword : debt ratio, ownership link with tax havens, profit-shifting, tax optimization, Slovak companies, Wilcoxon signed rank test, Mann-Whitney test
How to Cite
Ištok, M., & Kanderová, M. (2019). Debt/asset ratio as evidence of profit-shifting behaviour in the Slovak Republic. Technological and Economic Development of Economy, 25(6), 1293-1308. https://doi.org/10.3846/tede.2019.11338
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
Auerbach, A., Devereux, M. P., Keen, M., & Vella, J. (2017). International tax planning under the destination-based cash flow. National Tax Journal, 70(4), 783-802. https://doi.org/10.17310/ntj.2017.4.04
Bisnode. (2018). Daňové raje prišli o desiatky slovenských firiem. Retrieved from https://www.bisnode.sk/o-bisnode/o-nas/novinky/danove-raje-prisli-o-desiatky-slovenskych-fririem
Blouin, J., Core, J. E., & Guay, W. (2010). Have the tax benefits of debt been overestimated? Journal of Financial Economics, 98(2), 195-213. https://doi.org/10.1016/j.jfineco.2010.04.005
Chen, S., Chen, X., Chen, Q., & Shevlin, T. (2007). Are family firms more tax aggressive than non- family firms? Journal of Financial Economics, 95(1), 41-61. https://doi.org/10.1016/j.jfineco.2009.02.003
Chen, S., Huang, Y., Li, N., & Shevlin, T. (2019). How does quazi-indexer ownership affect corporate tax planning. Journal of Accounting and Economics, 67(2-3), 278-296. https://doi.org/10.1016/j.jacceco.2018.01.001
Clemente-Almendros, J. A., & Sogorb-Mira, F. (2018). Costs of debt, tax benefits and a new measure of non-debt tax shields: examining debt conservatism in Spanish listed firms. Revista de Contabilidad, 21(2), 162-175. https://doi.org/10.1016/j.rcsar.2018.05.001
Desai, M. A., Foley, C. F., & Hines, J. R. (2004). A Multinational Perspective on Capital Structure Choice and Internal Capital markets. The Journal of Finance, 59(6), 2451-2487. https://doi.org/10.1111/j.1540-6261.2004.00706.x
Graham, J. R. (1996). Debt and the marginal tax rate. Journal of Financial Economics, 41(1), 41-73. https://doi.org/10.1016/0304-405X(95)00857-B
Graham, J. R., & Tucker, A. L. (2006). Tax shelters and corporate debt policy. Journal of Financial Economics, 81(3), 563-594 https://doi.org/10.1016/j.jfineco.2005.09.002
Graham, J. R., & Mills, L. F. (2008). Using tax return data to simulate corporate marginal tax rates. Journal of Accounting and Economics, 46(2-3), 366-288. https://doi.org/10.1016/j.jacceco.2007.10.001
Hanlon, M., & Heitzman, S. (2010). A review of tax research. Journal of Accounting and Economics, 50(2-3), 127-178. https://doi.org/10.1016/j.jacceco.2010.09.002
Isin, A. A. (2018). Tax avoidance and cost of debt: The case for loan-specific risk mitigation and public debt financing. Journal of Corporate Finance, 49, 344-378. https://doi.org/10.1016/j.jcorpfin.2018.01.003
Ištok, M., & Kanderová, M. (2019). Interest expenses as a technique of profit shifting used by Slovak companies. In Inetrnationa Scientific Conference Hradec Economic Days 2019, Part I. Hradec Králové, Czech Republic, 9(1), 292-304.
Janský, P., & Kokeš, O. (2015). Corporate tax base erosion and profit-shifting out of the Czech Republic. Post-Communist Economies, 27(4), 537-546. https://doi.org/10.1080/14631377.2015.1084733
Janský, P., & Kokeš, O. (2016). Profit-shifting from Czech multinational companies to European tax havens. Applied Economics Letters, 23(16), 1-19. https://doi.org/10.1080/13504851.2015.1137543
Johannesen, N. (2014). Tax avoidance with cross-border hybrid instruments. Journal of Public Economics, 112, 40-52. https://doi.org/10.1016/j.jpubeco.2014.01.011
Krejčí, P. (2016). Vlastnické struktury a Compliance. In Odborní konference Mezinárodní struktury – Adaptace na aktuální legislativní změny. 26 April 2016, Akonttust company. Prague.
Kubick, T. R., & Lockhart, G. B. (2017). Corporate tax aggressiveness and the maturity structure of debt. Advances in Accounting, 36, 50-57. https://doi.org/10.1016/j.adiac.2016.10.001
Lee, Z., Deng, S., Lin, B., & Yang, J. G. S. (2010). Decision model and analysis for investment interest expense deduction and allocation. European Journal of Operational Research, 200(1), 268-280. https://doi.org/10.1016/j.ejor.2008.12.012
Lin, S., Tong, N., & Tucker, A. L. (2014). Corporate tax aggression and debt. Journal of Banking Finance, 40, 227-241. https://doi.org/10.1016/j.jbankfin.2013.11.035
Maßbaum, A., & Sureth, C. (2009). Thin capitalization rules and entrepreneurial capital structure decisions. BuR Business Research Journal, 2(2), 147-169. https://doi.org/10.1007/BF03342708
Martinez, A. L., & Ramalho, G. C. (2014). Family firms and Tax aggressiveness in Brazil. International Business Research, 7(3), 129-136. https://doi.org/10.5539/ibr.v7n3p129
Miniaci, R., Parisi, M. L., & Panteghini, P. M. (2014). Debt Shifting in Europe. International Tax and Public Finance, 21(3), 397-435. https://doi.org/10.1007/s10797-012-9266-4
Moravec, L., & Kukalová, G. (2014). Investments allocation tax factors in pre-crisis time. In European Financial Systems 2014. Proceedings of the 11th International Scientific Conference (pp. 396-402). Masaryk University, Brno.
Moravec, L., Rohan, J., & Hinke, J. (2019). Estimation of international tax planning impact on corporate tax gap in the Czech Republic. E&M Ekonomie a Management, 22(1), 157-170. https://doi.org/10.15240/tul/001/2019-1-011
Overesch, M., & Wamser, G. (2014). Bilateral internal debt financing and tax planning of multinational firms. Review of Quantitative Finance and Accounting, 42(2), 191-209. https://doi.org/10.1007/s11156-012-0339-3
Reuter, P. (2012). Draining development? Controlling flows of illicit funds from developing countries. World Bank License: CC BZ 3.0 IGO. Retrieved from https://openknowledge.worldbank.org/handle/10986/2242 https://doi.org/10.1596/978-0-8213-8869-3
Riedel, N. (2018). Quantifying international tax avoidance: A review of academic literature. Review of Economics, 69(2), 169-182. https://doi.org/10.1515/roe-2018-0004
Rohan, J., & Moravec, L. (2017). Tax information exchange influence on Czech based companies’ behaviour in relation to tax havens. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 65(2), 721-726. https://doi.org/10.11118/actaun201765020721
Scholes, M. S., Wolfson, M. A., Erickson, M. M., Maydew, E. L., & Shevlin, T. J. (2009). Taxes and business strategy: A planning approach. (4th ed.). New Jersey: Pearson Prentice-Hall.
Valencia, M. (2013). Storm survivors. The Economist. Retrieved from https://www.economist.com/special-report/2013/02/16/storm-survivors
Bisnode. (2018). Daňové raje prišli o desiatky slovenských firiem. Retrieved from https://www.bisnode.sk/o-bisnode/o-nas/novinky/danove-raje-prisli-o-desiatky-slovenskych-fririem
Blouin, J., Core, J. E., & Guay, W. (2010). Have the tax benefits of debt been overestimated? Journal of Financial Economics, 98(2), 195-213. https://doi.org/10.1016/j.jfineco.2010.04.005
Chen, S., Chen, X., Chen, Q., & Shevlin, T. (2007). Are family firms more tax aggressive than non- family firms? Journal of Financial Economics, 95(1), 41-61. https://doi.org/10.1016/j.jfineco.2009.02.003
Chen, S., Huang, Y., Li, N., & Shevlin, T. (2019). How does quazi-indexer ownership affect corporate tax planning. Journal of Accounting and Economics, 67(2-3), 278-296. https://doi.org/10.1016/j.jacceco.2018.01.001
Clemente-Almendros, J. A., & Sogorb-Mira, F. (2018). Costs of debt, tax benefits and a new measure of non-debt tax shields: examining debt conservatism in Spanish listed firms. Revista de Contabilidad, 21(2), 162-175. https://doi.org/10.1016/j.rcsar.2018.05.001
Desai, M. A., Foley, C. F., & Hines, J. R. (2004). A Multinational Perspective on Capital Structure Choice and Internal Capital markets. The Journal of Finance, 59(6), 2451-2487. https://doi.org/10.1111/j.1540-6261.2004.00706.x
Graham, J. R. (1996). Debt and the marginal tax rate. Journal of Financial Economics, 41(1), 41-73. https://doi.org/10.1016/0304-405X(95)00857-B
Graham, J. R., & Tucker, A. L. (2006). Tax shelters and corporate debt policy. Journal of Financial Economics, 81(3), 563-594 https://doi.org/10.1016/j.jfineco.2005.09.002
Graham, J. R., & Mills, L. F. (2008). Using tax return data to simulate corporate marginal tax rates. Journal of Accounting and Economics, 46(2-3), 366-288. https://doi.org/10.1016/j.jacceco.2007.10.001
Hanlon, M., & Heitzman, S. (2010). A review of tax research. Journal of Accounting and Economics, 50(2-3), 127-178. https://doi.org/10.1016/j.jacceco.2010.09.002
Isin, A. A. (2018). Tax avoidance and cost of debt: The case for loan-specific risk mitigation and public debt financing. Journal of Corporate Finance, 49, 344-378. https://doi.org/10.1016/j.jcorpfin.2018.01.003
Ištok, M., & Kanderová, M. (2019). Interest expenses as a technique of profit shifting used by Slovak companies. In Inetrnationa Scientific Conference Hradec Economic Days 2019, Part I. Hradec Králové, Czech Republic, 9(1), 292-304.
Janský, P., & Kokeš, O. (2015). Corporate tax base erosion and profit-shifting out of the Czech Republic. Post-Communist Economies, 27(4), 537-546. https://doi.org/10.1080/14631377.2015.1084733
Janský, P., & Kokeš, O. (2016). Profit-shifting from Czech multinational companies to European tax havens. Applied Economics Letters, 23(16), 1-19. https://doi.org/10.1080/13504851.2015.1137543
Johannesen, N. (2014). Tax avoidance with cross-border hybrid instruments. Journal of Public Economics, 112, 40-52. https://doi.org/10.1016/j.jpubeco.2014.01.011
Krejčí, P. (2016). Vlastnické struktury a Compliance. In Odborní konference Mezinárodní struktury – Adaptace na aktuální legislativní změny. 26 April 2016, Akonttust company. Prague.
Kubick, T. R., & Lockhart, G. B. (2017). Corporate tax aggressiveness and the maturity structure of debt. Advances in Accounting, 36, 50-57. https://doi.org/10.1016/j.adiac.2016.10.001
Lee, Z., Deng, S., Lin, B., & Yang, J. G. S. (2010). Decision model and analysis for investment interest expense deduction and allocation. European Journal of Operational Research, 200(1), 268-280. https://doi.org/10.1016/j.ejor.2008.12.012
Lin, S., Tong, N., & Tucker, A. L. (2014). Corporate tax aggression and debt. Journal of Banking Finance, 40, 227-241. https://doi.org/10.1016/j.jbankfin.2013.11.035
Maßbaum, A., & Sureth, C. (2009). Thin capitalization rules and entrepreneurial capital structure decisions. BuR Business Research Journal, 2(2), 147-169. https://doi.org/10.1007/BF03342708
Martinez, A. L., & Ramalho, G. C. (2014). Family firms and Tax aggressiveness in Brazil. International Business Research, 7(3), 129-136. https://doi.org/10.5539/ibr.v7n3p129
Miniaci, R., Parisi, M. L., & Panteghini, P. M. (2014). Debt Shifting in Europe. International Tax and Public Finance, 21(3), 397-435. https://doi.org/10.1007/s10797-012-9266-4
Moravec, L., & Kukalová, G. (2014). Investments allocation tax factors in pre-crisis time. In European Financial Systems 2014. Proceedings of the 11th International Scientific Conference (pp. 396-402). Masaryk University, Brno.
Moravec, L., Rohan, J., & Hinke, J. (2019). Estimation of international tax planning impact on corporate tax gap in the Czech Republic. E&M Ekonomie a Management, 22(1), 157-170. https://doi.org/10.15240/tul/001/2019-1-011
Overesch, M., & Wamser, G. (2014). Bilateral internal debt financing and tax planning of multinational firms. Review of Quantitative Finance and Accounting, 42(2), 191-209. https://doi.org/10.1007/s11156-012-0339-3
Reuter, P. (2012). Draining development? Controlling flows of illicit funds from developing countries. World Bank License: CC BZ 3.0 IGO. Retrieved from https://openknowledge.worldbank.org/handle/10986/2242 https://doi.org/10.1596/978-0-8213-8869-3
Riedel, N. (2018). Quantifying international tax avoidance: A review of academic literature. Review of Economics, 69(2), 169-182. https://doi.org/10.1515/roe-2018-0004
Rohan, J., & Moravec, L. (2017). Tax information exchange influence on Czech based companies’ behaviour in relation to tax havens. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 65(2), 721-726. https://doi.org/10.11118/actaun201765020721
Scholes, M. S., Wolfson, M. A., Erickson, M. M., Maydew, E. L., & Shevlin, T. J. (2009). Taxes and business strategy: A planning approach. (4th ed.). New Jersey: Pearson Prentice-Hall.
Valencia, M. (2013). Storm survivors. The Economist. Retrieved from https://www.economist.com/special-report/2013/02/16/storm-survivors