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How Closing a Tax Loophole Helps Resolve an Accounting Loophole

The CPA journal (1975), 2019-10, Vol.89 (10), p.48-51

COPYRIGHT 2019 New York State Society of Certified Public Accountants ;Copyright New York State Society of Certified Public Accountants Oct 2019 ;ISSN: 0732-8435

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  • Title:
    How Closing a Tax Loophole Helps Resolve an Accounting Loophole
  • Author: Furner, Zhan ; Dickins, Denise
  • Subjects: Accounting ; Accounting departments ; Corporate taxes ; Decision making ; Deferred income taxes ; Earnings management ; Executive compensation ; Financial reporting ; Financial statements ; Foreign source income ; Foreign subsidiaries ; Loopholes ; Multinational corporations ; Profits ; Real income ; Repatriation ; Researchers ; Tax cuts ; Tax Cuts & Jobs Act 2017-US ; Tax rates ; Tax reform ; Taxation
  • Is Part Of: The CPA journal (1975), 2019-10, Vol.89 (10), p.48-51
  • Description: The TCJA also closed a tax loophole by switching from a worldwide tax system, under which foreign- source income was taxed only when repatriated, to a quasi-territorial tax system, under which foreign-source income is substantially exempt from U.S. taxation, except for the additional tax imposed on certain foreign earnings [known as the Global Intangible Low-Taxed Income (GILTI) provision]. Evidence of the Manipulation of PRE Researchers have also found that even if repatriation is the optimal decision from a real income perspective, accounting income considerations tend to prevail, resulting in foreign earnings that are never repatriated (Douglas A. Shackelford, Joel Slemrod, and James M. Sallee, "Financial Reporting, Tax, and Real Decisions: Toward a Unifying Framework," International Tax and Public Finance, August 2011, http://bit.ly/2mi4iYi). Since it is fairly easy to meet the intention criterion, it should not be surprising that there is empirical evidence that MNCs use PRE to manage earnings, manipulating it to reduce effective tax rates, meet earnings targets, and increase managers' compensation (e.g., Linda K. Krull, "Permanently Reinvested Foreign Earnings, Taxes, and Earnings Management," Accounting Review, February 2004, http://bit.ly/2miHA2f; C. Fritz Foley, Jay C. Hartzell, Sheridan Titman, and Garry Twite, "Why Do Firms Hold So Much Cash? A Tax-based Explanation," Journal of Financial Economics, December 2007, http://bit.ly/2knMpGY; Zhan Furner, "The Relationship between Permanently Reinvested Foreign Earnings, Analysts' Expectations, and Executive Compensation," working paper, 2017). When making location, reinvestment, and repatriation decisions, MNCs care as much about being able to defer taxes for accounting purposes as saving taxes (J. Graham, M. Hanlon, T. Shevlin, and N. Shroff, "Inside the Corporate Tax Department: Insights on Corporate Decision Making and Tax Aggressiveness," working paper, 2011). [...]requiring a tabulated summary that covers each balance sheet period would enable financial statement users to more easily (i.e., without computation) understand an MNC's available domestic liquid assets and operating cash flows. q Zhan Furner, PhD, CPA, is an assistant professor, and Denise Dickins, PhD, CPA, CIA, is a professor, both at East Carolina University, Greenville, N.C. Researchers have also found that even if repatriation is the optimal decision from a real income perspective, accounting income considerations tend to prevail, resulting in foreign earnings that are never repatriated.
  • Publisher: New York: New York State Society of Certified Public Accountants
  • Language: English
  • Identifier: ISSN: 0732-8435
  • Source: ProQuest Central
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