Hold or sell? How capital gains taxation affects holding decisions

Investments with exit flexibility require decisions regarding both the investment and holding period. Because selling an investment often leads to taxable capital gains, which crucially depend on the duration of an investment, we investigate the impact of capital gains taxation on exit timing under different tax systems. We observed that capital gains taxation delays exit decisions but loses its decision relevance for very long holdings. Often the optimal exit time, which indicates the maximal present value of future cashflows, cannot be determined analytically. However, we identify the breakeven exit time that guarantees present values exceeding those of an immediate sale. While, after-taxes, an immediate sale is often optimal, long holding periods might also be attractive for investors depending on the degree of income and corporate tax integration. A classic corporate tax system often indicates holdings over more than 100 periods. By contrast, a shareholder relief system indicates the earliest breakeven exit time and thus the highest level of exit timing flexibility. Surprisingly, high retention rates are likely to accelerate sales under a classic corporate system. Additionally, the worst exit time, which should be avoided by investors, differs tremendously across tax systems. For an integrated tax system with full imputation, the worst time is reached earlier than under partial or non-integrated systems. These results could help to predict investors’ behavior regarding changes in capital gains taxation and thus are of interest for both investors and tax policymakers. Furthermore, the results emphasize the need to control for the underlying tax system in cross-country empirical studies.     

Welche privaten Veräußerungsgewinne sollten besteuert werden?

This paper analyses for various corporate tax systems whether the capital gains tax distorts investment decisions and how tax effects could eventually be neutralized. In case of the disposal of shares between private investors the capital gains tax, the corporate tax and the income tax on dividends induce a triple taxation. On the contrary, distributing cash via share repurchases instead of paying out dividends can lower the tax burden in a classical corporate tax system and a shareholder relief system respectively. These findings necessitate the differentiation between share repurchases and other realizations of stocks in order to establish a neutral capital gains tax. While the capital gains taxation on transactions between private investors has to be reduced, the taxation of share repurchases must be matched with the respective dividend taxation.     

Die Abgeltungsteuer auf Kursgewinne und der Steuerstundungseffekt in der Unternehmensbewertung

In Germany capital gains have to be taxed independently of the holding period, according to the withholding tax regulations. Nevertheless, investors can initially avoid taxation by not realizing capital gains. Then, taxes are postponed into the future. Thereby investors can make use of an interest-free tax loan (tax deferral). Equally beneficial would be the immediate realization of negative capital gains, if this leads to reduced taxes by balancing these losses against other gains. The potential use of interest-free tax loans leads to the necessity of making assumptions on the investors?? strategy with respect to liquidation when it comes to business valuation based on discounting future after-tax payments towards investors (DCF-methods). It will be shown how much firm value depends on these assumptions by taking alternative, inflexible and flexible strategies of investors into account. Our considerations generate a lower and an upper bound for the firm value, and easier to calculate medium values. The calculations are illustrated by a numerical example which is also the subject of a comparative static analysis.     

Besteuerung multinationaler Unternehmen in der EU – eine vergleichende Analyse ausgewählter Reformvorschläge

The European Commission is currently finalizing a tax system based on a Common Consolidated Tax Base (CCCTB), which multinational corporations throughout the European Union will be able to use to determine their tax burden in accordance to this system. Besides the CCCTB, we present and analyze an alternative tax reform proposal, the European Tax Allocation System (ETAS). Our analysis is based on a dynamic capital budgeting model. The effects of the underlying European tax concepts on marginal investment of multinational groups are investigated by determining the influence of taxation on the required minimum rate of return and herewith the pre-tax cost of capital. Performing analyses for different scenarios enables us to draw more detailed conclusions about whether implementing ETAS and CCCTB can foster or discriminate real investments. Our investigation shows which tax concept and which of the analyzed parameter particularly affects the multinational’s tax burden. E.g., we find that a CCCTB can foster real investments particularly by means of retention policy and profit shifting, whereas ETAS can foster real investments effectively exploiting the Member States’ tax rate differentials and taking advantage of differing national tax regulations.     

Income determination for corporate tax purposes using IFRS as a starting point: evidence for listed companies within Austria, Germany, and The Netherlands

The internationalisation of financial accounting and the European Commission’s ambition to harmonise corporate taxation have raised the question whether IFRS accounts could be used for tax purposes. In order to quantify the effects of an IFRS-based taxation on corporate tax burdens in different EU member states, we estimate firms’ tax equity using notes on income taxes in IFRS financial statements of companies listed in Austria, Germany, and The Netherlands. The difference between estimated tax equity and IFRS-equity, adjusted for the effect resulting from the recognition of deferred taxes, shows the effect of using IFRS as a tax base on the present value of corporate taxes. We find that estimated tax equity is mostly lower than IFRS-equity, indicating that an IFRS-based taxation would often increase the present value of corporate taxes. The median of estimated tax equity is 5.6 % (Austria), 6.4 % (Germany) and 9.0 % (The Netherlands) below IFRS-equity. However, an IFRS-based taxation does not always induce higher equity as often argued in the literature. In 307 of 1,113 totally analysed firm-years, estimated tax equity exceeds IFRS-equity. To find a further estimation for the effects of tax base reforms we also approximate the total stock of unused tax losses and the amount of useable tax losses. We find that deferred tax assets for unused tax losses are depreciated to a substantial extent.     

The impact of tax uncertainty on irreversible investment

Traditional models of capital budgeting with taxes are based on deterministic tax rates and tax bases. In reality, however, there are multiple sources of tax uncertainty. Frequent tax reforms make future taxation of investments a stochastic process. Fiscal authorities and tax courts create additional tax uncertainty by interpreting current tax laws differently. Moreover, simplified models that anticipate the actual tax base incorrectly contribute to tax uncertainty as perceived by investors. I analyze the effects of stochastic taxation on investment behavior in a real options model. The investor holds an option to invest in an irreversible project with stochastic cash flows and stochastic tax payments. Pre-tax cash flows and tax payments are assumed to be correlated. Increased tax uncertainty has an ambiguous impact on investment timing. For low tax uncertainty, high cash flow uncertainty and high correlation of cash flows and tax payments, increased tax uncertainty is likely to accelerate investment. A higher expected tax payment delays investment. A higher after-tax discount rate affects investment timing ambiguously.     

Capitalized investments with entry and exit options and paradoxical tax effects

Investment decisions are often characterized by uncertainty, irreversibility, and timing flexibility. We use a binomial model to investigate the interdependencies of effects from profit taxation and both an option to delay and an option to abandon on investment decisions. We show that increasing the tax rate can lead to paradoxical tax effects, i.e. it may foster an investor’s willingness to invest. By contrast, if we abstract from the abandonment option, such paradoxical effects cannot be identified. Hence, we show that paradoxical tax effects can be caused by an abandonment option. Our results are helpful for investors facing risky investment opportunities and for improving typical valuation approaches.     

Tax attractiveness and the location of German-controlled subsidiaries

This paper analyzes whether taxation has an influence on the location decisions of multinational enterprises. We employ a novel set of 22 tax variables, such as the taxation of dividends and capital gains, withholding taxes, the existence of a group taxation regime, and thin capitalization rules. Furthermore, we use the Tax Attractiveness Index, a new aggregate measure containing the 22 tax variables. Our count data regression analysis is based on a novel hand-collected dataset consisting of the subsidiaries of German DAX30 companies in 97 countries. Controlling for non-tax effects, we find that a country’s tax environment has a significantly positive effect on the number of German-controlled subsidiaries and, therefore, on the location decisions of German multinational enterprises. Specifically, our analysis reveals that German multinational firms place affiliates in countries that offer favorable statutory tax rates, withholding taxes, double tax treaty networks, and holding incentives. Additionally, we find that the Tax Attractiveness Index has explanatory power in subsidiary location decisions and, therefore, it can be used as alternative composite measure, for example, when 22 single tax variables are not at disposal.     

Modellierung von Aktienanlagen bei laufenden Umschichtungen und einer Besteuerung von Veräußerungsgewinnen

This paper develops a technique which simplifies the calculation of terminal values of share investments when portfolio turnovers repeatedly trigger capital gains taxation. So far, the calculations of these values are difficult, due to recursive dependencies, which cannot be expressed by geometric series. Using our technique, tax burdens of differently taxed forms of share investments can be determined in an easy way even if these methods imply different elements of deferred taxation (equity funds, certificates, preferred taxed pension plans). The simplification is reached by assuming a specific trading strategy. This strategy is in line with empirically observed investor behavior which is characterized by periodical portfolio turnovers and reluctance to realize taxable capital gains.     

Steuerfreiheit von Gewinnen aus der Ver?u?erung von Kapitalgesellschaftsanteilen durch nat��rliche Personen?

Subject of this article is the question for the taxation of capital gains of holdings in corporations, in which tax effects are reduced. Thereby tax effects are explicated under realistic uncertainty. Under realistic uncertainty tax effects are possible in case of taxation of capital gains, but not mandatory. Furthermore the analysis shows that for capital gains from concealed reserves each form of taxation will entail tax effects. This also applies to tax exemption. In the case of capital gains from profit reserves in the applicable corporate income tax system, tax exemption of capital gains from profit reserves and immediate write-off of profit reserves itself evoke tax effects. In the current corporate tax system only the distribution induced write-down of a shareholding to going concern value reduces tax effects. Nevertheless, this only applies to personal corporations, for public corporations tax effects have to be accepted. Beyond the valid tax system, tax effects must also be expected in a tax system, in which the corporate tax is integrated in the income tax and in which capital gains from profit reserves are tax-exempt. In comparison, the Dual Income Tax as proposed by the German Council of Economic Experts is a better solution for the problem of tax effects caused by the tax exemption of capital gains.     

Verlustnutzung von Kapitalgesellschaften bei Umwandlungen – Eine ökonomische Vorteilhaftigkeitsanalyse

This paper investigates the potential utilization of tax loss carry-forwards in case of reorganizations of corporations from an economic point of view. Thereby, we analyze the tax impacts of indirect utilizations of tax loss carry-forwards by means of increasing assets’ book values as well as the tax impacts of the minimum taxation. The paper illustrates that the implementation of minimum taxation on transfer gains – which is reasonable at first glance – results in the following effects: Contrary to assumptions made in literature, the consequence of the regulation is that no reorganization can be utilized in order to avoid minimum taxation of current earnings in a profitable way. Surprisingly, for reorganizations due to other intentions it may be economically reasonable to let tax loss carry-forwards lapse at least partially. From an economic viewpoint this is in breach of the objective net principle.     

Unternehmensbewertung bei wertabhängiger und autonomer Finanzierungspolitik unter Berücksichtigung einer Kursgewinnbesteuerung

The German tax reform in 2009 entails the general taxation of realized capital gains. The objective of this paper is to investigate the effect of a differentiated taxation of dividend payments and capital gains on discounted cash flow valuations. We develop explicit und practical useful valuation formulas for the free cash flow approach in case of financing based on market values and the adjusted present value approach in case of autonomous financing. Furthermore it is shown how the required risk-adjusted cost of equity can be derived from a modified Tax-CAPM. Finally we discuss how the particularities resulting from the new German tax law can be taken into account in discounted cash flow valuations.     

The impact of minimum taxation by an imputable wealth tax on capital budgeting and business strategy of German companies

An alternative minimum tax (AMT) that guarantees a minimum tax payment even in case of losses is often regarded desirable. We analyze the influence of a wealth tax designed as AMT on marginal investment decisions and provide an analytical approach and numerical analyses identifying distortive effects. We present a wealth tax AMT paradox under loss offset restrictions. Modelling enterprises of different structure, industry, size and legal status we show that companies in the financial services sector are more frequently subjected to this AMT than capital intensive industries. This result runs counter to well-known effects of a common wealth tax. We resume that whenever income is taxed correctly, AMT is dispensable.

开放经济中跨国公司的最优所得税模型

通过对不同避免双重征税方法下最优所得税模型的建立,解析了政府最优政策的收入函数,得到税收竞争均衡中的公司所得课税政策.对小型开放经济而言,在扣除法和抵免法,以及免税法与抵免法的不对称体系下,对跨国公司从源征收公司所得税都是最优选择.由此,得到不同于国际税收经典理论的结论.     

Corporate Strategy Formulation and Taxation: Evidence from UK Firms*

This paper considers the relationship between corporate strategy formulation and taxation. Drawing on prior literature we briefly review the important influence that international taxation has on an array of corporate strategy decisions. We then consider issues in strategy formulation and taxation planning in order to develop an understanding of when and how taxation factors impinge on strategic decision‐making. We draw out the apparent paradox between the nature of strategic decision‐making and financial decision‐making and look for areas of reconciliation. In order to shed light on some of these issues we present findings from the qualitative analysis of a set of personal interviews undertaken with senior tax practitioners in seven UK‐based multinational enterprises and then consider quantitative responses from the tax practitioners working in 145 UK firms.     

Hedonism versus accuracy: the influence of motivation and affect on the evaluation of multiple gains and losses

The perceived value of multiple gains and losses may be influenced by a perceiver’s goals or affective state. In this research, insights from prospect theory were combined with the heuristic-systematic model to shed light on the information-processing strategies that underlie motivated and affect-related preference formation in the context of valuating multiple gains and losses. Specifically, findings from two experiments examine the influence of motivation and affect on preferences for segregated versus integrated gains and losses. In the first experiment—consistent with hypotheses—accuracy motivation was found to induce systematic processing for gains. The mixed results in the loss condition are explained with the influence of negative affect. Overall, the evidence supports the notion that people’s value functions might be more flexible than predicted by prospect theory, depending on people’s current goals. The second experiment substantiates these findings, identifying the influence of negative versus positive affect on the valuation of gains and losses. The results suggest that mood-management determines information processing and preferences depending on the congruence of the valence of affect (e.g. negative such as sadness) and the valence event (e.g. a positive event such as a gain). From a managerial perspective these studies add to practical knowledge on price communication, bundling, surcharges, or sequences of payments. When setting prices, salaries or other compensation schemes managers should consider whether their target group tends to be more accuracy or more feeling motivated.     

Einfluss der Besteuerung auf die Bewertung ausländischer Kapitalgesellschaften

Zusammenfassung  Der vorliegende Beitrag integriert die Auswirkungen der Regelungen zur Besteuerung von Einkünften aus ausl?ndischen Kapitalgesellschaften in die Discounted Cashflow-Methodik. Bewertungsobjekt ist eine ausl?ndische Kapitalgesellschaft, der von einem inl?ndischen Anteilseigner oder von fremden Dritten Finanzmittel zugeführt werden. Da das Steuerrecht nicht entscheidungsneutral ist, sind die beiden Finanzierungsalternativen Eigen-oder Fremdfinanzierung nicht als gleichwertig zu beurteilen. Unterschiedliche steuerliche Effekte ergeben sich daraus, dass Zinsen bei der Tochterkapitalgesellschaft grunds?tzlich als Betriebsausgaben abzugsf?hig sind, wohingegen Dividenden aus dem bereits versteuerten Einkommen gezahlt werden (sog. Tax Shield). Im grenzüberschreitenden Fall wird mit der Entscheidung für eine Finanzierungsalternative gleichzeitig bestimmt, in welchem Umfang die mit der Finanzierung einhergehenden Kapitalertr?ge der deutschen oder der ausl?ndischen Besteuerung unterworfen werden. Die H?he des Tax Shield h?ngt damit nicht nur von den Abzugsm?glichkeiten der Fremdkapitalzinsen ab, sondern auch vom Steuerniveau im Ausland. Damit müssen in der Unternehmensbewertung die in- und ausl?ndischen Steuervorschriften, die Steuers?tze im In- und Ausland, sowie eventuell bestehende Doppelbesteuerungsabkommen berücksichtigt werden.

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Effects of the tax regulations on the taxation of income from foreign corporations

Summary  The present article integrates the effects of the tax regulations on the taxation of income from foreign corporations in the discounted cash flow method. The item to be assessed is foreign corporation that is allocated funds (equity capital or borrowed capital) by a domestic shareholder or an unaffiliated third party. In this cross-border case, the decision in favor of one financing alternative or the other will at the same time determine the extent to which the capital yields associated with the financing are liable to taxation in Germany or abroad. The amount of the tax shield therefore not only depends on the deductibility of interest payments on debt, it also depends on the rate of tax abroad. When assessing the company it will therefore be necessary to bear in mind both domestic and overseas tax regulations, domestic and overseas tax rates as well as any existing double taxation agreements.

     

Forschungsziele der Betriebswirtschaftlichen Steuerlehre in der Kritik

In this article the understanding of the scientific functions of business taxation represented by Jochen Hundsdoerfer, Dirk Kiesewetter and Caren Sureth is critically analyzed. It is argued that hypotheses on the influence of taxes on decisions, as far as they are based on neoclassical models, are not applicable to explain the actions of tax payers. These arguments at the same time object the realization of a neutral tax system. They further contradict the realization of a tax system, which is supposed to have an impact or which avoids taxes to have an effect on decisions, provided that the criticized hypotheses are used as a basis. Fiscal law standards should rather fulfil the principle of equability of taxation. It is supposed that such fiscal law standards have an effect on decisions of tax payers, which are contradictory to the aim of an equable taxation. Therefore hypotheses from scientific experience of the actual effect of taxes on decisions must be taken into account. Hence the object of this analysis is to investigate the real influence of taxes on decisions detached from neo-classical models.     

有效税率、投资与经济增长:来自中国数据的经验实证

本文测算了我国劳动、资本和消费的有效税率,以反映这三种要素的真实负担情况,然后,利用结构VAR模型分别研究三种税率的结构性冲击对投资和经济增长的动态影响。结果表明:消费支出有效税率的正冲击对投资率和经济增长率的影响程度最大,短期内有利于投资率的增加,长期来看有利于经济增长;劳动收入有效税率的正冲击对投资率和经济增长率的影响,短期效应为正,长期效应为负;对资本收入征税,短期内不利于投资率和经济增长率的提高,长期来看具有一定的正效应,但是影响程度相对较小。因此,我国税收政策调整的中长期目标应尽量选择以消费支出为税基,以促进经济的长期快速增长。     

Appraisal of investment in plant and machinery after the UK 1984 finance act

This article briefly surveys the changes in taxation and capital investment allowances introduced in the 1984 Finance Act and discusses their likely impact on the role of investment and also the practical problems faced by investment decision-makers during the transition period. The authors present an investment appraisal model supported by a computer programme, designed to evaluate projects under a régime of varying tax rates and capital allowances. The model is applied to a ‘standard project’ to demonstrate the impact of the recent taxation changes on the profitability of investment in plant and machinery. Generally, the impact is to reduce the post-tax profitability of such investment save for exceptionally attractive ventures.