1. Accounting for Income Tax Uncertainty on Corporate Tax Avoidance: International Evidence
Author: Khairunnisa Ridwan
This study investigates whether the accounting for uncertain tax treatments (IFRIC 23) under a principle-based reporting standard reduces corporate tax avoidance in an international setting. IFRIC 23 clarifies the recognition and measurement of uncertain tax treatments. Under this interpretation, firms assume that tax authorities have full knowledge of the tax information reported in the financial statements. As the interpretation increases transparency, it is expected to limit managers’ discretion in reporting aggressive tax positions in financial reporting. Consistent with my prediction, I find that IFRIC 23 adoption is associated with a reduction in corporate tax avoidance. The deterrent effect is more pronounced in jurisdictions with greater tax audit intensity and tax enforcement capacity. Supplemental textual analysis further shows that firms provide more extensive tax uncertainty disclosures after IFRIC 23 adoption. The increase in disclosure is more pronounced in countries with stronger tax enforcement. Overall, the findings suggest that accounting standards related to uncertain tax positions can reduce aggressive tax reporting, although their effectiveness depends on the surrounding enforcement environments.
2. Accelerated Depreciation and Corporate Investment: The Role of Economic Conditions and Financial Constraints
Author: Matthias Petutschnig and Khairunnisa Ridwan
We examine how adverse economic conditions and financial constraints influence firms’ investment responses to accelerated depreciation rules across European Union Member States. Using a stacked difference-in-differences (DID) research design, we compare firms’ responses during the non-crisis, global financial crisis, and COVID-19 pandemic periods. Overall, we find that during non-crisis periods, accelerated depreciation increases total capital investment among both financially constrained and unconstrained firms. The investment response is significantly stronger among constrained firms. During the global financial crisis, the effect on tangible capital investment is significantly weaker than during non-crisis periods and becomes negative for both groups. During the COVID-19 pandemic, accelerated depreciation increases tangible capital investment among both constrained and unconstrained firms. In contrast, total capital investment increases among unconstrained firms but decreases among constrained firms. Overall, our findings highlight that the effectiveness of accelerated depreciation depends on economic conditions and financial capacity.
3. Interest Deduction Limitations and Cross-Border M&A Activity
Author: Osaid Alshamleh, Harald Amberger, and Khairunnisa Ridwan
Profit shifting opportunities can motivate cross-border mergers and acquisitions (M&A), giving potential foreign acquirers a comparative advantage over domestic bidders. Anti-profit shifting rules, such as thin capitalization rules (TCRs) and earnings stripping rules (ESRs), could lower this advantage. We study the effects these rules on cross-border M&A activity using a stacked cohort difference-in-differences design across all EU and OECD countries from 2000 to 2023. We find that stricter interest deduction limitation rules reduce the likelihood that a target is acquired. Specifically, international acquisitions account for approximately 73% of the total decline following TCR adoption and 62% following ESR adoption, which indicates that the effects arise primarily through cross-border transactions. The effects are more pronounced when sellers face high capital gain tax rates. We also find that the two rules have different implications for likely targets that remain unacquired. These firms perform relatively better following TCR adoption but relatively worse following ESR adoption. Our results inform policymakers about the effectiveness of interest limitation rules in curbing profit shifting incentives as a driver of cross-border M&A, and the trade-offs between limiting profit shifting and creating an investment-friendly M&A environment.
4. Uncertain Tax Positions and IFRIC 23: Evidence from UK, Australia, and New Zealand
Author: Rodney J. Brown, Youngdeok Lim, and Khairunnisa Ridwan
In 2017, the IFRS Interpretations Committee (IFRIC) issued IFRIC 23 Uncertainty Over Income Tax to provide guidance for dealing with 'uncertain tax positions' (UTPs). Effective for financial years commencing on or after 1 January 2019, firms that prepare financial statements in accordance with International Financial Reporting Standards must apply IFRIC 23. If it is probable the tax authority will not accept the firm's treatment of a tax position, the UTP must be reflected in the income tax related financial statement balances. Scant evidence exists on the content and determinants of IFRIC 23 disclosures. Accordingly, this study helps fill this void by exploring UTP disclosures made by publicly listed firms in the UK and Australia between 2018 and 2023. We find that UK firms disclose more UTP information, on average, compared to Australian firms. Surprisingly, we find relatively few Australian firms disclose substantive qualitative and quantitative UTP information which raises compliance concerns. Further, our findings suggest that comprehensive UTP disclosures are more likely made by firms in more complex tax reporting environments. IFRIC 23 is a relatively new mandatory financial reporting obligation and thus our findings should be informative to standard setters, regulators, and tax authorities interested in its efficacy.