Permanently Reinvested Foreign Earnings, Taxes, and Earnings Management

Krull, Linda K.

doi:10.2308/accr.2004.79.3.745

Cited by 167 publications

(103 citation statements)

References 28 publications

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“…If these data are correct and generalizable, it suggests that there is little practical variation in the discretion applied to the designation. Thus, while Krull (2004) argues that firms use discretion within the account to manage earnings (and we do not dispute her results), such a conclusion does not easily square with the observation that the PRE designation seems to be fixed in many firms. An alternative explanation is that to manage earnings firms must repatriate (or reinvest) more cash than they otherwise would which would be a "real" decision rather than a simple accounting designation.…”

Section: Are Earnings Managed Through the Tax Accounts?mentioning

confidence: 88%

“…Firms can potentially manage earnings by either increasing or decreasing the amount of certain foreign source earnings designated as permanently reinvested (see Appendix A for details on the accounting). Krull (2004) finds that managers use discretion in the designation of permanently reinvested earnings (PRE) to manage reported earnings to meet analyst forecasts but not other targets.…”

Section: Are Earnings Managed Through the Tax Accounts?mentioning

confidence: 99%

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A review of tax research

Hanlon¹,

Heitzman²

2010

Journal of Accounting and Economics

2,073

814

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Abstract:In this paper, we present a review of tax research. We survey four main areas of the literature: 1) the informational role of income tax expense reported for financial accounting, 2) corporate tax avoidance, 3) corporate decision-making including investment, capital structure, and organizational form, and 4) taxes and asset pricing. We summarize the research areas and questions examined to date and what we have learned or not learned from the work completed thus far. In addition, we provide our opinion as to the interesting and important issues for future research. ______________________This paper was prepared for the 2009 Journal of Accounting and Economics Conference. We appreciate comments from Scott Dyreng, Mihir Desai (discussant), S.P. Kothari (editor), John Long, Ed Maydew, Lillian Mills, Tom Omer, Sonja Rego, Doug Shackelford, Terry Shevlin, Joel Slemrod, Cliff Smith, David Weber, Ryan Wilson, Jerry Zimmerman, George Zodrow, and conference participants at the JAE Conference as well as at the 2009 University of North Carolina Tax Symposium and the discussant there, Bill Gentry. All errors and omissions are our own. * Corresponding author: 100 Main Street, Cambridge, MA. email: mhanlon@mit.edu. 1 A Review of Tax Research IntroductionIn this paper, we review tax research in accounting as well as tax research in economics and finance to the extent that it is related to or is affected by research in accounting. Shackelford and Shevlin (2001) provide a careful and thorough review of empirical tax research in accounting in the prior Journal of Accounting and Economics review volume. Shackelford and Shevlin limit their review to research published in accounting outlets and describe the development of the relatively young archival, microeconomic-based income tax literature that arose from the Scholes andWolfson framework. In his discussion of the review, Maydew (2001) emphasizes the need for tax researchers in accounting to think more broadly and to incorporate more theory and evidence from economics and finance. We agree. Tax research has a long history in many disciplines; this fact cannot be ignored. Our goal in this paper is to integrate the theoretical and empirical tax research from accounting, economics, and finance, to summarize what is known and unknown, and to offer suggestions for future research.The multidisciplinary nature of tax research is what makes tax research exciting (yes, exciting), yet difficult. Tax research can be difficult not only because one has to follow tax studies in accounting, finance, economics, and law (through academic institutions, governmental agencies, and policy think tanks), but also because different disciplines often use different languages and have different perspectives. 1 For example, economists generally focus on tax compliance, tax incidence (such as who bears the corporate tax), investment and economic growth effects (such as how taxes 1 Slemrod (1992a) characterizes these differences as economists studying what corporations actually do and accountants stud...

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Section: Are Earnings Managed Through the Tax Accounts?mentioning

confidence: 88%

Section: Are Earnings Managed Through the Tax Accounts?mentioning

confidence: 99%

A review of tax research

Hanlon¹,

Heitzman²

2010

Journal of Accounting and Economics

2,073

814

View full text Add to dashboard Cite

show abstract

“…Thus, their study highlights the importance of considering how to measure the income shifting incentive as conclusions may change if the incentive is measured over multiple periods rather than annually. Rego (2003) and Krull (2004) also provide firm-level evidence consistent with cross-jurisdictional income shifting activities. Rego (2003) finds that firms with more extensive international operations have lower worldwide effective tax rates (ETRs) and lower foreign ETRs, which is consistent with foreign operations improving a company's ability to engage in income shifting.…”

Section: Income Shifting Incentivesmentioning

confidence: 93%

“…Rego (2003) finds that firms with more extensive international operations have lower worldwide effective tax rates (ETRs) and lower foreign ETRs, which is consistent with foreign operations improving a company's ability to engage in income shifting. Krull (2004) provides evidence that changes in permanently reinvested foreign earnings are negatively related to the tax benefit of deductible repatriations, 2 suggesting that firms shift income in response to tax incentives.…”

Section: Income Shifting Incentivesmentioning

confidence: 99%

Multi-Jurisdictional Tax Incentives and the Location of Innovative Activities

MacDonald¹

2011

SSRN Journal

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“…If, or when, a firm changes its reinvestment plans and no longer considers the earnings indefinitely reinvested, it records an expense for the U.S. tax liability. See Collins, Hand, and Shackelford (2001) and Krull (2004) for a discussion of firms' decisions to designate foreign earnings as PRE. 9 The temporary dividends received deduction is established in Internal Revenue Code Section 965.…”

Section: Summary Of Repatriation Taxes and The Tax Holidaymentioning

confidence: 99%

Bringing it Home: A Study of the Incentives Surrounding the Repatriation of Foreign Earnings Under the American Jobs Creation Act of 2004

2008

Self Cite

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The American Jobs Creation Act of 2004 (the Act) creates a temporary tax holiday that effectively reduces the U.S. tax rate on repatriations from foreign subsidiaries from 35% to 5.25%. Firms receive the reduced tax rate by electing to take an 85% dividends received deduction on repatriations in 2004 or 2005. This paper investigates the characteristics of firms that repatriate under the Act and how they use the repatriated funds. We find that firms that repatriate under the Act have lower investment opportunities and higher free cash flows than nonrepatriating firms. Further, we find that repatriating firms increase share repurchases during 2005 by approximately $60 billion more than nonrepatriating firms, an amount that cannot be explained by differences in earnings between the two groups of firms. This increase represents about 20% of the $291.6 billion repatriated by our sample firms under the Act. AbstractThe American Jobs Creation Act of 2004 (the Act) creates a temporary tax holiday that effectively reduces the U.S. tax rate on repatriations from foreign subsidiaries from 35 percent to 5.25 percent. Firms receive the reduced tax rate by electing to take an 85 percent dividends received deduction on repatriations in 2004 or 2005. This paper investigates the characteristics of firms that repatriate under the Act and how they use the repatriated funds. We find that firms that repatriate under the Act have lower investment opportunities and higher free cash flows than non-repatriating firms. Further, we find that repatriating firms increase share repurchases during 2005 by $55.80 to $60.85 billion more than non-repatriating firms. This increase represents 19.14 to 20.87 percent of the $291.6 billion repatriated under the Act. This paper provides useful information to policy makers about the effect of a temporary tax holiday on firms' investment behavior.

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Permanently Reinvested Foreign Earnings, Taxes, and Earnings Management

Cited by 167 publications

References 28 publications

A review of tax research

A review of tax research

Multi-Jurisdictional Tax Incentives and the Location of Innovative Activities

Bringing it Home: A Study of the Incentives Surrounding the Repatriation of Foreign Earnings Under the American Jobs Creation Act of 2004

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