The Effects of Management Practices on Effective Tax Rates: Evidence from Ecuador

Abstract

This paper examines the effects of management practices on effective tax rates (ETR) in a sample of medium and large manufacturing firms in Ecuador. We use a novel data set on management practice scores matched with administrative tax data from the Superintendence of Companies and the Internal Revenue Services of Ecuador based on firms' tax filings. We find that better management practices are positively associated with effective tax rates, defined as the share of tax obligations to profits. This result is robust under various specifications controlling for different covariates, and to different measures of effective tax rates. Furthermore, our findings indicate that the use of fiscal incentives is positively associated with higher effective tax rates. However, firms that use fiscal incentives are able to fatten or reduce their effective tax rates as management practices improved. Overall, our findings suggest that government-sponsored policies that seek to promote better management practices may be self-sustained, if the additional tax revenue expected from better management practices through higher profits is able to cover the cost of the programs.

Tax incentives, private investment and employment: Evidence from an Ecuadorian reform

“…Under this regime, firms must declare their revenues and costs to calculate and declare their profits. Profits or earnings before taxes are then adjusted by exempt income, deductions and non-deductible expenses covered by the law and its regulations (Beverinotti et al, 2021). Currently, the nominal CIT for firms in Ecuador stands at 22%.…”

“…This modification was generated within the framework of the Organic Code of Production, Trade and Investments (COPCI) (Deza et al, 2020). One particularity in the Ecuadorian tax regime is that, until 2019, firms had to pay a mandatory minimum advance payment towards their tax obligation during the fiscal year ( anticipo del impuesto a la renta ) (Beverinotti et al, 2021; Deza et al, 2020). This amount is calculated as a percentage of total assets (0.2%), total costs and expenses deductible for income tax purposes (0.2%), total assets (0.4%) and total taxable income for income tax purposes (0.4%), calculated in the annual declaration of the previous fiscal year.…”

“…This amount is calculated as a percentage of total assets (0.2%), total costs and expenses deductible for income tax purposes (0.2%), total assets (0.4%) and total taxable income for income tax purposes (0.4%), calculated in the annual declaration of the previous fiscal year. As of 2011 and until the end of 2017, the advance was a minimum and final payment, not subject to reimbursement in the event that it was greater than the tax due (see, for details, Beverinotti et al, 2021; Deza et al, 2020).…”

“…end of 2017, the advance was a minimum and final payment, not subject to reimbursement in the event that it was greater than the tax due (see, for details, Beverinotti et al, 2021;Deza et al, 2020). 8 Deza et al (2020) mention that tax incentives and benefits in the CIT regime in Ecuador amounted to about 1.2% of GDP in 2016.…”