Corporate profitability and effective tax rate: the enforcement effect of large taxpayer units

Sandria N. Tennant and Marlon R. Tracey

Accounting and Business Research, 2019, vol. 49, issue 3, 342-361

Abstract: This paper examines how Large Taxpayer Units (LTUs), a commonly-used tool for enforcing tax compliance, affect large firms’ reported profitability and effective tax rate. Increased scrutiny may either improve reporting and compliance efforts, or lead to adverse reactions from large taxpayers such as profit shifting to reduce tax liabilities. As a source of exogenous enforcement shock, we exploit the actions of Jamaica's LTU around its large-taxpayer eligibility cutoff using a before-during regression discontinuity approach. We find the LTU increases pre-tax profit margin by 2–3 percentage points. Increased effective tax rates are also evidenced, albeit less robustly.

Date: 2019
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DOI: 10.1080/00014788.2018.1512398

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