Deferred Taxation under Default Risk
Paolo Panteghini () and
No 7057, CESifo Working Paper Series from CESifo Group Munich
In this article, we have used a continuous EBIT-based model to study deferred taxation under default risk. Quite surprisingly, default risk has been disregarded in research on deferred taxation. In order to underline its importance, we first calculated the probability of default, over a given time period, together with the contingent value of tax deferral. We then applied our theoretical model to a sample of 27,749 OECD companies. We showed that, when accounting for both firms with a negative EBIT and firms with a probability of default higher than 50% (over a 10-year period), a relevant percentage of firms were close enough to default. Hence, these taxpayers should not consider deferred taxation in their financial statements, for the sake of prudence. Moreover, under default, the expected present value of deferred taxes was much lower than that obtained in a deterministic context. Hence, if we look at deferred taxes from the Government’s point of view, we must consider them as being risk-free loans. However, only a portion are subsequently repaid, due to default. This implies that, when a Government allows accelerated tax depreciation it should be aware of future losses due to default. So far, these estimates have been missing, although techniques do exist and are quite practical.
Keywords: capital structure; contingent claims; corporate taxation and tax depreciation allowances (search for similar items in EconPapers)
JEL-codes: H25 M41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_7057
Access Statistics for this paper
More papers in CESifo Working Paper Series from CESifo Group Munich Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().