Literature Review:

Determinants of Effective Tax Rate (USA firms)

Objectives:
changes in effective tax rate in corporate over the past 25 years
to find out whether there is same trend of effective tax rate in multinational and domestic firms
effect of firm statutory tax rate on effective tax rate

Examination of possible determinants of declining rates

 1.The effect of declining foreign statutory tax rates

 the decline in effective tax rates is associated with the de- cline in foreign statutory tax
rates.
 2.The effect of changes in firm characteristics
 Thus, changes in firm characteristics could account for a decline in effective tax rates over
time,
 3.The effect of changes in the US tax system over time
 we exam- ine three important changes to the US tax system that are most likely affect the
trend in effective tax rates. These are the advent of the “check-the-box”rules in 1997, the repa-
triation tax holiday in 20 04–20 05, and the bonus deprecia- tion rules in place during the periods
20 01–20 04 and after 2007.
 Overall, the evidence sug- gests that the trend in tax rates over time is negative,
notwithstanding some differences in the time trend during several regulatory regimes.
 The results show that the down- ward trend in effective tax rates is very similar between
intangible-laden firms versus other sample firm
 4.The effect of changes in financial accounting rules over time
 he results show that the down- ward trend in effective tax rates is very similar between
intangible-laden firms versus other sample firm

hypothesis
 H1 : The effective tax rates of US corporations have de- creased over time
 H2 : The effective tax rates of multinational firms are de- clining more over time than those
of purely domestic firms.
 H3: For multinationals the effective tax rate on foreign in- come declines more over time
than does the effective tax rate on domestic income
Design/methodology/approach –Regressions, Correlation

Variables: 2000-2016,

CASH ETR( is the ratio of cash taxes paid (TXPD) to pretax income (PI)), MNE, LOG ASSETS,
R&D EXPENSE, PP&E, INTANGIBLE ASSETS, LEVERAGE, CAPITAL EXPENDITURES,
ADVERTISING EXPENSE, SPECIAL ITEMS, LAGGED SPECIAL ITEMS, NOL
Findings – We examine systematic changes in corporate effective tax rates during the past 25
years. We test widespread be- liefs that firms, particularly large multinational firms, are
increasingly able to reduce their effective tax rates. The data confirm one important element of the
conventional wisdom but contradict many of the other commonly held beliefs. We find a clear
decrease in effective tax rates over time across the broad sample of US firms. On average, cash
effective tax rates of US corporations have decreased by about 0.4% per year over the past 25
years, representing a cumulative decline of approximately 10 percentage points. However, the data
do not support the belief that the decrease in effective tax rates is concentrated in multi- nationals.
We find essentially the same decrease in effec- tive tax rates over time among purely domestic
firms as among multinationals. Moreover, during most years purely
domestic firms avoid taxes at a rate equal to or greater than multinationals. The implications of
these findings are of broad importance. While multinational firms could have access to tax
avoidance opportunities that purely domes- tic firms do not, the end result is that the trend in their
effective tax rates is quite similar. The results suggest that purely domestic firms do not appear to
be disadvantaged relative to multinational firms in terms of tax avoidance and that both types of
firms are benefiting from decreased effective tax rates over time.

The evidence shows that the majority (54.5%) of sample firms follow a moderate
approach in financing their activities, which involves a trade-off between liquidity and
profitability. Respondents tend to use an informal approach for WCM and consider receivables
management as the most important component of WCM. In terms of WCM monitoring and
financial measures, respondents mainly consider the cash conversion cycle and net working
capital. Indian firms tend to use centralized cash

Major findings
We find a clear decrease in effective tax rates over time across the broad sample of US firms
the data do not support the belief that the decrease in effective tax rates is concentrated in multi-
nationals
domestic firms avoid taxes at a rate equal to or greater than multinationals
domestic firms do not appear to be disadvantaged relative to multinational firms in terms of tax
avoidance and that both types of firms are benefiting from decreased effective tax rates over
time.

Research Paper:
Scott D. Dyreng a , ∗, Michelle Hanlon b , Edward L. Maydew c , Jacob R. Thornock d
Changes in corporate effective tax rates over the past 25 years _
S.D. Dyreng et al. / Journal of Financial Economics 124 (2017) 441–463

Scott D. Dyreng a, et al [1] studied Changes in corporate effective tax rates over the past 25 years for
USA firms. This paper finds a clear decrease in effective tax rates over time across the broad
sample of US firms also the data do not support the belief that the decrease in effective tax rates
is concentrated in multi- nationals. domestic firms do not appear to be disadvantaged relative to
multinational firms in terms of tax avoidance and that both types of firms are benefiting from
decreased effective tax rates over time.