Analysis of the determinant factors of the effective tax rate Author : Ivana Alexandru Coordinator Prof Dr. Univ. :Georgeta Vintila Abstract In this paper I tried to analyze the importance and the significance of determinant factors over the effective tax rate, based on financial indicators and corporate governance indicators, such as social corporate responsibility. Company s performance is influenced both by external and internal factors, specific to the company or to the economies of the countries in which the study case is performed. Using a database and a statistically methodology I will analyze the influence of this factors and the impact they have on a company s effective tax rate. Keywords: effective tax rate, fiscal influence and policy. Introduction Taxes have existed since ancient times and it is believed to have occurred in the evolution of human society in the first state formations, being determined by the need for maintenance of those materials exercising public power, performing management tasks. Taxes have been designed differently, influenced especially by social and economic development and public spending supported by each state. Effective tax rate includes all taxes and fiscal obligations incurred by a taxpayer. The tax burden is influenced by the sector of activity, the existence of deductibles and fiscal incentives from the state. Determinants of effective tax rate are the features highlighted by company size, market share. Also, there are other internal factors that influence the company s effective tax rate, and this is what I am trying to determine in this study.
Literature review Impact of effective tax rate and the determinants are subject to numerous case studies on international and national level that focus on microeconomic sphere. The calculation and estimation vary from author to author, and distribution channels impact financial results Presented below are a couple of case studies focusing on determining the factors that influence the effective tax rate. B. Janssen and Buijink W. (2000) study the existence of an association between changes in effective average tax rate (ETR) and firm characteristics such as size, asset structure, existence with foreign operations, performance, leverage, whether the fact that a company stock is listed or not, or if the company is public. The database included financial information for the period 1994-1998, comprising 879 firms and 4395 observations. The study was a model with panel data, regression used is defined as: ETRt = αt + β1fsizet + β2capintt + β3invintt + β4foreignt + β5roat + ß6 LEVERAGE + β7listedt + ß8PUBLIC + εt. In conclusion, through a cross-sectional study panel, including financial data for Dutch companies, it was attempted to determine the factors that influence the effective tax rate, using variables that incorporates characteristics of firms and the variables control. Study results confirmed that the Dutch corporate tax system provides significant amounts of tax deductions to companies, yet it is fair and neutral, the average effective tax rate is not related to company characteristics. Janssen B. (2005) investigates the actual size of the Dutch tax incentives to companies using data from the financial statements of 1592 companies in the period 1994-1999. The paper tries to find solutions to two problems, namely the impact of tax incentives provided by the Dutch government on corporate tax burdens, and the importance of the impact of certain types of companies. The author uses the effective tax rate in the analysis, as the ratio of tax and accounting profit before tax as the dependent variable and independent variables firm size, capital intensity, the ratio of foreign sales in total sales, ROA and leverage. Correlations between effective tax rate and the explanatory variables are mostly insignificant, and when significant, are small (correlation with ROA is significant, but low, as
well as capital intensity). The results indicate that the Dutch tax system provides few tax incentives for companies, the differences between statutory rates and effective tax rates are relatively low. Sebastian Lazar (2010) studies for non-financial companies listed on the Bucharest Stock Exchange in the period 2000-2009 the correlation between actual and statutory taxation rate. The database was developed using the financial statements of companies listed on the Bucharest Stock Exchange. The author chose to use the consolidated data to capture specific influences and determined the tax code contained in Romania. A problem in case studies using data from Romania is the unavailability and unreliability of financial information, Mr. Lazar calling Infin database covering over 60 of the non-financial firms listed on the stock exchange. The case study begins with 2000 being when the Romanian firms have begun to report their financial statements in accordance with International Standards of Accounting and Regulatory Accounting Directives. Also, 2000 was the year of tax reform, the state's share of income tax fell from 38% to 25%. The effective tax rate is calculated using two major approaches: one based on the accounting information and the other based on tax information. In this case, Romania, given the tax and accounting, the author adopted the method of accounting information: ETR = CIT / PI * 100, where CIT is tax, while PI is gross profit. In the study, the author revealed the following: companies benefiting from tax deductions. In 2005, when the statutory rate fell from 25% to 16%, there was a significant decrease in the effective tax rate to the pre-2005 as the tax base has increased. The difference between actual and law rate may be correlated with certain financial ratios (ROA, ROE, and NPM), showing a negative correlation of -0.636 between ROA and the gap between the rates at a significance level of 5%. The coefficient of determination is 40% best tax regime with an effective tax rate of approximately 15%, while the energy sector is the most heavily taxed, with the effective tax rate to about 31.4%. Lee N. and C. Swenson (2012) investigate the common factors of influencing the tax base effective tax enforcement, through an analysis of international tax regimes. In this paper, it specifically examines the determinants of effective tax rate to 86 advertising companies
operating in the Member States of the European Union, being selected companies listed on the stock exchange. The period of analysis is 2005-2007 after, designating 2004 when companies were forced standardized reporting of financial statements in accordance with IFRS. The database derived from the Compustat Global requiring adjustments to the indicators that were expressed in the currency of the country of origin of the company, they are converted into indices in relation to total assets or turnover as appropriate. The effective tax rate is the ratio of current income tax expense and net income before tax, both the method and the tax accounting. Conclusions are: effective tax rate variation was explained 36% by 1% change in the statutory tax rate STR; of taxation; iables LEV, PPE, INV, Rdinv are statistically significant, reducing the effective rate Vintilă G. et al (2012b), in a globalized economy and the lack of stability of the input, it generates a public issue of corporate involvement in social responsibility actions. The purpose of this study is to investigate empirically whether how a corporation deals with corporate social responsibility influence the level of aggressiveness of tax, on the example of Romanian companies listed on Bucharest Stock Exchange. Using financial information for the year 2010 for 40 Romanian corporations listed, it is examined the association between corporate social responsibility and tax aggressiveness. Hypothesis testing is that the companies who undertake more social responsibility activities are less aggressive in terms of fiscal, while socially irresponsible firms have a higher tax aggressiveness. To investigate the correlation CSR - tax aggressiveness, as a measure of tax aggressiveness is used effective tax rates and as a level of employment in responsibility activities it is used the corporate social responsibility index determined on data from annual reports. The effective tax rate was determined as the ratio of corporate tax and the gross result of company.
Conclusions are: level of 10%) of the seven variables are statistically significant (TROUBLE, INVINT, respectively GROWTH), while the other variables, with very high probability, are not statistically significant; does not outstand the correlation between tax aggressiveness and corporate social responsibility, critical probability associated to the independent variable is very high, the coefficient is regarded as having, statistically speaking the value zero. Database In this study, I selected a sample of 20 companies for the period 1999-2011. Selection criteria for Romanian companies were consistent with the methodology studies, excluding from the sample all firms belonging to the financial sector and financial intermediation due to specific regulations. All the information was obtained from the firm s financial statements and a from the firm s direct websites for the corporate social responsibility information. The indicators used in the study are represented by the ones used to quantify performance such as company financial return ( ROE), return on assets or economic profitability ( ROA) and return on sales (ROS - computed as Net Profit divided by total revenue ). We have also considered other indicators which should have a great impact over the effective tax rates such as :EBIT, Amortize costs and interest expenses. From the descriptive analysis we determined that the value of the effective tax rate, calculated has the highest values recorded in 2000, when the average effective tax rate of ETR equaled 19.9%. Also, in the study we observed that the values of the effective tax rate was significantly lower than the statutory rate, less for the last three years analyzed, when the effective tax rate slightly exceeded the statutory tax rate values.
Research Methodology In this section I will present the main modeling methods used in order to determinate the determinant factors of the effective tax rate in Romania. The main rates characterizing the performance of the companies selected are represented by the following : return on assets ( ROA ), return on equity ( ROE ) and return on sales ( ROS). Also, apart from these I have used indicators such as equity or commercial margin in order to demonstrate their impact on the income tax. Economic profitability (ROA ) measures the efficiency of allocation of resources and the quality of management. This indicator measures the effectiveness of the company s assets. The ROA formula it is represented as follows: ROA PN 1 +Dob 1 (1-τ) -represents earnings before tax and interest AE 0 -represents the economic asset of the company at the beginning of the year Return on equity represents one of the major indicators and it is very important for the users of financial statements especially by investors and management. In respect of this rate, investors can assess whether their investment it is profitable or not. We have used the following formula : where : PN 1 represents the net profit of the company at the year end CPR 0 represents the equity of the company at the beginning of the year, the opening balance The return of sales it is widely used to evaluate the company s operational efficiency. In the theoretical framework it is both known as operating profit margin. This ratio it is helpful for management to know how much profit it is being produced per monetary unit of
sales. As it with many ratios it is best that these would be compared over a period of time in order to identify and explain the trend across the period. An increasing ROS indicates the company is growing more efficiently. Also, I tried to determine the influence and to evaluate the impact of the corporate social responsibility index on the company s effective interest rate. In my study this variable was named as CSP and was a dummy variable with values such as 0 or 1. (0 for the years the company didn t perform corporate social responsibility actions and 1 for the years they did). The study case performed it based on the following regression formula : ETR= ROE + ROA + ROS+ + EBIT+ Amortise_Costs + GearingRatio+ Inflation Rate+ Results The model tested is valid from an econometrical point of view. The determination degree is 76.19 % which means that the dependent variable is explained in a proportion of 76% by the independent variables. As such the coefficients of the significant from an econometrical point of view due to the fact that their probability is lower than our significance threshold of 5 %. Also, we determined that all the indicators presented above are statistically significant due to the fact that their probability is lower than our significance threshold of 5 %.The indicators that a have a direct positive impact on the ETR are ROA, Inflation rate, EBIT and gearing ratio. We also made a more detail analysis on the corporate social responsibility indicator in determining in which direction it influences the firm s financial performance and thru that the firm s ETR. We determined that the indicator influences in negative direction the firms performance thus confirming that the Romanian managers for the selected firms are not yet focused on this type of actions. Also, we made a detail analysis on the industry level, thus in our initial database we included 11 companies from the construction sector and 9 from the telecommunications.
Analyzing the results obtained in the studies above, we can see that the biggest difference identified between the two sectors analyzed is the impact the indicator, ROS (Return on Sales) has on the firm s ETR. We can see that for the sample of companies from the construction sector, the ROS indicator is not statistically significant taking into account the 5% threshold, obtaining a probability of 83%, while for firms in telecommunications the indicator is statistically significant (with a probability of about 1.63%). 60% 50% ROE Return on Equity Variable Coefficient Std. Error t-statistic Prob. C 16.91998 1.117573 15.13993 0 CSR? -9.004505 3.664025-2.457544 0.0147 R-squared 0.249389 Adjusted R-squared 0.186576 S.E. of regression 15.1413 Sum squared resid 54792.92 Log likelihood -1064.507 F-statistic 3.970362 Prob(F-statistic) 0 The variation of the financial indicators 40% 30% 20% ROE ROA ROS 10% 0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 This indicator shows the importance and impact of sales for companies in the telecommunications sector. Among other, we noticed that the indicator related to corporate social responsibility (CSP) and Ri (inflation rate) have a similar impact regardless of the sector companies activate.
Conclusions In this paper I studied the determinants of effective tax rate. The period of analysis was 1999-2011; the database consisted of financial statements of companies classified into 2 sectors.(constructions and telecommunication). Aim of the study was to determine the effective tax rate, presenting professional articles on national and international. Case studies focused on the issue of ETR concept approach include the period 1997 to 2012, and could easily see the evolution of thought in the literature on calculation of the effective tax rate and its determinants. At the aggregate level of the analyzed companies, the highest values of average effective tax rates have been recorded since 2000, when the average effective tax rate ETR equaled 19.9%. From the econometric perspective we can deduce, that: - Positive correlation was observed between the dependent variable and RI (inflation rate) GR_Indat (debt ratio), ROS (return on sales), ROA (Return on assets) and EBIT. - Negative correlation was found between the effective tax rate and Amortise_Expense_LG (the amortize expenses logarithmic), ROE (return on equity) and corporate social responsibility index (CSP). For the econometric analysis, we started from a basic model, where the ETR variable was the dependent variable, and the financial indicators and corporate social governance indicator,were the independent variables. Among the economic indicators used,we included: return on equity (ROE), return on assets (ROA), return on sales (ROS) and EBIT. Including these variables we aimed to determine the factors influencing the choice being made in the other models presented in the literature review. Corporate governance (CSP) variable was included in the model social responsibility index (CSP), which we tried to determine the impact on the financial performance indicators and thus on the effective tax rate values. The results showed that the indicator for social responsibility indirectly impact the financial performance of the considered firms. This result shows that the companies in Romania do not have a tendency to invest in socially responsible actions, preferring to invest the added value obtained, directly in production (through new investments), ignoring somehow, a key stakeholder represented by customer and employees.
Taking into account the conclusions learned above, the company, in order to reduce the effective rate of tax adjustment may use specific indicators to increase or to contract the values of ETR. Also, depending on economic conditions existing at a given time, and the characteristics of the industry, and the interests of the company, a mixed downwards effective quota is highlighted, while maintaining funding policy, and maximizing their performance and reaching the main goals such as maximizing the shareholders value.
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