RALEIGH – A recent study of more than 2,000 companies found that companies facing financial difficulties can benefit significantly from a more aggressive stance in their tax planning strategies. One lesson of the finding is that tax authorities should closely examine the activities of companies in financial distress to ensure that their tax activities are not becoming too aggressive.
Financial bottlenecks are not uncommon and occur when a company cannot afford to fund a project that would add value. Sometimes the restrictions are caused by an external event – like a pandemic – where companies have less income than they expected. Sometimes the factors that cause a limitation are specific to an individual company, such as: B. Business mismanagement.
“Economists are interested in how companies respond to sudden changes in their financial constraints,” said Nathan Goldman, co-author of the study and assistant professor of accounting at North Carolina State University’s Poole College of Management. “However, it is difficult to separate several confusing variables from the financial bottlenecks companies face. However, my co-authors and I have found that the Pension Protection Act 2006 (PPA) provides us with a great opportunity to investigate financial constraints. “
The PPA increased the pension fund requirement for all companies with defined benefit plans by nearly 500%. For example, if a company had pension obligations of $ 400 million and pension obligations of $ 100 million prior to the PPA, it would have 30 years to fund 90% of its obligations. In other words, it could provide an additional $ 9 million annually for 30 years. But the PPA changed that, and the same company should have funded 100% of its commitments in seven years – or an additional $ 43 million a year.
“The PPA placed new demands on the financial resources of these ‘pension companies’ – and that means that many were suddenly faced with financial bottlenecks,” said Goldman.
To assess the impact of these financial bottlenecks, the researchers examined data from 2,647 publicly traded companies: 730 pension companies and 1,907 companies that did not provide their employees with defined benefit pension plans.
“We found that pension funds were able to make up 19% of their investment deficit by changing their tax strategies,” said Goldman. “That’s a significant amount of money.”
The benefits of the control strategies can differ in whether they are one-time benefits, e.g. B. R&D costs, or recurring savings, e.g. E.g. the relocation of businesses to locations with lower taxes.
Ultimately, the researchers found that there were three important takeaway messages for the business community.
First, companies facing funding shortages should consider turning to tax planning to generate capital without increasing debt or equity, “Goldman says. Second, tax planning alone cannot solve liquidity requirements. However, the average business generated a significant amount of money to make up for investments that would otherwise be lost. Finally, the tax authority should take a closer look at the tax positions of companies in financial distress – as those companies are more likely to increase the aggressiveness of their deductions and are therefore more likely to be overturned. “
The paper “Do Funding Restrictions Lead to Incremental Tax Planning? Evidence from the 2006 Pension Protection Act, ”appears in Contemporary Accounting Research. The paper was co-authored by John Campbell of the University of Georgia and Bin Li of the University of Houston.