Performance Measurement of Corporate Tax Departments

The Accounting Review, Vol. 85, No. 3, May 2010

Posted: 30 Jul 2007 Last revised: 25 Jan 2014

See all articles by John R. Robinson

John R. Robinson

Texas A&M University - Department of Accounting

Stephanie A. Sikes

University of Pennsylvania - Accounting Department

Connie D. Weaver

Texas A&M University - Department of Accounting

Date Written: September 15, 2009

Abstract

We investigate why firms choose to evaluate a tax department as a profit center (“contributor to the bottom line”) as opposed to as a cost center and the association between this choice and effective tax rates (ETRs). Using data from a confidential survey taken in 1999 of Chief Financial Officers, we develop and test a theory for choosing between these two methods of evaluating a tax department. We find that the likelihood of evaluating the tax department as a profit center is increasing in firm decentralization characteristics and tax planning opportunities. We then employ instrumental variables to investigate whether evaluating a tax department as a profit center provides an effective incentive for the tax department to contribute to net income through lower ETRs. We find that our instrument for profit center firms is associated with significantly lower ETRs than cost center firms.

Keywords: Tax department, effective tax rate, profit centers, managerial incentives

JEL Classification: H25, L33, M41, M43

Suggested Citation

Robinson, John R. and Sikes, Stephanie A. and Weaver, Connie D., Performance Measurement of Corporate Tax Departments (September 15, 2009). The Accounting Review, Vol. 85, No. 3, May 2010, Available at SSRN: https://ssrn.com/abstract=1003262

John R. Robinson (Contact Author)

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

Stephanie A. Sikes

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Connie D. Weaver

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

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