Do Country Risk Factors Attenuate the Effect of Tax Loss Incentives on Corporate Risk-Taking?

66 Pages Posted: 14 Dec 2018 Last revised: 11 Feb 2024

See all articles by Benjamin Osswald

Benjamin Osswald

University of Illinois at Urbana-Champaign - Department of Accountancy

Caren Sureth-Sloane

Paderborn University; Vienna University of Economics and Business; TRR 266 Accounting for Transparency

Date Written: February 1, 2024

Abstract

This study investigates whether tax-specific country risk factors attenuate the effectiveness of tax loss offsets in fostering corporate investments. We posit that impairments of the administrative and financial capacity of countries, administrative risk and budget risk, to provide tax refunds upon losses affect firms’ confidence in tax loss incentives. Exploiting a cross-country panel, we find that country risk factors do damp the effectiveness of loss offsets in fostering risky investments. This effect is economically significant. While the existence of a loss carryback is associated with about 10.1 percent higher corporate risk-taking in low risk countries, we do not find a significant increase in high risk countries. Our results indicate that the damping effect is most pronounced in countries with high administrative risk and high taxes. For loss carryforwards, we document about 3.1 percent higher risk-taking in low risk countries and a less pronounced attenuation under both administrative and budget risk. Additional analyses suggest that the incentive of loss offsets may even reverse under high country risk, especially in high tax countries. Narrower settings around rating downgrades and budget crises provide consistent evidence. Our results suggest that countries’ prompt and reliable processing of tax refunds can be undermined by country risk factors. For tax incentives to succeed, governments need to minimize administrative and budgetary risks.

Keywords: administrative risk, budget risk, corporate risk-taking, corporate tax, country risk, investment incentives, loss offset, tax reform

JEL Classification: H25, H32, G31

Suggested Citation

Osswald, Benjamin and Sureth-Sloane, Caren, Do Country Risk Factors Attenuate the Effect of Tax Loss Incentives on Corporate Risk-Taking? (February 1, 2024). WU International Taxation Research Paper Series No. 2018-09, TRR 266 Accounting for Transparency Working Paper Series No. 28, Available at SSRN: https://ssrn.com/abstract=3297418 or http://dx.doi.org/10.2139/ssrn.3297418

Benjamin Osswald (Contact Author)

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Caren Sureth-Sloane

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

TRR 266 Accounting for Transparency ( email )

Warburger Straße 100
Paderborn, 33098
Germany

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