13 /304
13
臺大管理論叢
第
28
卷第
1
期
Stores’ affiliates. Our research question would like to examine whether the listed firms
such as Far Eastern Department Stores having 5 layers are more likely to avoid tax than
other listed firms (located at layer 0) having the number of investment layers less than 5.
Specifically, to measure the length of investment layers, we first identify all
subsidiaries as defined by R.O.C accounting standards No. 7, consolidated financial
statements. We only focus on subsidiaries because the parent firm can only control these
firms’ operating and financing decisions. Second, we then identify all intermediate layers
connecting the parent company and the lowest-tire affiliates. That is, the holding company
(i.e., the parent company) at the apex of investment structure indirectly controls firms
sitting on the lowest tier of investment layer through intermediate companies. If firms
have multiple chains in investment structure, we will focus on the longest chain which has
the largest number of intermediate layers, and calculate the number of intermediate layers
connecting the parent company and the lowest-tier firms.
3.2 Measures of Tax Avoidance
To examine the level of tax avoidance (
AVOID
), we employ four commonly used
measures of tax avoidance drawn from the prior literature. Our first measure of tax
avoidance is
GAAP_ETR
, where we define
GAAP_ETR
as total tax expense divided by
pre-tax accounting income in year t. As this measure reflects tax avoidance via permanent
differences between financial and tax reporting, prior research suggest that a lower value
of
GAAP_ETR
reflects an increased level of tax avoidance (e.g., Rego, 2003).
3
Although
GAAP_ETR
is commonly used (e.g., Chen et al., 2010; Dyreng et al., 2010; Rego, 2003;
Rego and Wilson, 2012; Robinson et al., 2010), it has two limitations. First, tax avoidance
activities that generate temporary differences between financial and tax reporting (e.g.,
those that defer cash taxes paid to later periods) are not reflected in
GAAP_ETR
.
4
Second,
financial accounting rules also affect
GAAP_ETR
.
5
3 e.g., investments in tax exempt or tax-favored assets, such as interest received on certain types of
government obligation is recognized for financial reporting purpose but is tax free.
4 According to IAS 12
Income Taxes
as well as SFAS No. 109
Accounting for Income Taxes
, income tax
expense is the aggregate amount of both current tax and deferred tax. Accelerating expenses or
deferring income for tax purpose reduces current taxes but increases deferred taxes, which is not
captured by
GAAP_ETR
.
5 It sometimes captures several items that are not tax planning strategies, but caused by financial
accounting rules such as changes in the valuation allowance or changes in the tax contingency reserve
(Hanlon and Heitzman, 2010). Thus, GAAP_
ETR
is the jointed product of both tax avoidance
activities and financial accounting rules.