Debt/Asset Ratio as Evidence of Profit-Shifting Behaviour in the Slovak Republic

Abstract

Companies use different methods and techniques to transfer taxable profits to tax havens. The paper aims at analysing the influence of the relocation of the registered office of Slovak companies in tax havens in relation to the leverage ratio and the ratio of debt per sales and to verify the use of debt by Slovak firms in the transfer of profits. In evaluating these indicators, we chose two approaches. We first analysed the change of indicators only for those firms that transferred their seat to lower tax jurisdiction. The analysis is complemented by a different view, when the selected indicators are compared to a group of businesses with a link to tax havens and with no link to tax havens. Our empirical results clearly indicate the tendency that firms in Slovakia benefit from the possibility of transferring profits to lower tax jurisdictions via debt channels. The median values of debt ratio after the transfer of the registered office to tax havens increased by 7.8%. The median value of the tracking indicator is 1.2 times higher for firms with tax haven links than for companies without links to tax havens.

A Study from Slovakia on the Transfer of Slovak Companies to Tax Havens and Their Impact on the Sustainability of the Status of a Business Entity

“…When assessing the previous research on Slovak companies [4,5], we can conclude that debt as a profit-shifting technique (before and after getting links to a tax haven) is used more by Slovak companies with ownership links to a midshore category (mainly Cyprus). Regarding tax optimization, it is essential to recognize interest expenses as a tax-deductible expense under conditions that consider the so-called thin-capitalization rules and the EU directive on interest and royalty payments (the EU Interest and Royalties Directive).…”

“…Respectively, companies with ownership links to tax havens reported an investigated indicator increase of 41% compared to their counterparts (those companies with no ownership links to tax havens). The empirical evidence of Ištok and Kanderová [5] clearly indicates the trend in the behavior of Slovak companies regarding the use of debt channels as a method of profit shifting. The median values of debt ratio after the transfer of the registered office of Slovak companies to tax havens increased by 7.8%.…”

The effect of corporate income tax on financial performance: Evidence from Palestine

“…Sucipto and Hasibuan (2020) indicate that the debt-to-assets ratio has a significant effect on tax avoidance as this variable represents CIT. Furthermore, Ištok and Kanderová (2019) indicate that debt per asset is the key indicator to measure tax aggression, the authors state that Slovak companies are more tax aggressive in using the debt channel as a technique for profit shifting, as it denotes the CIT which affects financial performance.…”

Proposal for Progressive Taxation of Corporate Entities in the Czech Republic and Its Evaluation

“…Současné celosvětové podmínky vybízejí k zamýšlení se nad současným korporátním daňovým systémem moderních ekonomik. Řada ekonomů veřejně (Auerbach, 2010;Mooij a Devereux, 2011;Devereux a Vella, 2014Clausing et al, 2016;Stiglitz, 2014Stiglitz, a 2019Baker a Murphy, 2020;Murphy, 2019aMurphy, , 2019b a další) vystupuje s myšlenkou modernizace daňového korporátního systému ve smyslu změn v daňové struktuře. Zdanění právnických osob totiž neodpovídá realitě 21. století, které je silně ovlivněno globalizací, mobilitou kapitálu i výrobních faktorů, digitalizací a stále více agresivnějším daňovým plánováním vedoucím k erozi daňových základů a přesouvání zisku do jurisdikcí s nízkým či preferenčním zdaněním, kdy státy ztrácí enormní část svých fi skálních prostředků.…”

“…snižujících, výsledek hospodaření nežli samotný výsledek hospodaření. Tyto korekční prvky pak narušují princip neutrality (Brown, 1948;Boadway, 2012;Mirrlees et al, 2011;de Mooij, 2011;Mooij a Devereux, 2011;Devereux a Vella, 2014a Clausing et al, 2016.…”