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Deferred taxation under default risk

Author

Listed:
  • Cristian Carini

    (University of Brescia)

  • Michele Moretto

    (University of Padua)

  • Paolo M. Panteghini

    (University of Brescia)

  • Sergio Vergalli

    (University of Brescia)

Abstract

In this article, we have used a continuous EBIT-based model to study deferred tax liabilities under default risk. Quite surprisingly, default risk has been disregarded in research on deferred taxation. In order to underline its importance, we first calculated the probability of default, over a given time period, together with the contingent value of tax deferral. We then applied our theoretical model to a sample of 27,749 OECD companies. We showed that, when accounting for both firms with a negative EBIT and firms with a probability of default higher than 50% (over a 10-year period), a relevant percentage of firms were close enough to default. Hence, the expected present value of deferred taxes is much lower than that obtained in a deterministic context. From the Government’s point of view, deferred tax liabilities are a risk-free loan. Since only a portion are subsequently repaid, the Government should account for future losses due to companies’ default. So far, these estimates have been missing, although techniques do exist and are quite practical.

Suggested Citation

  • Cristian Carini & Michele Moretto & Paolo M. Panteghini & Sergio Vergalli, 2020. "Deferred taxation under default risk," Journal of Economics, Springer, vol. 129(1), pages 33-48, January.
  • Handle: RePEc:kap:jeczfn:v:129:y:2020:i:1:d:10.1007_s00712-019-00671-x
    DOI: 10.1007/s00712-019-00671-x
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    More about this item

    Keywords

    Capital structure; Contingent claims; Corporate taxation; Tax depreciation allowances;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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