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Optimal Stopping Time Strategy for Paying Tax

Author

Listed:
  • Soufiene ASSIDI

    (Department of Accounting and Finance, Higher Institute of Computer Science and Management of Kairouan, Kairouan University, Tunisia)

  • Noureddine JILANI BEN NAOUARA

    (Department of Applied Mathematics, Honoris United Universities, ESPRIT)

  • Wing-Keung Wong

    (Department of Finance, Quantum AI Research Center, Fintech & Blockchain Research Center, and Big Data Research Center, Asia University, Taiwan; Department of Medical Research, China Medical University Hospital, Taiwan; Business, Economic and Public Policy Research Centre, Hong Kong Shue Yan University; The Economic Growth Centre, Nanyang Technological University, Singapore)

Abstract

[Purpose] In this study, we examine the strategic timing for paying corporate taxes under varying financial market conditions. [Design/methodology/approach] We develop a model by using optimal stopping theory and considering three tax regimes: (i) no tax, the firm is never required to pay taxes; (ii) paid tax on a monthly basis, taxes paid based on revenues periodically; and (iii) deferred tax with penalties, delaying taxes but incurring financial penalties. [Findings] Our results indicate that the optimal timing of tax payments is highly sensitive to market parameters such as drift, volatility, and the structure of tax penalties. The evidence further suggests that, under certain risk conditions, tax deferral can serve as a legitimate and value-enhancing strategy, allowing firms to retain more earnings and allocate resources more efficiently. [Originality] Our main contribution is to identify how timing strategies are shaped by drift, volatility, and tax penalties. The model is developed theoretically and supported by a Monte Carlo simulation. We also address the legal and policy implications of tax deferral, namely that under certain risk conditions, tax deferral increases firm value. Overall, our conclusions are based on mathematically rigorous modeling and simulations.

Suggested Citation

  • Soufiene ASSIDI & Noureddine JILANI BEN NAOUARA & Wing-Keung Wong, 2025. "Optimal Stopping Time Strategy for Paying Tax," Advances in Decision Sciences, Asia University, Taiwan, vol. 29(1), pages 55-82, March.
    • Handle: RePEc:aag:wpaper:v:29:y:2025:i:1:p:55-82
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    References listed on IDEAS

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    2. Tang, Tanya Y.H. & Firth, Michael, 2012. "Earnings Persistence and Stock Market Reactions to the Different Information in Book-Tax Differences: Evidence from China," The International Journal of Accounting, Elsevier, vol. 47(3), pages 369-397.
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    Keywords

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    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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