Open Journal of Social Sciences, 2015, 3, 134-137
Published Online November 2015 in SciRes.
How to cite this paper: Yuan, M.X. and Xu, X. (2015) Reviews of Tax Planning. Open Journal of Social Sciences, 3, 134-137.
Reviews of Tax Planning
Manxia Yuan, Xi Xu
School of Management, Jinan University, Guangzhou, China
Received 23 October 2015; accepted 13 November 2015; published 16 November 2015
Copyright © 2015 by authors and Scientific Research Publishing Inc.
This work is licensed under the Creative Commons Attribution International License (CC BY).
This article reviewed the researches on tax planning published in the domestic and foreign au-
thoritative magazines, and found that scholars put their emphasis on three points: research on the
motivation of tax planning; research on the measurement of tax planning; research on the eco-
nomic consequences of tax planning. With the improvement of the market economy system and
the tax system in our country, tax planning can help enterprises to achieve maximum direct eco-
nomic benefits and value. Besides, with the four-year reform of business tax to value-added tax”
coming to the end, it is particularly important for the enterprises to establish effective corporate
tax planning strategy to achieve the scientific and sustainable development.
Motivation of Tax Planning, Measurement of Tax Planning, Economic Consequences of Tax
1. Introduction
In 2012, the APPLE Company paid $14 billion taxes for the $55.76 billion annual pre-tax income, and after
comprehensive calculating, we found that the total tax rate is only 22%, far lower than the federal rate. As the
world’s most profitable enter prise, its tax planning also did a best j ob.
Tax planning in developed countries is very common and has become a mature industry, and its specialization
trend is clear. More than 60% of the companies in the United States appoint a tax agent to handle their tax work,
and the rate in Japan is as high as 85%. The annual output of tax consult industry is about $100 billion in the
United States. By contrast, the development of tax planning in China is still at the starting stage. It is not until
the establishment of the market economy system that the tax becomes an important factor for corporate interests.
On January 1, 2000, the Chinese Tax News paper, supervised by the State Administration of Taxation, set up
“tax planning” column to introduce the basic principle and method of tax planning for taxpayers, which shows
that Chinese government departments began to face up to tax planning issues.
M. X. Yuan, X. Xu
Tax planning, an importan t thro ttling way for enterprises by making a complete tax operation scheme through
the planning of tax-related business, has caused more and more attention in business world and academic world.
The following content is divided into two parts. The first part is the reviews of Tax Planning, including re-
views on the motivation of tax planning, reviews on the measurement of tax planning and reviews on the eco-
nomic consequences of tax planning. The last part is the conclusion, illustrating the existed opinions on Tax
Planning and trying to find new understandings of tax planni ng.
2. Reviews of Tax Planning
2.1. Reviews on the Motivation of Tax Planning
Cloyd et al. [1] held an investigation about the large and medium-sized public and private manufacturing enter-
prises with the method of questionnaire survey, and the survey found that enterprise managers’ behavior motive
and their behavior would affect the degree of enterprise tax planning, and pointed out that the personal cost of
public enterprise executives for tax planning was higher, which lead to the desire of tax planning for th e public
enterprises is not strong.
Mills and Newberry [2] took the manufacturing enterprises in the United States as the research object, ana-
lyzed the difference of tax planning degree between the private listed companies and the public listed companies,
and believed that the cost of financial report for the listed enterprise managers is a major determinant of whether
the listed companies would conduct tax planning or not, the cost of financial report for public listed enterprise
managers is higher, thus the motivation for tax planning is weaker.
Graham [3] took a questionnaire surv ey of the tax directors for 600 companies, and the study found that 69%
of the tax directors would regard the costs of reputation as the main cause why they did not take tax planning
strategy. Besides, they also found that financial accounting motivation is one of the important factors when con-
sidering tax planni ng strate gy.
Domestic research took the property rights as the breakthrough point, and put much emphasis on the different
tax planning policies caused by the different enterprise characteristics.
Ying Du, Liguo Liu [4] analyzed the different choice in tax planning strategy between the executives of state-
owned enterprises and non-state-owned enterprises, and the results showed that relative to the non-state-owned
enterprises, tax planning motivation for state-owned enterprises is smaller, the reason for this is th at state-owned
enterprises executives had pressure in performance appraisal and political promotion, and tax contribution is set
to be an important indicator of performance for the state-owned enterprises executives .
Ying Lin [5] divided the 31 provinc es and cities in our country into four major economic zones by the region
partition method, she collected and counted up the tax data of every economic zone from 1994 to 2006, and
found sign ificant r egional tax ga p of our countr y, sh e a lso pointed out that the difference of corporate ownership
structure between the zones was the fundamental reasons of this phenomenon, such as the area where the
state-owned enterprises accounted for a larger part , the tax revenues were high, which reflected from the side
that our state-owned enterprises pay more taxes, i.e. the degree of tax planning in state-owned enterprises was
Wei Lv [6] took the implementatio n of the new Enterprise Income Tax Law a s an opportunity and researched
the relationship among trace-analysts, property rights arrangement and the company’s tax avoidance behavior;
he found that with more trace -an alys ts, lower degr ee of infor mation asymmetr y, the enterprises’ implicit tax cost
was low er , which would lead to a more aggressive tax avoidance behavior.
2.2. Reviews on the Measurement of Tax Planning
1) The e ffective tax rate method
The most widely existing calculation method for tax planning is the effective tax rate method (ETR), because
of the different purpose, definition of molecule and denominator in ETR metrology will have big difference. By
reviewing and sorting, the foll owing four methods have been widely used to calculate the effective tax rate:
a) ETR = Income tax expenses/Earnings Before Interest and Tax [7]
b) ETR = (Income tax expenses-deferred income tax expenses)/Earnings Before Interest and Tax [7]
c) ETR = Income tax expenses/profit before tax-deferred income tax expense s /s tatutory rates [8]
d) ETR = (Income tax expenses-deferred income tax expenses)/(profit before tax-the deferred tax changes/
M. X. Yuan, X. Xu
statutory rates) [9]
A large number of domestic scholars adopt the effective tax rate index as the measuremen t of the tax planning
for the listed company, i.e. ETR = The current income tax/the main business income.
2) Long-term effective tax rate method
Dyreng et al. [10] put forward the long-term effective tax rate method, i.e. the actual payable taxes in ten
years divided by the pre-tax profits of the same period, and use the payable cash taxes as the molecules, which
would avoid the influence of the volatility of each year for the effective tax rate method and avoid the mismatch
problem for cash taxes and profits. Considering the tax rebates and the tax dispute between corporate and tax
collection and administration department may last for s everal years, it is in appropriate to j ust use the current ef-
fective tax rate measuring corporate tax avoidance, and a more effective method is to take the average effective
tax rate for many years to depict enterprise tax. Because of this, Hang Liu [11] using the five-year-average of
“the difference between nominal income tax rates and the actual income tax rate” (from t 4 to t) to me a s u r e th e
business tax.
3) Difference between Accounting an d T a x
Difference between Accounting and Tax can directly provide related information of tax planning behavior
caused by the difference between Accounting and Tax.
Desai et al. [12] took a deep study on the growing phenomenon of the difference between Accounting and
Tax, and found that the main reason of the growing difference between Accounting and Tax is the growing in-
crease in tax planning behavior for enterprise.
Fuquan Zeng, Min Lv [13] had an empirical analysis about the relationship between the Accounting-Tax dif-
ference and the income tax avoidance with the preliminary evidence from Shanghai and Shenzhen A-share listed
companies, and f ound th at the greater the difference between Accounting and Tax was, the lower the income tax
burden was, and the greater the income tax avoidance was. These studies have proved that the difference be-
tween Accounting and Tax can show some part of the tax planning, which proves that regard the difference be-
tween Accounting and Tax as a measurement for tax planning is rational.
2.3. Reviews on the Economic Consequences of Tax Planning
Comprehensive reviews on existing literature both at home and abroad, we found that the proposed tax planning
behavior would produce a series of explicit and implicit results. Explicit results including the increase in cost
that can be deducted, which further increases the cash flow and the wealth of the shareholders; indirectly, in-
cluding the reduce in the earnings of the interest tax shields, which may change the en terprise’s capital structure
decision [3], so they think that tax planning is a kind of activity that can increase the enterprise value. And
another implic it result is that the companies may be limited by the more attention and review of the taxation au-
thority, forced to pay the additional taxes or interest and penalties, brought huge reputational damage, thus re-
ducing the cash flow and the wealth of shareholders. Hanlon and Slemrod [14] analyzed the market reaction af-
ter the enterprises adopt specific tax avoidance policy, and foun d tha t share pric es c hanged −1.04% after the first
announcement about the news of tax shields. Their further study in 2010 found that the bigger the scale of the
company was, the more vulnerable its tax planning behavior was to the media, which would lead to the increase
of political costs.
Dong Chen, Jianxin Tang [15] did a research on the relationship among executive pay, tax avoidance rent-
seeking and accounting information disclosure, and found that the increase of corporate tax avoidance results in
deterioration in the qua lity of the accounting information disclosure.
Hang Liu, Kangtao Ye analyzed the correlatio n between the degree of enterprises tax avoidance and the effi-
ciency of investment based on the data of Chinese listed companies from 1999 to 2010, and found a positive
correlation, and the positive correlation relationship mainly reflected as tax avoidance caused the excessive in-
vestment; besides, they also pointed out that perfecting the corporate governance mechanism can restrain the in-
fluence of the tax avoidance on excessive investment.
3. Conclusion
In conclusion, the scholars studied the motivation of tax planning mainly from the respects of enterprise manag-
ers’ behavior motive and property rights, and demonstrated the economic consequences of tax planning with ex-
plicit and implicit resu lts . But there are still some problems in the research: taking the motiva tion of tax p lannin g
M. X. Yuan, X. Xu
for example, foreign scholars mainly focused on the management behavior, and the domestic scho lars mainly
put emphasis on property rights, but few scholars tried to explain it from executives’ background characteristics
or the personal traits of the executives. Executives are the key to the formulation and implementation of tax
planning, and executive background characteristics directly reflect their cognitive abilities and values, which
will affect the behavior of the executives and their decision making about the tax planning. Therefore, re-
searches on executives’ background characteristics and tax planning from the micro-perspective will deepen the
understanding of tax planning and strengthen the construction of senior management team.
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