An empirical investigation of impacts of the integrated income tax system on corporate financing decisions

Authors: Jui-Chih Wang; Ming-Chin Chen;

Journal: Chia Da Management Review. Jun. 2007, 27(1): 221-246.

Keywords: Integrated Income Tax System; Imputation Tax Credits; Undistributed Earnings Tax; Debt-to-Equity Ratios

Abstract:
Enacted in 1998, the Integrated Income Tax System has two important features, i.e., the imputation tax credit (ITC) to shareholders and the 10% surtax levied on undistributed earnings. This study examines the impacts of the two important features on corporate financing decisions. After implementation of the Integrated Income Tax System, the imputation tax credits can reduce the double taxation on stockholders' dividend i ncome and, hence, reduce corporations' debt-to-equity ratios. However, the 10% surtax on undistributed earnings may result in opposite effect on corporate debt-to-equity ratios. The empirical results of this study show that, certeris paribus, under the new tax system, companies with greater ITC ratios tend to have lower debt-to-equity ratios, while companies with greater undistributed earnings ratios tend to have higher debt-to-equity ratios, consistent with our expectations. The findings of this study have important implications for the government to take into account the potential adverse Impacts resulted from taxes levied on corporations' undistributed earnings