• An Empirical Investigation of the Surtax on Undistributed Earnings Before and After Changes in the Tax Basis of Undistributed Earnings

Abstract

This study empirically investigates the factors influencing firms’ surtax liabilities on undistributed earnings before and after changes in the tax basis of undistributed earnings. The tax basis of the 10% surtax on undistributed earnings was changed from taxable income (the old tax system) to book income (the new tax system) in 2006. The results of this study show that by adopting financial income as the tax basis, the new tax system can alleviate the distortions in firms’ surtax on undistributed earnings caused by the book-tax income differences. The empirical results, however, indicate that there is a positive relation between firms’ investments in R&D and fixed assets and the surtax on undistributed earnings, suggesting that the policy of taxing undistributed earnings may cause firms to bear higher tax costs on investments. Finally, the paper documents the evidence that firms’ surtax on undistributed earnings is associated with several firm characteristics such as firm size, volatility of earnings, returns on equity, liquidity, and debt ratio.

Keywords: Surtax on undistributed earnings, Imputation system, Book-tax income differences, Income tax of profit-seeking enterprises