To Shift or Not to Shift? Intertemporal Income Shifting as a Response to the Introduction of the Risk Capital Allowance in Belgium

This study examines how Belgian firms react in terms of intertemporal profit shifting in response to the introduction of the risk capital allowance (RCA) by the law of June 22nd, 2005. We predict and find that firms with relatively low (but positive) earnings in 2006 have incentives to defer profits in 2005. Adversely, we predict and find that firms that are highly profitable in 2006 and have net operating loss carryforwards in 2005 have incentives to accelerate profits. Our study contributes to the literature by providing evidence of how a tax regulation change impacts financial reporting quality and by indicating to what extent the introduction of an ACE-type (allowance for corporate equity) tax regulation has a different impact on intertemporal profit shifting, and hence government revenues, than an ordinary statutory rate change.

This seminar is organised by the Erasmus Accounting Research Group.