Working Capital Management and Corporate Income Tax Prepayment Outcomes

This study identifies whether or not working capital management explains corporate income tax (CIT) prepayment outcomes using a sample of 4,040 large private firms covering the period 2005 - 2015. First, we try to address why firms are willing to provide the government with an interestfree loan through advance payments that exceed the ctual CIT expense, i.e. the overpayment puzzle. Second, we try to uncover whether firms view insufficient advance tax prepayments as a financing source since tax payment deferral amounts to an automatically granted short-term loan at the late payment interest. Our findings indicate that the overpayment puzzle can be explained through -averse firms are willing to pay a supplementary markup in order to ensure that the CIT expense is reached through prepayments. However, firms should possess sufficient capital in order to afford this markup. We also observe evidence suggesting that firms do use tax payment deferral as a financing source. Tax payment deferral acts as a complement to disinvestment in current assets and also acts as a substitute to supplier trade credit and short-term bank debt. Moreover, firms engage in more tax payment deferral as this financing source becomes less costly. Lastly, we find that defaulters are more likely to make no tax prepayments at all.