El quinto postulado de Euclides

In the sample of Australian listed companies in Chapter 4, the results indicate that the mean and median values of foreign ownership are 0.0535 and 0, respectively. Therefore, it was impossible to obtain a sample, with reasonable size, of Australian listed companies that are substantially foreign-owned. In fact, FOACs are best represented by Australian subsidiaries of foreign MNEs because they are foreign-owned, yet operate in Australia

and therefore are subject to Australian corporate income tax. The main issue of using the Australian subsidiaries of foreign MNEs to represent FOACs is that they are not listed on the ASX and are thus not required to make their annual reports publicly available. Nevertheless, because of their large sizes, they are required to lodge annual reports with the ASIC. Consequently, their annual reports can be purchased from the ASIC at a cost of $38 each (per company, per year). As a result of the high cost of acquiring FOACs’ annual reports, this study’s decision regarding the sample year and size is subject to resource constraints. Considering the increasing publicity of the OECD’s BEPS Project from 2013, and that the sample periods in the previous two chapters are 2009 to 2012, this study selects a sample period of 2012.91

This study takes the following steps to determine the FOACs for which annual reports are purchased from the ASIC. First, a list of Australia’s top 2,000 companies in 2012 is obtained from IBISWorld.92 The list includes public companies (both listed and non- listed), large proprietary companies, foreign-owned companies, trusts (such as large superannuation funds), and public sector and not-for-profit entities (such as universities and charitable organisations). Following this, a description of each of the companies, which is also available from IBISWorld, is examined. Companies described as ‘subsidiaries’ of foreign MNEs or ‘wholly foreign-owned’ are classified as FOACs. Additional efforts are made to identify companies with names appearing to associate with foreign MNEs, but whose foreign ownership cannot be confirmed by screening the information from IBISWorld.93 Financial companies,94 companies with operations in countries other than Australia and New Zealand, and companies without annual reports for 2012 available from the ASIC are excluded.95 The above selection procedure results

91 _{In addition, because the researcher commenced the PhD study in 2013, 2012 is the latest year with}

corporate annual reports available.

92 _{This study focuses on the top 2,000 companies to increase the chance of finding foreign-owned}

companies, which tend to be large in size.

93 _{For instance, the foreign ownership of some Australian companies is confirmed by examining the list of}

subsidiaries of their foreign parents. The list can usually be found in the foreign parents’ annual reports or in the files lodged to the Securities and Exchange Commission by U.S. MNEs.

94 _{FOACs in the financial industry (such as subsidiaries of foreign banks) are excluded because they are}

subject to prudential regulations and special thin capitalisation rules, so their operations and financial structures are different from other companies.

95 _{This study excludes foreign-owned companies with operations in countries other than Australia and New}

Zealand to ensure that the foreign-owned companies included in the FOACs sample are not affected by other foreign tax rates or tax systems. For example, if an Australian subsidiary of a foreign MNE has subsidiaries in Singapore, its financial statement will reflect both the Australian and Singaporean operations. Further, its intra-group transactions with the Singaporean operating part are not reflected in its financial reports.

in 319 FOACs for which annual reports are purchased from the ASIC. In addition, for each of the FOACs, the parent company information in their annual reports is also examined to ensure that the FOAC is not a subsidiary of another FOAC included in the sample. In cases where a FOAC has a few subsidiaries in Australia, the financial data of the Australian consolidated group are collected.

The sample of DOLACs is based on companies listed on the ASX for 2012. Foreign companies, financial companies, trusts and stapled securities are first excluded.96 The top 500 companies, ranked by sales revenue, are then taken to help better match FOACs and DOLACs in term of firm size because FOACs in the sample are generally large in size. Sales revenue, rather than total assets, is used as the ranking base because ranking based on total assets may result in a large number of mining firms with substantial assets being included in the sample, although they are still in their start-up stage and do not have significant operating revenues. To ensure that the companies selected as DOLACs have predominantly domestic ownership, this study excludes those with more than 20% foreign ownership among the top 20 shareholders (that is, FOW—the foreign ownership measure developed in Chapter 4—is restricted to be less than or equal to 20%).97 _{The 20%}

threshold is employed to maintain a reasonably large sample size. In total, 423 companies are included in the DOLACs sample.

Six sub-samples

This study employs six sub-samples, extracted from the initial sample described above. Each sub-sample is used to test one of the six hypotheses—that is, it corresponds to one of the six outcome ratios. For example, the Gross Profit Ratio sub-sample is used to test Hypothesis 6.1A, and the EBIT Ratio sub-sample is used to test Hypothesis 6.1B. In each of the six sub-samples, companies with the corresponding outcome ratio greater than 1 or

96 _{The ASX identifies 95 foreign incorporated entities quoted on the ASX in June 2012. Foreign companies}

are excluded because the Australian dividend imputation system does not apply to them. Financial companies are excluded because they are subject to special regulations and special disclosure requirements. Consequently, some of the required data items in this study are unavailable for financial companies. Trust funds and trusts in stapled securities are excluded because they are ‘pass-through’ entities for tax purposes. In addition, in Chapters 4 and 5, utilities companies are excluded because they are subject to special rules that regulate prices charged on utilities hence affect the companies’ financial performance. In this study, utilities companies are not excluded. As will be explained in Section 6.3.3, FOACs are matched with DOLACs on the basis of industry groups, which reduces the industry affiliation effect.

97 _{In total, 74 companies with FOW greater than 20% are excluded (including the two dual-listed}

companies: BHP Billiton and Rio Tinto Group). Three companies with no top 20 shareholder information are also excluded. Consistent with Chapters 4 and 5, New Zealand shareholders are not treated as foreign because the Australian and New Zealand governments have extended their dividend imputation systems to include companies residing in the other country under the trans-Tasman triangular imputation rules.

lower than 0 are excluded. For example, in the Gross Profit Ratio sub-sample, FOACs and DOLACs with a Gross Profit Ratio higher than 1 or lower than 0 are excluded. This is done to ensure that the results are not dominated by extreme values, which is essential because the sample sizes are relatively small. Thus, the size of each sub-sample varies, depending on the number of observations with extreme values.

The Gross Profit Ratio sub-sample is much smaller than all the other sub-samples because around 40% of the companies do not disclose cost of goods sold hence are excluded.98 According to the Australian Accounting Standards 101 Presentation of Financial Statements, when presenting expense items in income statements, companies can use a classification based on the nature or function of the expenses, depending on which provides reliable and more relevant information. If the company chooses to present expense items based on the nature, no cost of goods sold will be presented in the income statements. Table 6.1 summarises the sizes and compositions (FOACs and DOLACs) of the six sub-samples.

Table 6.1: Sizes and Compositions of Sub-Samples

FOACs DOLACs Total

Gross Profit Ratio Sub-Sample 219 229 448

EBIT Ratio Sub-Sample 260 321 581

Interest Expense Ratio Sub-Sample 319 422 741

Leverage Sub-Sample 316 421 737

Pre-Tax Profit Ratio Sub-Sample 250 308 558

Income Tax Expense Ratio Sub-Sample 271 342 613