Title
Optimal Stopping Time Strategy for Paying Tax
Authors
Abstract
Purpose: In this study, we examine the strategic timing for paying corporate taxes under varying financial market conditions.
Design/methodology/approach: We develop a model by using optimal stopping theory and considering three tax regimes: (i) no tax, the firm is never required to pay taxes; (ii) paid tax on a monthly basis, taxes paid based on revenues periodically; and (iii) deferred tax with penalties, delaying taxes but incurring financial penalties.
Findings: Our results indicate that the optimal timing of tax payments is highly sensitive to market parameters such as drift, volatility, and the structure of tax penalties. The evidence further suggests that, under certain risk conditions, tax deferral can serve as a legitimate and value-enhancing strategy, allowing firms to retain more earnings and allocate resources more efficiently.
Originality: Our main contribution is to identify how timing strategies are shaped by drift, volatility, and tax penalties. The model is developed theoretically and supported by a Monte Carlo simulation. We also address the legal and policy implications of tax deferral, namely that under certain risk conditions, tax deferral increases firm value. Overall, our conclusions are based on mathematically rigorous modeling and simulations.
Keywords
Optimal stopping problem, Markov processes, tax payment, reinvestment, penalty
Classification-JEL
H26, C61, C63
Pages
55-82
How to Cite
ASSIDI, S., JILANI BEN NAOUARA, N., & Wong, W.-K. (2025). Optimal stopping time strategy for paying tax. Advances in Decision Sciences, 29(1), 55-82.