Abstract
The aim of the paper is to empirically examine the scale and the distribution of the tax advantage which emerges when provisions for future liabilities are deductible from taxable earnings, as proposed in the CCCTB concept. The paper concentrates on Poland - a country for which the expected economic effects of this proposal are still controversial and ambiguous. The results are also relevant for other European countries in which provisions are currently treated in a different way for financial and for tax accounting purposes. The analysis is based on the information from financial statements of 250 companies from the period 2007 - 2012. The microsimulation method in a multi-period setting is implemented. The results show that in case provisions are deductible for tax purposes the tax due decreases by 5,6 % or and by 9,8 % on average, depending on the liquidity situation of companies. The tax advantage is distributed differently among companies. The majority of taxpayers is expected to gain from the reform. Only for single companies there is an increase in tax, induced by the existing, restricted tax loss carry forward rules. The median change in CIT amounts to -1 % and -2 %.
Highlights
Creating provisions for future obligations is necessary to account for possible risks connected with different corporate activities and changing economic environment
The aim of the paper is to empirically examine what the scale and the distribution of the tax advantage which emerges when provisions for future liabilities are deductible from taxable earnings, as proposed in the common consolidated corporate tax base (CCCTB) concept is
A potential shortcoming of this approach is connected with the fact that in jurisdictions characterized by little book-tax conformity the notions of earnings and expenses for financial accounting may differ strongly from these used for tax purposes
Summary
Creating provisions for future obligations is necessary to account for possible risks connected with different corporate activities and changing economic environment. Being recognized both in the balance sheet and, correspondingly, as costs in the profit and loss account, provisions are an important instrument of firm’s accounting policy. While some of them allow tax-effective deduction of provisions when they are created, the majority of countries recognize tax deductible expenses only in periods when actual payment is made. This is crucial in the context of the harmonization of business income taxation within the European Union. Since the Draft Council directive on a common consolidated corporate tax base (CCCTB) allows to Leszczyłowska, A.: Deductibility of Provisions under the CCCTB Proposal and Its Effects on Companies: The Case of Poland
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