Does the government-mandated adoption of international financial reporting standards reduce income tax revenue?

Abstract

The mandatory adoption of International Financial Reporting Standards (IFRS) has been the most noteworthy accounting regulatory change in a multitude of countries. After adopting IFRS, the gap between accounting earnings and taxable income increases in most of these countries. Previous literature suggests that low book-tax conformity is associated with higher corporate tax avoidance, thereby collecting lower income tax revenues. This study applies the propensity score matching method and the difference-in-differences design to empirically examine the impact of the government-mandated adoption of IFRS on a country’s income tax revenue. Using panel data of 137 countries covering the period from 2000 to 2010, the empirical results show that the mandatory IFRS adoption results in a decrease in income tax revenue.