Tax Aggressiveness as a determining factor of Accounting Conservatism in Brazil

Abstract

This paper investigates whether the degree of tax aggressiveness is a determinant of accounting conservatism. The taxable income has a dependent relationship with the accounting income in the Brazilian corporate income tax system. One way to reduce the corporate tax base is to adopt conservative accounting choices. After a conceptual discussion of accounting conservatism, differentiating conditional and unconditional conservativeness, and a thorough literature review on accounting conservatism by Brazilian academia. A literature gap was found since the relationship between a company's degree of tax aggressiveness, and its accounting conservatism behavior has not been investigated. For this research purpose, the Basu model was adopted, adapted with tax aggressiveness controls. The study period was from 2010 to 2019 for Brazilian firms from B3. The findings show a significant relationship between tax avoidance and conditional accounting conservatism. That is, more tax-aggressive firms tend to use more conservative accounting. The results provide insights that firms with higher effective tax rates are less inclined to use conservatism. The choice of a conservative accounting pattern may be in part to avoid the tax burden; therefore, this outcome states evidence that there is a difference between the degree of conservatism depending on the firm's tax aggressiveness profile.