The Cash-Relevance of Ifrs – European Legislation Regarding Dividends and Taxation in the Context of Ifrs Reporting

Abstract

This paper provides an overview of rules for taxation and dividend distributions for EU and UK listed entities in EU regulated markets. Empirical research on IFRS application typically considers IFRS as informative about future cash flows. However, taxes and distributable dividends are based on national rules different from IFRS in all EU countries prior to Brexit. To analyze these differences, researchers need to know about 1) how taxable and distributable income are determined in different EU countries mandating IFRS for most listed firms; 2) the differences between IFRS and the national rules on taxable and distributable income. Regarding Question 1), we analyze and classify the EU countries’ regulations about tax and income distributions and whether and how the are legally linked to IFRS. To address Question 2), we develop an ordinal measure of the de jure differences between IFRS income and taxable income on the one hand and IFRS income and distributable income on the other. Our study contributes to empirical research on the informativeness of IFRS by providing measures of book-tax and book-dividend conformity within the EU and the UK. By comparing the national rules to IFRS, we enhance the understanding of the relevance of IFRS reporting.