THE EFFECT OF IFRS ADOPTION AND LAW ENFORCEMENT ON BOOK TAX AGGRESSIVENESS: EVIDENCE FROM ASEAN COUNTRIES

Theresia Woro Damayanti

doi:10.3846/btp.2019.27

Abstract

Firms are arguably motivated to exhibit tax aggressiveness because tax constitutes a significant portion of firms’ total costs. This study aims to test the effects of IFRS adoption and law enforcement on book-tax aggressiveness in six developing ASEAN countries. Our sample is 29,504 firm-year observations generated from Thomson Reuters Eikon for the years 2000–2017. The results show that IFRS adoption has a positive effect on book-tax aggressiveness, indicating that firms tend to prioritize book-tax aggressiveness over book-tax conformity. Further, law enforcement negatively affects book-tax aggressiveness. All in all, our findings imply that law enforcement is very crucial for ASEAN countries to enhance managers’ awareness of not engaging the book-tax aggressiveness practice.

Highlights

Previous studies investigate how managers are confronted with a trade-off between book income and tax income (Badertscher et al 2009, Balakrishnan et al 2012, Watrin et al 2012, Lennox et al 2013)
This study aims to test the effects of International Financial Reporting Standards (IFRS) adoption and law enforcement on firms’ choice to engage in book-tax aggressiveness or book-tax conformity
Using the Transparency International’s Corruption Perception Index (CPI) scores as the proxy of law enforcement, we show that Singapore (9.00) and Malaysia (4.92) have the highest law enforcement scores among all Association of Southeast Asian Nations (ASEAN) countries

Summary

Introduction

Previous studies investigate how managers are confronted with a trade-off between book income and tax income (Badertscher et al 2009, Balakrishnan et al 2012, Watrin et al 2012, Lennox et al 2013). Maximizing book income (financial reporting aggressiveness) implies higher taxes. On the contrary, minimizing tax income (tax reporting aggressiveness) will lead to a lower book income. Managers have to choose between financial and tax reporting aggressiveness. Ball and Shivakumar (2005), Watrin et al (2012) demonstrate that managers prefer reducing tax income to save taxes by minimizing book income. Erickson et al (2004) and Roxas (2016) indicate that firms are willing to pay higher taxes to report higher book income

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Results

Conclusion