The Value Relevance of Book-Tax Differences in Brazil

Abstract

Article history: Background: Accounting income and taxable income can be distinct. This gives rise to the concept of book-tax differences (BTDs), meaning the differences that can exist between the accounting income, in conformity with corporate legislation, and taxable income, in line with tax legislation. Hanlon and Heitzman (2010) mention the BTD theme as an important and promising research topic in the area of taxation in the international literature. Objective: This study analyzes whether there is a relationship between BTDs and the future earnings and stock returns. We examine whether BTDs differentially influence earnings persistence and informativeness in the Brazilian context. Results: Based on the econometric models adapted to Brazilian circumstances, we observed a statistically significant influence of BTDs on the estimation of future earnings of the firms studied. This study is particularly relevant given the changes in accounting rules in Brazil during the study period caused by Law 11,638 of 2007 and the adoption of IFRSs. The results of the models proposed showed increased relevance of BTDs especially in 2008 and 2009. Conclusion: This research helps to address some critical issues by making an in-depth study of book-tax differences and evaluating how the BTD have an effect on the earnings persistence and investor responsiveness to earnings. Our findings suggest that, while some research results in the U.S.-based studies can be generalized to Brazil, empirical evidence from the Brazil setting helps supplement and enrich the current BTD literature.