Book-tax Conformity Research Articles

Impact of Outside Blockholders on Related Party Transactions and Book-tax Conformity Link

This study assesses the effects of transfer pricing audit rules in 2005 on related party transactions and book-tax conformity. Further, the presence of outside blockholder beneficially owning at least five percent of the company’s outstanding common stocks is examined. Data from 2003 to 2007 and 2018 of Taiwan-listed firms were collected from the Taiwan Economic Journal database and estimated by ordinary least squares using EViews. This study finds that book-tax conformity has no relation to related party transactions. The presence of outside blockholders is significant in the 2005 sample which might have resulted from an implementation of Transfer Pricing Assessment Rules. However, the presence of outside blockholder as an effective monitor over related party transactions – book-tax conformity link has no evidence. This paper offers evidence in an Asian context to enrich the discussion on related party transactions, book-tax conformity and outside blockholders. The finding is robust to an alternate measure of book-tax conformity.

Book-tax Conformity: Moderating Effect of Aggressive Management Practices on Earnings Persistence

Book-tax Conformity: Moderating Effect of Aggressive Management Practices on Earnings Persistence

The Effect of Tax Avoidance on Audit Costs

This research aims to analyze the impact of tax avoidance on audit fees in Indonesian Stock Exchange (IDX) companies in 2013-2015. This research used book-tax differences and book-tax conformity as a proxy for tax avoidance. The result of book-tax differences as a proxy of tax avoidance showed a significant effect on audit fees, indicating that the bigger the negative book-tax differences, the more the audit fees. On the other hand, the result of book-tax conformity as a proxy of tax avoidance showed that there is no significant effect on audit fees. Thus, book-tax differences is preferable to book-tax conformity as a proxy for tax avoidance. This research does a difference test of the impact of large book-tax differences and small book-tax differences on the audit fees as an additional analysis. The result showed that large book-tax differences is more significant than the other. This research also does a difference test of the impact of large positive book-tax differences and large negative book-tax differences on audit fees. It indicates no significant difference between the effect of large positive book-tax differences and large negative book-tax differences on audit fees.

Book Review. Luca Menicacci, Book-Tax Conformity in the IFRS era. Evidence from Italian Listed Companies

Book Review. Luca Menicacci, Book-Tax Conformity in the IFRS era. Evidence from Italian Listed Companies

Book-tax conformity and earnings management: recent research

Corporations use two different sets of financial statements which have mirror-image goals, firms want to maximize book income reported to investors, while minimizing the taxable income reported to the tax authorities. The dual nature of corporate profit reporting may be creating a lose-lose situation, less meaningful profit numbers for capital markets and lowered corporate tax revenue for the government. Defenders of the book-tax divide argue that a unified system cannot accommodate these differing objectives, while supporters of the book-tax conformity claim that a tax-based book income can restore the integrity of the financial accounting system. The study reviews the arguments of high vs. low book-tax conformity. It also reviews prior research that examines the association between book-tax conformity and earnings management.
 
 JEL Classification: H2, M4, M40, M41
 Key words: book-tax conformity, earnings management, book income, tax income, tax incentives

Reconciling Competing Reporting Objectives Through Deferred Tax Accounts: Evidence on Private Italian Firms

This paper contributes to the growing literature on earnings management in private firms by focusing on deferred taxes. This accounting treatment requires sophisticated use of accruals that provides the chance to manage earnings and net assets without affecting the tax payable. We argue that in a setting with high book-tax conformity, the small room that allegedly exists to recognise deferred taxes remains a comfortable avenue to reach reporting objectives that a tax-minimisation strategy may preclude. We use a sample of private firms operating in a credit- and tax-driven environment such as Italy to test this expectation. Our results show that private firms use deferred taxes to extract multiple financial reporting benefits that may facilitate debt contracting: smoothing earnings over time, meeting/beating historical earnings, avoiding reporting accounting losses, and managing leverage. Tax loss carryforwards are the source of deferred tax assets where the exercise of discretion becomes more critical.

Book-tax conformity and the demand for auditor-provided tax services: European evidence

PurposeThis study aims to examine the impact of different levels of required book-tax conformity (BTC) on audit clients' demand for auditor-provided tax services (APTS). In addition, the authors also investigate the effects of the European Union (EU) Regulation (2014).Design/methodology/approachThis study utilizes a sample of listed companies from 10 EU countries between 2010 and 2019. The final sample consists of 16,049 firm-year observations from 2,515 unique firms, and the authors use both probit and ordinary least square (OLS) regression models in this study.FindingsThe main finding of this paper is that companies listed in countries with a higher level of BTC are less likely to purchase tax services from incumbent auditors and pay fewer auditor-provided tax service fees. Results from further analyses confirm that firms substantially reduced their purchase of APTS after the EU Regulation (2014) was implemented, but these reduced purchases were found to be more pronounced for firms located in countries with low BTC.Originality/valueThis study advances the understanding of the determinants of APTS and the consequences of BTC. Specifically, the authors report that variation in a country-specific feature (i.e. BTC) also affects firms' decision to purchase APTS. Moreover, this paper provides some preliminary evidence of the new regulation and contributes to the literature on APTS regulation. The findings of this study have important policy implications for regulators and are also relevant for various capital market participants.

Diversity of Book-Tax Conformity in Asean 4: Philippines, Indonesia, Malaysia, and Singapore

Diversity of Book-Tax Conformity in Asean 4: Philippines, Indonesia, Malaysia, and Singapore

The Impact of Book-Tax Conformity on Reporting and Investment Behavior

The Impact of Book-Tax Conformity on Reporting and Investment Behavior

The real earnings management gap between private and public firms: Evidence from Europe

Employing a comprehensive dataset spanning 11 European Union countries, we provide novel insights on how country-level institutional factors affect differences in the extent of real earnings management (REM) activity by publicly listed and privately held firms (the ‘REM gap’). Thus, we explain why the public–private firm REM gap varies systematically across countries. Exploring the impact of country-level governance and legal environment, we observe the REM gap to be greater in weaker market settings and in jurisdictions with higher book-tax conformity, despite REM levels overall typically being lower in such jurisdictions. While overall REM levels are positively related with the strength of investor protection and the extent of disclosure requirements and negatively related with ownership concentration levels, these factors play only a modest role in explaining variations in the REM gap. Our broad-based evidence also provides consistent support for the existence internationally of a ‘partial substitution effect’ where increased (decreased) REM activity is offset to some extent, but not wholly, by reduced (increased) accruals-based earnings management activity. Our findings have important implications regarding the comparability of financial statement information provided by public and private firms.

Corporate Income Tax Changes in the Context of Earnings Management: a Review of the Literature

The purpose of the article/hypothesis: This paper aims to provide a comprehensive review of the theoretical and empirical literature regarding tax-induced earnings management. In particular, the association between anticipated tax changes and earnings management is of interest to the authors.
 Methodology: This paper uses a systematic literature review to achieve its research objectives.
 Results of the research: The presented research is mostly devoted to tax rate decreases and focuses on accrual-based earnings management methods. In anticipation of a tax rate change, companies shift their income from a high to a low tax rate period. Moreover, the probability of tax-induced earnings management is higher in case of extreme changes in the tax rate, larger prospects for tax savings as well as in case of private firms. This paper identifies several inconsistencies and gaps in the current literature, emphasizing that the connection between firms’ characteristics, the level of book-tax conformity and the practice of earnings management remains unclear.

Book Tax Conformity for Financial Instruments

Since the introduction of the corporate income tax in the United States in 1909, both lawyers and accountants have discussed whether to allow corporate taxpayers to use income reported by corporations to their shareholders on their financial reports under Generally Accepted Accounting Principles (“GAAP”) as the basis for imposing corporate income tax. Similar discussions have taken place in other countries, particularly in Europe in recent years. As of today, several countries apply general book-tax conformity, while several others apply it only to financial instruments. In the United States, limited booktax conformity already exists, to some extent, in the tax law, under the clearreflection-of-income principle contained in section 446, and in other specific provisions. Commentators agree, however, that currently, a general book-tax conformity regime for corporate tax is not feasible. In addition, courts often discuss the different roles of tax and accounting rules, generally concluding that tax does not have to follow books in all cases.

Financial reporting and book-tax conformity: A review of the issues

This work reviews accounting research on book-tax conformity (BTC) with specific reference to financial reporting issues. There is an ongoing debate in the accounting literature about the impact of BTC levels (weak/strong) on accounting quality and on tax avoidance. Policymakers have discussed at length the opportunity to reform BTC as well. Proponents of a strong BTC argue that it can deter both financial reporting ma-nipulation and aggressive tax planning by creating contrasting incentives between book earnings maximisation and taxable income minimisation. Further controls on book earnings assured by taxing authorities will reinforce such beneficial ef-fects. Opponents of a strong BTC suggest that financial accounting decisions should not interfere with tax accounting and vice versa, as financial reporting and tax reporting have different purposes. Furthermore, under a strong BTC, managers will tend to smooth earnings to minimise income taxes, thus reducing earnings in-formativeness. Even if a strand of research based on the Tax Reform Act (TRA 86) in the US corroborates the position of opponents, a large body of literature formed in international settings has not yet reached a consensus over the conse-quences of BTC. This circumstance makes BTC a relevant topic to the current de-bate on financial reporting quality.

Does Book-Tax Conformity Reduce a Corporate Tax Avoidance?: Analysis of Conforming Tax Avoidance and Non-conforming Tax Avoidance

Purpose - The purpose of this study is to examine the effect of book-tax conformity on conforming tax avoidance and non-conforming tax avoidance. Design/methodology/approach - This study uses financial data from 1996 to 2019 of 34 countries. We regress conforming or non-conforming tax avoidance on book-tax conformity. We use the book-tax conformity measure developed by Atwood et al. (2010), the non-conforming tax avoidance measure developed by Desai and Dharmapala (2006), and the conforming tax avoidance measure developed by Badertscher et al. (2019). Findings First, book-tax conformity has a significant positive relationship with non-conforming tax avoidance. Second, book-tax conformity is not statistically related to conforming tax avoidance. Research implications or Originality While prior research focuses on the effect of book-tax conformity on earnings quality, we examine on the effect on tax avoidance. Furthermore, this study is expected to provide important policy implications regarding the types of tax avoidance strategies that tax authorities should pay attention to. Our results imply that tax authorities in countries with high book-tax conformity should pay more attention to non-conforming tax avoidance than to conforming tax avoidance.

The implications of book-tax conformity and tax change for the earnings management of Portuguese micro firms

Since 2014, Portugal has a special, optional tax regime for micro firms called the simplified tax regime, which is an alternative to the general tax regime. In the simplified tax regime, income tax is a percentage of specific revenues, which could be seen as an example of lower book-tax conformity. The general tax regime is an example of higher book-tax conformity because tax income is based on accounting income. Using the tax regimes as a proxy of book-tax conformity we study the influence of the different tax regimes on earnings management, as well as whether earnings management in the general tax regime is used to achieve taxable income and reporting goals. We find that firms opting for the simplified tax regime manage earnings less than firms in the general tax regime, and they manage earnings upwards while the latter manage earnings downwards. Furthermore, we conclude that accruals with high book-tax conformity are used to decrease taxable income and those with low conformity are used to increase accounting income. This leads us to conclude that lower book-tax conformity reduces earnings management. This single country case study contributes evidence on book-tax conformity issues.

Mandatory Book-Tax Conformity and its Effects on Earnings Management and Tax Avoidance

Mandatory Book-Tax Conformity and its Effects on Earnings Management and Tax Avoidance

Intelligent Supervision and Earnings Management Choice：A Natural Experiment Based on Golden Tax-III

This paper studies the impact of intelligent tax supervision on the decision of corporate earnings management. Companies determine earnings management strategies by weighing the marginal benefits and costs of accrual-based earnings management and real earnings management. Existing literature finds that managers prefer real earnings management than accrual-based earnings management because of regulatory pressure. This paper takes tax costs into consideration and adopts that tax will affect the substitution relationship between different earnings management methods.Accrual-based earnings management is realized by accounting methods. But real earnings management has a direct cash flow effect. Compared with accrual-based earnings management, real earnings management is subject to a higher level of book-tax conformity. Real activity manipulation is more costly due to tax incentives. Intelligent tax supervision represented by Golden Tax-III can effectively realize information integration and reduce information asymmetry between taxpayers and tax authorities. It can help to identify companies whose tax burdens deviate from the industry average. So Golden Tax-III can strengthen tax supervision and significantly increase the tax costs of real earnings management. Then, it can affect earnings management strategies. The higher the degree of tax non-compliance, the greater the impact of the implementation of Golden Tax-III.We use the implementation of Golden Tax-III as an exogenous event to construct a DID test. The results show that: Tax-noncompliant companies have a higher level of accrual-based earnings management after Golden Tax-III; tax-noncompliant companies have a lower level of real earnings management after Golden Tax-III; the substitution relationship between the two earnings management strategies in tax-noncompliant companies is mainly reflected after Golden Tax-III.The main contributions of this paper are as follows: (1) It directly examines the impact of tax costs on earnings management strategies, and finds that companies prefer accrual-based earnings management to real earnings management under strong tax supervision. It also expands the previous earnings management model. The research enriches and supplements the literature on earnings management. (2) It constructs a DID test to examine the impact of tax regulation on earnings management based on the implementation of Golden Tax-III. It can help to solve the problem of self-selection and endogeneity and supplement the relevant literature on tax and earnings management. (3) It finds that the intelligent supervision represented by Golden Tax-III can effectively distinguish tax-noncompliant companies and achieve precise supervision. The results help to understand and evaluate the economic consequences of Golden Tax-III, and also provide enlightenment for the development of intelligent tax supervision and taxation regulatory policy.

The Possible Weakening of Financial Accounting from Tax Reforms

ABSTRACTThere are past and proposed tax law changes that contain provisions that affect financial reporting. These include calls for book-tax conformity, proposals to increase the links between financial accounting and taxable incomes, and actions by Congress that make direct alterations to U.S. GAAP. I submit that these tax law changes potentially threaten financial reporting quality. I discuss my concerns about why such provisions have not attracted attention from accountants to the extent they should and make a case for more awareness and more research going forward.

Does IFRS convergence improve earnings informativeness? An analysis from the book-tax tradeoff perspective

Exploiting the convergence of tax-based accounting standards to the judgement-based International Financial Reporting Standards (IFRS) as an information shock, this study examines whether the decrease in book-tax conformity improves earnings informativeness in China from the book-tax tradeoff perspective. Using A-share firms which experience this drastic regulatory change as the treatment firms and B-share firms which are not subject to such change as the benchmark firms, we find a significant decrease in the earnings informativeness for A-share firms but not B-share firms, and that the decrease is most pronounced for firms with strong financial reporting incentives. Additional analyses reveal that the decreases in earnings informativeness are due to financial reporting changes rather than changes in economic conditions. Our results shed light on the importance of considering underlying institutional factors in assessing the impact of changes in financial reporting on earnings quality.

Earnings Management around the Tax Cuts and Jobs Act of 2017

This paper examines earnings management around the reduction in the corporate tax rate from 35% to 21% as enacted by the Tax Cuts and Jobs Act (TCJA) of 2017. Building on a theoretical model that considers a higher level of book-tax conformity of ‘real earnings management’ (REM) relative to ‘accrual-based earnings management’ (AEM), we hypothesize that firms concertedly use these manipulation techniques for different purposes. Specifically, we predict and find that firms engage in REM to reduce income in the high-tax period prior to the TCJA. Our results suggest that the 851 firms of our sample save approximately $32 billion in taxes from REM shifting. We also predict and find that firms use AEM, which has a lower degree of book-tax conformity, to simultaneously increase book income. Consistent with intertemporal income shifting, we find that these effects reverse in 2018. Overall, our results document an unintended consequence of the TCJA on firm behavior that should be of interest to policymakers, regulators, and researchers as they evaluate the largest tax reform since 1986.