Tax Conformity Research Articles

Do Indonesia Tax Rules Support Or Hinder Sme’s Tax Conformity?

This study aims to determine the effect of tax knowledge, tax awareness, and tax sanctions on tax compliance in the SME sector in Cirebon City, Indonesia. The population of this study was 2,426 SMEs in Cirebon City, and a sample of 343 was used for analysis, with purposive random sampling employed. This study employs a quantitative approach with SPSS. For testing the analyses employed, this study utilizes a quantitative approach. The findings indicate that tax compliance is significantly influenced by tax knowledge, tax awareness, and tax enforcement among SME actors.

The Influence of Tax Incentives and Financial Conditions on Tax Compliance Registered at KPP Pratama Tabanan

The tax industry is a substantial source of state revenue. The enhancement of tax compliance is a pivotal determinant in boosting the tax sector's revenue, thereby prompting the government, by means of its Directorate General of Taxes (DGT), to persist in its efforts to improve tax compliance. The present research endeavors to ascertain the impact of tax incentives and financial conditions on tax compliance. The present study was executed on individuals who have enrolled as taxpayers and are currently registered under the administration of the KPP Pratama Tabanan. The methodology employed for gathering data encompassed the utilization of questionnaires, documentation, and observation techniques. The analytical methodology utilized in this study adopts a multifaceted approach involving the employment of multiple linear regression analysis. This commences with the evaluation of the research instrument and the application of classical assumption testing. The findings indicate that tax incentives and financial circumstances exerted a favorable and noteworthy influence on tax conformity among taxpayers who had registered with KPP Pratama Tabanan

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.

ANALISIS KEBIJAKAN COMPLIANCE RISK MANAGEMENT BERBASIS MACHINE LEARNING PADA DIREKTORAT JENDERAL PAJAK

Implementation of tax self-assessment system gives full trust to taxpayers to calculate, pay, and report their tax themselves. To get the optimum result, the implementation of this system is determined by the level of compliance of the taxpayers. It is affected by internal and external factors such as technology, resources, legislation where the tax authority operating, organization’s aim and strategy, and public general tax conformity. This study aim to analyze taxpayer conformity level with machine based Compliance Risk Management (CRM) policy. This study is using qualitative approach through interview with people who have roles in implementing tax policy in Indonesia. This study founds the importance of machine learning based CRM policy, in which the tax authority cannot apply the same treatment to all taxpayers, so it needs to decide which taxpayer needs to be investigated with rational justification based on risk level. Tax authority needs to focus on implementing big data analytics with machine learning algorithm as an important source of information in decision making process, and helps predict taxpayers with potential fraud, so it can be used to reduce task risk before it happens.

State Individual Income Tax Conformity in Practice: Evidence from the Tax Cuts & Jobs Act

Nearly every state incorporates the federal tax code into its individual income tax system. This widespread incorporation has many supporters and has been justified on the basis that it is necessary in order for states to have a simple and efficient tax system. This article explores the practical effects and dynamics of state tax conformity through a novel examination of how states that tightly conformed to the federal individual income tax responded to the recently enacted Tax Cuts and Jobs Act which, for these states, would have both raised state taxes and changed the distribution of state tax burdens. The study reinforces concerns raised in both the theoretical and economic literature regarding conformity’s enhancement of revenue volatility and likelihood of distorting state legislative decision-making, while adding several new observations of conformity’s impact. The study illustrates that conformity imposes significant time constraints on state legislatures, conformity causes not only revenue shocks, but tax policy shocks, and even where state revenue is kept constant following a federal change, conformity may cause relative state tax burdens to change. Based on these findings, the article concludes by offering suggestions for how states can move past the idea that extensive conformity with the federal tax code is required and instead design an individual income tax system that is simple, efficient, and enhances a citizen’s relationship to the state.

Taxing Corporations on Financial Statement Earnings: Current Proposals, Long-Standing Concerns

Book-tax differences have existed for as long as the corporate income tax. And for almost as long, there have been regular efforts to introduce greater conformity between the two. Over the past four decades, proposals to substitute (in whole or in part) a tax base that relies on profit as reported in financial statements for the legislatively enacted corporate tax base have been regularly introduced. These proposals are generally based on the assumption that taxing book income provides a simpler, fairer and more efficient way to tax corporate income. The proposals also assume that taxing book income permits less opportunity for corporate tax avoidance. Such efforts for parity between book and tax income – also referred to as book-tax conformity – have regularly failed to gain traction. Nonetheless, the idea is again rearing its head both in the international and domestic spheres. In the international arena, two proposals introduced by the OECD for taxing the digitalized economy relied to a greater or lesser extent on a tax base computed from multinationals’ consolidated financial accounts economy (OECD 2019a,b). Domestically, at least three leading Democratic presidential candidates for the 2020 election proposed a minimum tax on corporate profits as computed from financial statements, including former Vice President Joe Biden. The resurgence of interest in the use of financial statement profits as an alternative tax base prompts a reexamination of the history of similar prior proposals, the critiques levied against them, and the reasons for their lack of success. Careful consideration of the problems highlighted by those who have earlier delved into the subject is due, in order to determine whether its possible to address concerns previously raised before moving forward with a plan to tax multinationals based on financial statement profits. Or reconsideration of these concerns may make clear that the detriments outweigh the perceived benefits of these proposals. Part I of this paper outlines the history of prior proposals for book tax conformity. Part II reviews more recent proposals for taxing multinationals based on financial statement profits both domestically and internationally. Part III highlights concerns that have been raised, both about older and more recent proposals. Part IV concludes with a consideration of the extent to which concerns raised in other contexts remain valid for proposals made in 2019, and whether it may be possible to modify these proposals to adequately address the problems.

A LEI ESTADUAL NO 1.320/2018 E O PROCEDIMENTO DE LANÇAMENTO TRIBUTÁRIO

The complementary state law n. 1.320 / 2018 added in the scope of the State of São Paulo the Program of Encouragement to Tax Conformity. This law defines principles of relationship between taxpayers and the State of São Paulo, establishing rules of tax compliance. In this context, the purpose of this article is to verify whether or not this law belongs to the the administrative procedure for tax registration. The method applied was the legal deductive, from the analysis of national legislation and articles. It was verified that the launch procedure in its definition does not belong to the law of conformity. However, taking into account a systematic interpretation, it is possible to say that the law of conformity has its merits and can coexist in harmony with the launch procedure for tax registration

Mandatory Book Tax Conformity and Its Effects on Strategic Reporting and Auditing

This paper studies how mandating higher book-tax conformity influences a manager's strategy to misreport financial and taxable incomes in the presence of a financial auditor and subsequently a tax auditor. The main result is that allowing for some differences between GAAP and tax laws minimizes misreporting. The paper provides an explanation for why empirical research concerning how book-tax conformity affects misreporting finds mixed results: mandating higher book-tax conformity is a double-edged sword. It enables financial audits to resolve uncertainty about the source of a book-tax difference with higher precision. This reduces misreporting by complementing the deterrence effect of a subsequent tax audit. Contrarily, precluding all book-tax differences minimizes the probability of utilizing this precision effect and fosters misreporting because a manager optimally misreports both incomes to maintain conformity and avoid audit scrutiny. The paper provides further empirical predictions that depend on the relative strength of a manager's book-tax reporting incentives.

A potential benefit of increasing book–tax conformity: evidence from the reduction in audit fees

Our study explores a possible benefit of conforming book income to taxable income. We expect that increased book–tax conformity can reduce audit fees by simplifying tax accruals and increasing tax authorities’ monitoring, which reduce audit workload and audit risk, respectively. Consistent with our expectations, we find that a higher country level of required book–tax conformity leads to lower audit fees. Moreover, firm-level book–tax differences are positively associated with audit fees. We also find that the negative association between country level of required book–tax conformity and audit fees is mitigated among firms with larger book–tax differences. Our findings are robust to including country-level legal investor protection or other extra-legal institutions. Overall, our results suggest that one benefit of increasing book–tax conformity is the reduction in audit fees.

Income smoothing and book tax conformity: some evidence on Paris stock exchange companies

This paper investigates whether book tax conformity and tax planning are linked to firms' income smoothing. We attempt to explore taxation policy in the French context and we tend to associate it with income smoothing. This study is performed using a large sample of French listed companies. Empirical results show that French companies have high value of book-tax conformity, which affects negatively income smoothing practices.

Possibilities for and limits to enforcing tax compliance measures on ‘irregular’ workers

This article is a contribution to ongoing studies of tax compliance by Australian taxi-cab operators and their drivers. The limits of the dominant academic literature and the industry-specific legislation on tax conformity will be assessed. The article’s core premise is that social and economic activities (legal and illicit) of cab drivers are embedded within unique networks of social relations. Cab drivers are subjected to a multitude of structural arrangements and informal social control mechanisms, which influence their attitudes and actions with regard to tax compliance. Regulatory initiatives towards diminishing non-compliance in the Australian taxi-cab industry continue to ignore the concept of mixed embeddedness and the interrelatedness between compliance rules, enforcement practices and broader legislative framework. It will be argued that changes to the employment status of Australian taxi drivers can produce a more expedient way for curtailing the deeply entrenched tax non-compliant modus operandi within this particular sector of Australia’s transport-services industry.

Effects of IFRS Adoption on Tax-induced Incentives for Financial Earnings Management: Evidence from Greece

We investigate whether the adoption of International Financial Reporting Standards (IFRS) in Greece affected tax-induced incentives for financial earnings management. Prior to the implementation of IFRS, there were powerful incentives for firms facing higher tax pressure to restrict (exacerbate) upward (downward) financial earnings management due to direct tax implications. IFRS adoption reduced book–tax conformity, thereby releasing financial income from tax implications. As expected, we find that tax pressure is a significant negative determinant of discretionary accruals in the pre-IFRS period. However, this effect dissipates under the new IFRS regime.

Riscos de Conformidade Tributária: Um estudo de caso no estado de São Paulo

This research provides an empirical investigation about factors that affect the risks related to tax conformity. To obtain data in depth in order to achieve the objective of the present research, it was used a case study of an industry that has implemented a management of tax risks concerning ICMS of Sao Paulo state - Brazil, which didn’t exist until then. Using the methodology suggested by COSO for risk management, its components as well as the risks and factors that trigger them and the activities of control and response to tax risks that impact on the tax compliance costs were identified. Quantitative and qualitative methodologies of risk measurement were evaluated and strengths and weaknesses were found in both methodologies. It was observed that the perception of the company on the tax risks has no complete adherence with the quantitative evaluation. The human resources were identified as being the most relevant risk factor within the environment of the investigated company. It was also found that while establishing the control activities and response to tax risks, the company incurs in an increasing of tax compliance costs, but this impact is mitigated by the reduction of the exposure of tax risks.

Tax conformity of earnings and the pricing of accruals

The primary purpose of this study is to investigate whether the market prices discretionary and non-discretionary tax accruals. Previous studies have examined the persistence of total accruals (Sloan in Account Rev 71(3):289–315, 1996) and the persistence of discretionary and non-discretionary components of total accruals (Xie in Account Rev 76(3):357–373, 2001). These studies do not investigate the tax components of accruals. We argue that tax accruals are mispriced more than book accruals because of the complexity of tax accruals in assessing future earnings. We use a sample of 6,397 firms and the Mishkin model to investigate whether the market overvalues tax accruals more than book accruals. Descriptive statistics show that firms are increasingly using more income decreasing tax accruals than income-increasing book accruals contributing to the growing divergence between tax and book earnings. Results from the Mishkin test show that the overpricing of tax accruals is more severe than that for book accruals. Finally, hedge portfolio tests show that investors can earn excess returns using a hedging strategy based on tax accruals. Interestingly, excess returns based on a hedging strategy using book accruals almost disappear.

The Effect of the Mandatory Application of IFRS on the Value Relevance of Accounting Data: Some Evidence from Greece

In this study we tested the effect of the mandatory adoption of IFRS upon the value relevance of earnings and book values using data from the Athens Stock Exchange that covered a period of two years before and two years after the mandatory adoption of IFRS. Greece is a code-law country with strong tax conformity, bank orientation and conservative accounting rules which have a negative effect on the value relevance of financial statements. As IFRS adoption promotes fair value accounting and weakens the link between taxation and accounting rules we expect earnings and book value to become more value relevant ceteris paribus. We report that the adoption of IFRS positively affected the value relevance of consolidated net income and book value although it had no effect on their unconsolidated counterparts and that consolidated accounting numbers are by far more value relevant than unconsolidated ones in both periods and, unexpectedly, this superiority is more pronounced after IFRS adoption. We also report that disaggregating net income increases the explanatory power of the earnings – book value capitalization (EBVC) model. Finally, we report that although the overall explanatory power of the model increases, the incremental explanatory power of both net income and financial income decreases. These last findings question the expected benefits of specific IFRS rules concerning the measurement of these income components. Nevertheless, assuming that the total impact of IFRS adoption is captured by the overall explanatory power of the models which actually increased, we conclude that mandating IFRS may prove beneficial even in an unfavorable context.

Book-Tax Conformity of Earnings and the Pricing of Accruals

We examine managerial incentives underlying book accruals and tax accruals affecting stock prices. Due to the differential incentives underlying tax and financial reporting systems differences between book and tax earnings are likely to exist despite the requirements of tax conformity. It is widely argued in the literature that tax conformity will likely reduce opportunistic behavior. However, recent findings of Hanlon et al. (2006) indicate that tax conformity leads to tax-induced conservatism which in turn reduces the information content of earnings. Hanlon (2005) demonstrates the association between tax differences and the persistence of earnings. We decompose total accruals into discretionary tax accruals and non-discretionary tax accruals, discretionary book accruals and non-discretionary book accruals to examine how the market prices book versus tax accruals. As predicted, the evidence shows that during the period of 1986-2001 firms had increased the use of income decreasing discretionary tax accruals in an effort to reduce their tax liability. In contrast with prior studies, a test of equality of multivariate regression coefficients reveals that the persistence of the nondiscretionary book accruals is not significantly different than the cash flow component of earnings. This implies that by taking into account the tax incentives embedded in tax accruals provides a more transparent measure of book accruals that better reflects changes in earnings and firm value. The market's inability to correctly assess the persistence of accruals is more severe for tax accruals than for book accruals. In addition, a trading strategy of portfolios with high levels of discretionary tax accruals yields positive size-adjusted abnormal returns. These results suggest that the market has difficulty interpreting tax accruals either because of lack of sufficient disclosure regarding these accruals or lack of understanding of their tax consequences.

An international comparison of income statement and balance sheet information: Germany, Japan and the US

As accounting regulators develop international standards, it is helpful for them to understand the use of financial statements by investors in different countries. In this study we compare the value relevance of earnings relative to book value of equity in Germany, Japan and the US owing to the size of their capital markets and differences in accounting systems and institutional structures. Accounting in Germany and Japan is conservative, creditor-oriented and tax-based, with institutional structures that rely on bank financing and close relationships between capital providers and investee firms, while the US is used as a basis for comparison. This study hypothesizes that book values are more value relevant than earnings in Germany and Japan while earnings are more value relevant in the US, because capital providers in Germany and Japan are more concerned with balance sheet measures such as liquidity. Also, accounting characteristics such as conservatism and tax conformity may lead to greater value relevance of the balance sheet compared to the income statement in those countries. Our results provide evidence that book value of equity is more value-relevant than earnings, particularly in Germany, with mixed results for Japan. In the US, positive earnings are more value relevant than book value of equity, but not negative earnings. In summary, we provide evidence concerning the relative value relevance of summary measures of the balance sheet versus the income statement. Standard-setters can then look at potential causes for these differences and determine if proposed accounting standards will have a desired outcome.

The association between financial accounting measures and real economic activity: a multinational study

We investigate how cross-country differences in financial accounting standards affect the relation between financial accounting earnings and real economic value-relevant events that underlie those earnings. Based on previous research and economic theory we hypothesize that, because of differences in legal systems and the demand for accounting information, differences in legal protection for external shareholders, and differences in the degree of tax conformity in our sample countries, accounting earnings in the UK and the US will be more closely related to underlying economic activity than will accounting earnings in France and Germany. Empirical results are generally consistent with our hypothesis.