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The purpose of this paper is to discuss the causes that justify the application of presumptions in corporate income taxation. The authors focus on motives showing a connection to errors or fraud in the recognition of operations by the financial accounting system. The research question can be framed as follows: How to define the frontier between reliable accounting records and unreliable information, the latter rendering presumptions as an admissible way of taxing income?

The research design of this paper rests on two analytical steps based on the legal research method. The first step enquires, at the accounting level, how to define and quantify errors that render accounting statements inappropriate to assess firms’ performance and compute taxable income. The second step explores the practical application of presumptive tax concepts by Portuguese courts, to offer some criteria that can function as guidelines to firms and tax auditors.

The judgment about the boundaries of accounting errors that allow the use of presumption-based taxation is often decided by litigation. Portuguese jurisprudence provides strong evidence that presumptions should only be applied if, even by correcting of errors and inaccuracies, corporate real income cannot be obtained. The level of contamination must be obvious, and tax audits must present a strong and documented claim that presumptions are a last-resort mechanism to compute an appropriate tax base. The Supreme Tax Court has been applying a consistent approach characterized by: presumptive taxation is a last-resort mechanism; tax audits must prove that a generalized contamination of accounting data is observed; it is not possible to correct accounting errors, given their extension and depth, and the taxpayer did not submit contradictory solid evidence.

Applying, in practice, legal criteria to decide that accounting manipulation is so extensive that taxation must be based on presumptions is fraught with subjectivism. However, we offer an analysis where some guidelines to this complex issue are presented in a logical way. Principles-based taxation can, nonetheless, be applied with a significant degree of fairness and consistency.

The paper contributes to the literature by offering an analysis of the criteria used by Portuguese tax courts when deciding that accounting data can be disregarded and presumptions used as a tax computation tool. Given that the rule, in many countries, is to base taxable income on accounting records (albeit with adjustments established in Corporate Income Tax Codes), presumptions are a notable exception to this well-established rule. As such, taxpayers have a significant interest in knowing how courts rule on tax authorities’ use of presumptions. In this light, the paper has also potential value to professionals in the accounting and tax fields. They are often confronted with tax audits that apply presumptions. Therefore, knowing jurisprudential trends in the judgment of such, usually complex, cases is an important issue.

This study investigates the gap between financial accounting income and taxable income (i.e. book‐tax difference) and the value relevance of corporate taxable income in providing information on the quality of reported earnings for Malaysian listed firms during the tax years 2000 to 2004. The large gap between the financial accounting income and taxable income resulting from tax planning activities is reflected in firms’ effective tax rates (ETRs), a proxy for firms’ actual tax burdens. Thus, lower ETRs indicate high tax planning activities undertaken by the sample firms, and vice‐versa for firms with higher ETRs. This study uses a tax‐based earnings quality indicator, that is, the ratio of after‐tax taxable income to reported income (ATTI) to investigate the quality of corporate earnings. The study provides empirical evidence that firms report higher financial accounting income to shareholders and lower taxable income to tax authorities during the years 2000 to 2004. The significant and positive relation statistical results between firms’ after‐tax taxable income (ATTI) and market value of equity provided indicate the value relevance of taxable income as both an earnings quality indicator and a performance measure. Thus, the empirical results suggest investors appear to fully comprehend the quality‐related information in taxable income. This study concludes that first, tax planning activities contribute to a large gap between financial accounting income and taxable income; and second, taxable income contains useful information on the quality of reported earnings.

The purpose of this chapter is to discuss the relation between tax reporting and financial reporting, their influence on transparency, and empirical implications.

The relationship between accounting and fiscal rules has long been controversial. Financial statements conform to accounting principles and methods regardless of tax rules. This independence generates important permanent and temporary differences between accounting and taxable income. The paper analyses the behaviour of listed Spanish firms in this accounting‐taxation relationship 1996‐1998, the extent of introduction of the inter‐period income tax allocation method, and the number and types of permanent and temporary differences reported. Most firms adopt the income tax allocation method, and report the differences, although they do not always specify which transactions provoked them. Among the long list of operations that generate differences, the most frequent are income tax expense, welfare schemes, provision for pensions, monetary correction, accelerated depreciation, or exemption for reinvestment. Although the number and kind of differences vary through time, the variation is not statistically significant. This is the first study analysing such differences for a European Union state.

This study examines the use of linear regressions that include interaction terms, finding frequent interpretation errors in published accounting research. We provide insights on how to estimate, interpret, and present interactive regression models, and explain seldom-used but easily-implemented methods to report conditional marginal effects. We also examine the use of interaction terms in tax and financial reporting trade-off studies, evaluating the conceptual fit between a regression model with interactions and alternative definitions of trade-off. Although we advocate the use of interactive models, noise levels common in accounting research greatly reduce the ability to detect interaction effects.

Purpose: Development of an approach, methods to the internal audit of tax differences, analysis of the peculiarities of the application of internal audit procedures of tax differences and their reflection in the software in Ukraine.

Need for the Study: One of the most important general economic and accounting problems both in practical and scientific terms is the problem of determining the financial results of the enterprise, the methodology of its calculation and methods of taxation.

Questions of consistency of indicators of tax and financial accounting arise constantly as the results revealed according to tax accounting data, considerably deviate from real financial results of activity of the enterprise according to financial accounting data. This leads to tax differences. Moreover, significant deviations can be both in one direction and in the other. These indicators are important for study and analysis.

Methodology: The method of a systematic approach was used to reveal the content of tax differences and build the methodology of internal audit. Selective research, grouping, generalisation are used to study the state of the methodology and organisation of accounting for tax differences and their internal audit.

Findings: The study of the organisation and methods of internal audit allowed the authors to develop their methods of internal audit of tax differences. The chapter highlights such elements of internal audit as sources of information, audit directions, objects of audit and possible typical errors that may be identified during the internal audit. Sources of information for internal audit of tax differences are divided into groups: primary documents, accounting records, reporting and legislation. The authors systematised tax differences and analysed their impact on the pre-tax financial result. Possible errors in accounting for tax differences and ways to correct them are considered. The authors present options for displaying tax differences in software products used in Ukraine.

Practical Implications: This chapter examines the key components of the methodology of auditing the financial statements of the enterprise in terms of indicators of tax differences, the use of which ensures the reliability of reporting, avoids penalties from the tax authorities and ensures the prospects for the organisation. The possibility of digitalisation of accounting for tax differences on the example of software that is popular in Ukraine is considered. The pre-tax financial result is a consolidated, aggregate indicator that is determined by comparing income and expenses from different activities recognised per accounting rules and in most cases cannot be used to calculate income tax without appropriate adjustments.

An intractable effect of revenue and expense recognition based on tax regulation and accounting rules is unresolved and may be manageable only by reducing the value of deferred taxes. Therefore, in this study, the authors examined the relationship between the International Accounting Standard 12 (IAS 12) and deferred income taxes associated with tax and accounting rules.

The authors used a large sample of balanced data from 144 firms across 1992–2019. To mitigate the problem of superfluous results, the authors used the same number of firms and years for pre- and post-IAS 12 periods. The authors employed robust econometric estimations to establish the impact of IAS 12 on deferred tax.

The regression results show that deferred tax assets decreased significantly, whereas deferred tax liabilities increased significantly, in the post-IAS 12 period. These contrasting results imply that IAS 12 implementation has increased conservatism and prudence in financial reporting. However, the authors find that the increase in deferred tax assets post-IAS 12 is value destructive, suggesting that its implementation has unintended consequences. The results are robust to alternative measurements and econometric identification strategies.

While prior studies have explored topics such as deferred tax measurement and the impact of income and expense recognition, the authors specifically analyzed how IAS 12 affects deferred taxes and their effect on the market valuation. The authors find that certain accounting standards may not be relevant to the capital market.

Almost all estate agencies that are involved in residential property sales recognise the commission income from a sale when the commission concerned is actually received. This practice is at variance with generally accepted accounting practice, which requires recognition of income to occur on the signing of the agreement or when the sales contract becomes firm (i.e. unconditional). The South African Revenue Services (SARS) has required the few estate agencies that apply generally accepted accounting practice in their financial statements to align their income tax accounting with their financial accounting. This alignment results in tax being paid on the commission that is due from the sale of properties that have not yet been transferred. This paper debates the issue of the recognition of income. It provides suggestions for the improvement of disclosure in estate agencies’ financial statements. Furthermore, it suggests changes to estate agencies’ standard sales contracts to the effect that income is deemed to have been earned upon the registration of the transfer of a property.

The purpose of this chapter is to serve as a resource for accounting faculty seeking tax-related cases to include in their courses. This annotated bibliography provides a table and discussion of 50 educational tax cases published in six major accounting journals from 2003 to 2021. Cases are classified and discussed by recommended course placement. In addition, the authors make observations about trends in case content and format. This chapter complements the Fogarty (2022) review and commentary on tax cases published in this volume.