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Article
Publication date: 8 February 2016

Mingjun Zhou

This study aims to use research setting provided by the implementation of Financial Accounting Standards Board Interpretation 48 (FIN48) to help develop a further…

1327

Abstract

Purpose

This study aims to use research setting provided by the implementation of Financial Accounting Standards Board Interpretation 48 (FIN48) to help develop a further understanding of large positive book–tax differences (LPBTD) and their relationship with earnings persistence. Extant literature indicates that the tax information provided in financial statements, such as large book–tax differences, is useful for detecting earnings management and signals less persistent future earnings. However, more information is needed about the causes of large book–tax differences and their abilities to signal the differences in earnings persistence (Blaylock et al., 2012).

Design/methodology/approach

In the first step, temporary book–tax differences are ranked by quintiles based on the approach in Hanlon’s (2005) study and the highest quintile in the sample observations are designated as large positive temporary book–tax differences (LPBTD). In the second step, differences in the persistence of earnings for high tax-planning firms as measured by UTB_NonETR are searched for. In further testing, an ordered logistic model and the Vuong (1989) test are applied to compare both the incremental and the relative ability of UTB_NonETR and Cash-ETR to explain the ranking order of temporary book–tax differences.

Findings

The negative relation between temporary differences and earnings persistence is moderated by the level of tax planning as measured by UTB_NonETRs. More specifically, the persistence of earnings appears to be higher for firm-years with large UTB_NonETRs. When comparing the relative power of UTB_NonETR with Cash-ETR, the results indicate that UTB_NonETR is incrementally useful for explaining the ranking orders of temporary book–tax differences. However, it appears that neither UTB_NonETR nor Cash-ETR is relatively more useful over another under the Vuong (1989) test.

Originality/value

First, the part of UTB, if recognized, that would not affect earnings (UTB_NonETR) is used as an empirical proxy and its usefulness is tested in the context of book–tax differences and the persistence of earnings. Second, new evidence is provided supporting the predictions, as in Ayers’ et al. (2010) and Blaylock et al.’s (2012) studies, that the level of tax planning will attenuate the negative association between large book–tax differences and earnings quality. Third, the findings can contribute to the post-implementation review of FIN48 (Financial Accounting Foundation, 2012) supporting the argument that FIN48 can provide decision-useful information for financial statement users.

Details

Review of Accounting and Finance, vol. 15 no. 1
Type: Research Article
ISSN: 1475-7702

Keywords

Article
Publication date: 30 August 2013

Der‐Fen Huang and Chao‐Lan Wang

The purpose of this paper is to investigate the relationship between book‐tax differences and earnings quality for commercial banks in Taiwan. The paper focuses on the…

1242

Abstract

Purpose

The purpose of this paper is to investigate the relationship between book‐tax differences and earnings quality for commercial banks in Taiwan. The paper focuses on the banking industry because industry‐specific accrual models of accounting discretion in the loan loss provisions are available to develop powerful tests of earnings management related to book‐tax differences. In addition, the paper replicates the analysis of book‐tax differences that previous studies conducted on a heterogeneous sample of nonfinancial firms, to ascertain whether prior inferences also hold in the study's sample of banks in an emerging economy.

Design/methodology/approach

This paper estimates the magnitude of discretionary loan loss provisions as a proxy for earnings quality (positively correlated with earnings management; therefore, inversely correlated with earnings quality). Then, the study partitions the sample into three subsamples (large positive book‐tax differences, large negative book‐tax differences, and small book‐tax differences) to set the regression models.

Findings

This paper finds that bank‐years with large positive or negative temporary book‐tax differences have discretionary loan loss provisions that are greater than bank‐years with small temporary book‐tax differences. The paper also finds that bank‐years with large temporary book‐tax differences have one‐year‐ahead persistence of current earnings and accruals that are less than those with small temporary book‐tax differences. Additionally, the study does not find a significant relation between permanent book‐tax differences and earnings quality. Overall, the evidence is consistent with the supposition that large temporary book‐tax differences are associated with lower earnings quality.

Research limitations/implications

The study contributes to the literature on book‐tax differences and earnings quality in two ways. First, the paper provides evidence to ascertain prior inferences that the association between book‐tax differences and earnings quality also hold in the banking industry, it may generalize to the banking sector in other emerging countries. Second, the study utilizes a banking‐specific accrual model to construct more powerful tests of information in book‐tax differences for earnings quality. The study has an inherent limitation arising from small sample size of the banking industry in an emerging economy. Future tax accounting researchers should develop appropriate country‐specific measures of book‐tax differences.

Originality/value

The study focuses on the banking industry because industry‐specific accrual models of accounting discretion in the loan loss provisions are available to develop powerful tests of earnings management related to book‐tax differences. In addition, the study replicates the analysis of book‐tax differences that previous studies conducted on a heterogeneous sample of nonfinancial firms, to ascertain whether prior inferences also hold in the sample of banks in an emerging economy.

Details

Pacific Accounting Review, vol. 25 no. 2
Type: Research Article
ISSN: 0114-0582

Keywords

Article
Publication date: 2 November 2015

Chunwei Xian, Fang Sun and Yinghong Zhang

This study aims to investigate the moderating effect of equity-based compensation on the sources of book-tax differences. The authors investigate whether equity-based…

1813

Abstract

Purpose

This study aims to investigate the moderating effect of equity-based compensation on the sources of book-tax differences. The authors investigate whether equity-based compensation affects the association between book-tax differences and tax planning, and the association between book-tax differences and earnings management.

Design/methodology/approach

The authors use a sample of 9,024 firm-year observations (913 firms) spanning the period 1992-2011, obtained from ExecuComp and Compustat. They estimate cross-sectional regressions of the proxy for tax planning, discretionary accruals and their interactions with equity-based compensation on book-tax differences.

Findings

The authors find that tax planning-related book-tax differences increase as the equity-based pay of executives does, and that earnings management-related book-tax differences decrease as the equity-based pay of executives increases. The results are robust across three alternative measures of tax planning.

Originality/value

Equity-based compensation plays an important role in managerial discretion on tax planning and earnings management. The findings suggest that, although equity incentives promote a high level of both tax planning and earnings management, they motivate managers to constrain the level of earnings management to avoid larger book-tax differences.

Details

Accounting Research Journal, vol. 28 no. 3
Type: Research Article
ISSN: 1030-9616

Keywords

Abstract

I reexamine the conflicting results in Frank, Lynch, and Rego (2009) and Lennox, Lisowsky, and Pittman (2013). Frank et al. (2009) conclude that firms can manage book income upward and taxable income downward in the same period, implying a positive relation between aggressive book and tax reporting. Lennox et al. (2013) conclude the relation is negative and aggressive book reporting informs users that aggressive tax reporting is less likely. I identify four key differences in the research designs across the two studies, including measures of aggressive book reporting, measures of aggressive tax reporting, sample time periods, and empirical models. I systematically examine whether each of these differences is responsible for the conflicting results by altering the key difference while holding other factors as constant as possible. I find the relation between aggressive book and tax reporting is driven by the measure of aggressive book reporting, as the relation is positive for some subsets of firms and negative for others. Firms accused of financial statement fraud have a negative relation while nonfraud firms exhibit a positive relation. Using discretionary accruals, I also look for, but do not find a “pivot point” in the relation between aggressive book and tax reporting. I provide a better understanding of the relation between aggressive book and tax reporting by identifying research design choices that are responsible for prior results. I show that measures of both discretionary accruals and financial statement fraud are necessary to gain a more complete picture of the relation between aggressive book and tax reporting.

Book part
Publication date: 29 November 2012

Silvio Hiroshi Nakao

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

Abstract

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

Details

Transparency and Governance in a Global World
Type: Book
ISBN: 978-1-78052-764-2

Keywords

Article
Publication date: 3 July 2017

António F. Martins

In transfer pricing (TP) methods, especially when based on margins, accounting indicators are of paramount relevance to assess the profitability of firms, and to compare…

Abstract

Purpose

In transfer pricing (TP) methods, especially when based on margins, accounting indicators are of paramount relevance to assess the profitability of firms, and to compare such indicators to samples of similar companies. The purpose of this paper, drawing on the legal research method, is to discuss the following questions: when using the transactional net margin, quite common in TP tax reporting, does the new (IFRS-based) Portuguese financial accounting system produce profit level indicators that are closer to the underlying reality that TP aims to capture, or are these profit level indicators of a lower quality than before?

Design/methodology/approach

The methodology used in the paper draws on legal research. The hermeneutical and evaluative approaches are used to answer the research question. The legal research method is often criticized by not making the empirical sciences’ type of generalizations, since many problems are, by nature, related to national legal systems and, therefore, proposed solutions are not valid outside a specific territory. However, given the nature of the accounting and tax issues identified and discussed in the paper the topic is relevant outside Portugal, given the widespread adoption of IFRS-based accounting systems and the multinational impact of TP principles’ and legislation.

Findings

The main conclusion is that the new accounting regime has a significant potential for increasing uncertainty and compliance costs in the area of TP, given the nature of operating income adopted in the new IFRS-based system. As such, taxpayers and tax authorities (TA) and tax courts will have to allocate more resources to an already complex and uncertain fiscal area. A careful analysis of non-recurrent items is now mandatory, given the increased flexibility and the amalgamation of recurring and non-recurring accounting items that can have a pernicious influence in TP tax compliance. The answer to the research question is that the new accounting system produces operating margins that, when used as profit level indicators in TP, are of lower quality.

Practical implications

Taking into account the aim of this study, the discussion of a Portuguese particular feature of corporate financial information and tax system can highlight useful policy points to a broader audience. Many OECD countries face a dire situation in budgetary terms. Therefore, given the pressure to increase tax receipts, TP issues can shed some light on solutions being applied in other countries, and enhance awareness of corporate tax policy points. Directive 2013/34/EU gives Member States some accounting flexibility (e.g. in the design of the income statement). Therefore, the authors would argue for a new design of the SNC’s income statement by the Portuguese legislators. The analysis also argues for a broader level of coordination and consultation between accounting standard setters and TA, in areas where a strong link exists between book and tax income.

Originality/value

The link between IFRS-based account systems and TP tax issues is not, to the best of the authors knowledge, a widely researched topic Thus, the paper adds value to the discussion related to book-tax relation in the specific area of transfer price profit level indicators. It finds a divergent path between the economic reality that TP tries to capture and a concept of operating margin that is affected by non-recurring and peripheral transactions.

Details

EuroMed Journal of Business, vol. 12 no. 2
Type: Research Article
ISSN: 1450-2194

Keywords

Book part
Publication date: 18 September 2017

Abstract

Details

Advances in Taxation
Type: Book
ISBN: 978-1-78714-524-5

Article
Publication date: 2 October 2017

Dirk Kiesewetter and Johannes Manthey

This paper aims to answer how corporate governance and corporate social responsibility (“CSR”) affect the relationship between value creation and tax avoidance. This study…

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Abstract

Purpose

This paper aims to answer how corporate governance and corporate social responsibility (“CSR”) affect the relationship between value creation and tax avoidance. This study further analyses the impact of the institutional environment, i.e. whether a country is rather a liberal or a coordinated market economy, on the relationship between CSR and tax avoidance.

Design/methodology/approach

The empirical analysis comprises a panel data set of 7,924 observations for the years from 2005 to 2014 for European companies. The relationship between value creation and tax avoidance is tested by grouping the sample in high and low CSR performers. Similarly, the impact of the type of market economy is analysed for the firms.

Findings

The research design does not find evidence that tax avoidance is creating value. The empirical findings reveal that there is a positive relationship between value creation and the effective tax rate for firms with low social and environmental characteristics. Further, this analysis could show that stronger corporate governance is associated with a lower effective tax rate in both coordinated and liberal market economies. The analysis identifies social strengths being associated with a higher effective tax rate for coordinated market economies.

Practical implications

It is proposed to encourage CSR disclosure. The creation of incentives for social strengths could increase tax revenue. Firms should reconsider whether the engagement in tax avoidance is worth it and pursue social responsibility to achieve higher value creation for their stakeholders.

Originality/value

The paper challenges the intuitive expectation that tax avoidance creates value. It is suggested that the governance and CSR culture, as well as the tax legislation in Europe, is different to the USA. Conclusively, tax avoidance is not generating value for the European sample.

Details

Corporate Governance: The International Journal of Business in Society, vol. 17 no. 5
Type: Research Article
ISSN: 1472-0701

Keywords

Article
Publication date: 7 September 2015

Robert Hogan and Jocelyn D. Evans

This paper aims to advance the literature by extending the empirical relation between a firm’s strategy and socially responsible value drivers (customer/employee relations

Abstract

Purpose

This paper aims to advance the literature by extending the empirical relation between a firm’s strategy and socially responsible value drivers (customer/employee relations) beyond firm performance to the impact on earnings persistence. Although existing research demonstrates that management’s effective implementation of a specific strategic orientation such as cost focus or product differentiation leads to better financial performance, no studies, to the authors’ knowledge, directly address the effect of strategic orientation on the persistence of earnings.

Design/methodology/approach

This paper utilized the evaluation of a firm’s focus on employee and customer relations through the rating provided by Kinder, Lydenberg and Domini. It uses linear regression analysis to identify statistically significant relations.

Findings

The findings demonstrate that simply focusing on socially responsible employee and customer relations alone does not result in higher earnings persistence. But rather, higher earnings persistence is associated with firms whose strategic orientation is aligned with the firm’s socially responsible value drivers. Additionally, we find that the capital market understands the importance of alignment between a firm’s strategy and its value drivers.

Research limitations/implications

The analysis was based on a large-scale sample, and the authors concede that as a consequence of this decision, the results are based on indirect assessments of the firm’s actions rather than direct feedback from the firm. However, the authors believe the large-scale, external assessment that they use increases the generalizability of the results.

Practical implications

The results provide guidance to management and boards of directors regarding the critical nature of disclosure regarding firm strategy and corporate social responsibility (CSR) as well as inform financial statement users as to useful relations beyond the actual reported accounting numbers.

Originality/value

Existing research has explored the relation between CSR and improved financial performance, but no studies, to our knowledge, examine the relation a firm’s strategy and value drivers (customer/employee relations) has on earnings persistence. Earnings persistence is worthy of study, as it captures the non-transitory nature of earnings, which is a useful attribute for both internal and external users of financial reporting.

Details

Sustainability Accounting, Management and Policy Journal, vol. 6 no. 3
Type: Research Article
ISSN: 2040-8021

Keywords

Article
Publication date: 1 September 2009

Rohaya, Noor, Nor’Azam Mastuki and Barjoyai Bardai

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…

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Abstract

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.

Details

Journal of Financial Reporting and Accounting, vol. 7 no. 2
Type: Research Article
ISSN: 1985-2517

Keywords

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