Document Type

Journal article

Source Publication

Journal of International Accounting Research

Publication Date

1-1-2013

Volume

12

Issue

2

First Page

1

Last Page

25

Keywords

book-tax conformity, financial reporting incentives, firm size, tax expense

Abstract

This study employs a natural experiment to examine the tax effects of a change in the level of conformity between tax and financial reporting in China for firms with different financial reporting incentives. We find that in a full book-tax conformity system, firms with incentives to report higher book income pay significantly higher income tax (per dollar of sales) than do firms without the same incentives. Although we do not find similar evidence in a non-conformed system, we observe cross-sectional variation in taxes paid by firms of varying sizes: by exploiting non-conforming financial reporting rules to a greater extent, large firms pay proportionately lower taxes than do small firms. To improve financial reporting quality, many countries have adopted International Financial Reporting Standards (IFRS) that may affect book-tax reporting differences. Our results suggest that this policy alternative is less desirable from a tax perspective. Therefore, accounting standard setters and securities regulators around the world should consider not only how such a change is intended to benefit capital markets, but also what unintended consequences this policy choice might have for government revenue. Our results also strengthen the government policy position on giving more tax relief to small firms.

DOI

10.2308/jiar-50404

Print ISSN

15426297

E-ISSN

15588025

Publisher Statement

Copyright © 2013 American Accounting Association

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Full-text Version

Accepted Author Manuscript

Recommended Citation

Chan, K. H., Lin, K. Z., & Tang, F. (2013). Tax effects of book-tax conformity, financial reporting incentives and firm size. Journal of International Accounting Research, 12(2) 1-25. doi: 10.2308/jiar-50404