Accounting for Income Tax Uncertainty and Corporate Tax Avoidance: International Evidence

The International Financial Reporting Interpretation Committee (IFRIC) 23 stipulates that firms shall recognize, measure, and disclose uncertain tax treatments to increase transparency and comparability in reporting firms' tax position. Under this interpretation, firms must assume that tax authorities have full knowledge of the tax information reported in the financial statements. I examine the effect of IFRIC 23 on corporate tax avoidance across 79 Countries. While audit probability assumption and explicit guidelines are expected to limit firm's discretion in avoiding their taxes, I find limited evidence that affected firms reduce tax avoidance after IFRIC 23 adoption. However, I document that affected firms increase reported income by 13.7% after IFRIC 23 adoption than non-affected firms. In addition, affected firms with high initial levels of tax avoidance, domestic firms, firms in high tax enforcement jurisdictions, and firms in OECD countries avoid less taxes in the post-IFRIC 23 adoption. Overall, the results provide insights whether tax disclosure requirements can be an important tool in deterring tax aggressiveness.