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

Description

The International Financial Reporting Interpretation Committee (IFRIC) 23 stipulates firms to recognize and measure 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. Audit probability assumption and explicit guidelines are expected to limit firm’s discretion in avoiding their taxes. I examine the effect of IFRIC 23 on corporate tax avoidance and reported book pre-tax income across 80 countries. I also test whether the effect varies among avoider and non-avoider firms. Using difference in difference analysis, I find a weak negative effect of IFRIC 23 adoption on corporate tax avoidance. However, I document a significant higher reported book pre-tax profit in the post IFRIC 23 adoption. Moreover, avoider firms avoid less taxes relative to non-avoiders. In addition, firms from countries with voluntarily adopting IFRS, low tax complexity, high tax enforcement, and low audit rate increase the deterrent effect of IFRIC 23 adoption on corporate tax avoidance. Overall, the result suggests that accounting for income tax might have an unintended consequence in combating tax avoidance.

Period	6 Mar 2024 → 8 Mar 2024
Event title	VHB Jahrestagung 2024
Event type	Conference
Location	Lüneburg, GermanyShow on map
Degree of Recognition	International