Purpose 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? Design/methodology/approach 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. Findings 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. Practical implications 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. Originality/value 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.
Tax morale has been recognized as the key to understand the levels of compliance achieved in most countries. We applied a structural equation model (SEM) to gain a better understanding about the factors shaping tax morale of Portuguese taxpayer's. Our purpose was to analyse through SEM the direct effects of political democratic system, political participation, religiosity, individual satisfaction, trust in others and institutional trust on tax morale. SEM of tax morale allowed us to analyse the impact of demographic variables and risk aversion as determinants of tax morale through the use of multi-group analysis of structural invariance of SME developed. A sample of 1,553 Portuguese individual's representative of Portuguese population obtained from European Values Study (EVS, 2010) was used. The results confirmed that Portuguese taxpayers´ tax morale is influenced by taxpayers trust on institutions like government, parliament and the judicial system, by political participation and by the belief that democracy is a good political system for governing the country. Tax morale is also influenced by individual´s satisfaction, by religiosity and by societal behaviour (trust in others).
The progressive harmonization of corporate financial information, based on the International Financial Reporting Standards, has moved fair value accounting (FVA) to the forefront of a debate that straddles accounting and corporate tax. Given the subjectivism that FVA may exhibit, especially when mark to market is not available and mark to model is used as in level 3 FVA, tax legislators have strongly restricted its impact on the corporate tax base. This paper argues that while the Portuguese corporate tax legislators explicitly followed this worldwide trend of restricting the tax impact of fair value to certain circumstances when market prices are observable (level 1 FVA), the corporate tax code has, nonetheless, several important avenues through which FVA influences taxable income determination. The main purpose of this paper is to present and discuss some important ways through which FVA may influence taxable income determination in Portugal, such as goodwill, impairment charges, transfer pricing, capital gains and exit taxation. Thus, the question emerges: is FVA returning through the window to impact the corporate tax base? Considering the global trends in public finance, and the need for present and future tax revenues, we believe this is an important topic to be addressed.
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