Effects of IFRS adoption on tax avoidance

Abstract

This study investigates the association between mandatory International Financial Reporting Standards (IFRS) adoption and corporate tax avoidance. In this study, tax avoidance is defined as a reduction in the effective corporate income tax rate through tax planning activities, whether these are legal, questionable, or even illegal. Three measures of tax avoidance are used and factors at the country and firm level (that have already been associated with tax avoidance in prior research) are controlled. Using samples that range from 9,389 to 15,423 publicly-traded companies from 35 countries, covering 1999 to 2014, it is found that IFRS adoption is associated with higher levels of corporate tax avoidance, even when the level of book-tax conformity required in the countries and the volume of accruals are controlled, both of which are considered potential determinants of this relationship. Furthermore, the results suggest that after IFRS adoption, firms in higher booktax conformity environments engage more in tax avoidance than firms in lower book-tax conformity environments. It is also identified that engagement in tax avoidance after IFRS adoption derives not only from accruals management, but also from practices that do not involve accruals. The main conclusion is that companies engage more in tax avoidance after mandatory IFRS adoption.

CEO narcissism and corporate tax avoidance,

“…TA is defined as total corporate tax avoided in relation to the amount computed at the home-country statutory corporate tax rate divided by pre-tax income before special items (Atwood et al, 2012;Braga, 2017). Equation 1 (Atwood et al, 2012) was used to calculate TA1:…”

“…The current tax paid (CTP) is the current tax expense (TXC) minus the variation in income tax payable (TXP). In the absence of data on current tax expenses (TXC), we used the total tax expenses minus the deferred tax expenses (TXT minus TXDI), following the example of Braga (2017).…”

“…In addition to the metric proposed by Atwood et al (2012), we employed two metrics developed by Tang (2015) and tested by Braga (2017). Tang (2015) defines TA as the difference between the home-country statutory corporate tax rate and the effective tax rate levied on earnings.…”

The Effect of Ifrs Adoption and Law Enforcement on Book Tax Aggressiveness: Evidence From Asean Countries

“…Besides its effect on financial reporting aggressiveness, IFRS adoption also arguably affects tax reporting aggressiveness because tax reporting aggressiveness is closely related to accounting standards (Hanlon and Slemrod 2009, Braga 2017, Huang et al 2018. After the IFRS adoption, the principles to prepare financial statements for commercial and fiscal purposes tend to be increasingly different.…”

“…We contribute to the literature by at least (1) expanding studies on the effect of IFRS on book-tax aggressiveness as a combination of financial reporting aggressiveness and tax reporting aggressiveness. Previous studies largely focus on the impact of IFRS on financial reporting aggressiveness (Ball 2006, JeanJean and Stolowy 2008, Christensen et al 2013 or tax reporting aggressiveness (Desai 2005, Atwood et al 2012, Chan et al 2013, Tang 2015, Braga 2017 without combining these two issues. (2) using longer observation periods (2000)(2001)(2002)(2003)(2004)(2005)(2006)(2007)(2008)(2009)(2010)(2011)(2012)(2013)(2014)(2015)(2016)(2017) and data from various developing countries that belong to the Association of Southeast Asian Nations (ASEAN) that enables us to analyze the varied effects of IFRS adoption in several countries through the law enforcement variable that has not been investigated before.…”