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Will a departure from tax-based accounting encourage tax noncompliance? Archival evidence from a transition economy

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  • Chan, K. Hung
  • Lin, Kenny Z.
  • Mo, Phyllis L.L.
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    Abstract

    We investigate whether a departure from a tax-based accounting system toward the adoption of International Financial Reporting Standards encourages tax noncompliance. We also examine whether such a departure, which weakens book-tax conformity, affects the informativeness of book-tax differences for tax noncompliance. Our evidence suggests that as book-tax conformity decreases, tax noncompliance increases. Although book-tax differences remain informative of tax noncompliance, the informativeness attenuates as book-tax conformity weakens. Additionally, firms with high incentives to inflate book income are more tax compliant than their counterparts after the departure from a tax-based accounting system.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Accounting and Economics.

    Volume (Year): 50 (2010)
    Issue (Month): 1 (May)
    Pages: 58-73

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    Handle: RePEc:eee:jaecon:v:50:y:2010:i:1:p:58-73

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    Web page: http://www.elsevier.com/locate/jae

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    Keywords: Book-tax differences IFRS Informativeness of book-tax differences Tax-based accounting system Tax noncompliance;

    References

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    1. Mihir Desai & Dhammika Dharmapala, . "Corporate Tax Avoidance and High Powered Incentives," American Law & Economics Association Annual Meetings 1006, American Law & Economics Association.
    2. Hanlon, Michelle & Maydew, Edward L. & Shevlin, Terry, 2008. "An unintended consequence of book-tax conformity: A loss of earnings informativeness," Journal of Accounting and Economics, Elsevier, vol. 46(2-3), pages 294-311, December.
    3. Mihir A Desai & Dhammika Dharmapala, 2009. "Corporate Tax Avoidance and Firm Value," The Review of Economics and Statistics, MIT Press, vol. 91(3), pages 537-546, August.
    4. Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, vol. 47(1), pages 153-61, January.
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    7. Murray, Matthew N., 1995. "Sales Tax Compliance and Audit Selection," National Tax Journal, National Tax Association, vol. 48(4), pages 515-30, December.
    8. Guenther, David A. & Maydew, Edward L. & Nutter, Sarah E., 1997. "Financial reporting, tax costs, and book-tax conformity," Journal of Accounting and Economics, Elsevier, vol. 23(3), pages 225-248, November.
    9. Michelle Hanlon & Terry Shevlin, 2005. "Book-Tax Conformity for Corporate Income: An Introduction to the Issues," NBER Chapters, in: Tax Policy and the Economy, Volume 19, pages 101-134 National Bureau of Economic Research, Inc.
    10. Mills, Lillian F., 1996. "Corporate Tax Compliance and Financial Reporting," National Tax Journal, National Tax Association, vol. 49(3), pages 421-33, September.
    11. Plesko, George & Mills, Lillian, 2003. "Bridging the Reporting Gap: A Proposal for More Informative Reconciling of Book and Tax Income," Working papers 4289-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    12. Mihir A. Desai, 2003. "The Divergence between Book Income and Tax Income," NBER Chapters, in: Tax Policy and the Economy, Volume 17, pages 169-208 National Bureau of Economic Research, Inc.
    13. Jason Zezhong Xiao & Pauline Weetman & Manli Sun, 2004. "Political Influence and Coexistence of a Uniform Accounting System and Accounting Standards: Recent Developments in China," Abacus, Accounting Foundation, University of Sydney, vol. 40(2), pages 193-218.
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