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Tax waiver year effect on earnings management practices in Malaysia

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  • Jafni Hashim
  • Mohd Nizal Haniff
  • Ibrahim Kamal Abdul Rahman
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    Abstract

    Purpose – The purpose of this paper is to address the question of whether Malaysian public listed companies manage their earnings in response to changes in tax polices. The context of this study is the tax waiver year of 1999 which came about from the introduction of the Self Assessment System (SAS) by the Inland Revenue Board of Malaysia (IRBM) in the year 2000. If companies are to minimize tax liabilities, then the tax waiver year of 1999 may provide a substantial incentive for these companies to manage earnings in 1999. Design/methodology/approach – The modified Jones Model (adjusted) is used to obtain the discretionary current accruals which represent earnings management. It is hypothesized that there is a significant positive discretionary current accrual (income increasing earnings management) in the tax waiver year of 1999. Findings – The results indicate that that there is a negative relationship between earnings management and the effect of the tax waiver year of 1999. These results suggest that the magnitude of discretionary current accrual is not related to the tax waiver year in a way that is consistent with tax-motivated income shifting behavior. Instead companies tend to manipulate earnings downwards during severe economic downturn. This is in line with Healy's bonus maximization hypothesis. Research limitations/implications – The test sample is limited to public listed companies only and some companies are excluded due to insufficient data. Therefore, the results cannot be a representation of Malaysian companies' practices. Originality/value – The findings of this paper contribute to the sparse literature on tax-induced earnings management practices in Malaysia. The findings could be of value to the IRBM in designing and improving on the plans for future tax-based incentive schemes.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Journal of Financial Reporting and Accounting.

    Volume (Year): 10 (2012)
    Issue (Month): 2 ()
    Pages: 171-189

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    Handle: RePEc:eme:jfrapp:v:10:y:2012:i:2:p:171-189

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    Related research

    Keywords: Discretionary current accruals; Earnings management; Economic downturn; Malaysia; Non-discretionary accruals; Organizational earnings; Public companies; Tax self assessment system; Tax waiver year; Taxation;

    References

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    1. Norashikin Ismail & Pauline Weetman, 2007. "Forecast accuracy in initial public offerings and the impact of external constraints relative to managerial choice: a research note," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 47(3), pages 513-525.
    2. James R. Hines, Jr. & Eric M. Rice, 1990. "Fiscal Paradise: Foreign Tax Havens and American Business," NBER Working Papers 3477, National Bureau of Economic Research, Inc.
    3. Bartelsman, Eric J & Beetsma, Roel, 2000. "Why Pay More? Corporate Tax Avoidance Through Transfer Pricing in OECD Countries," CEPR Discussion Papers 2543, C.E.P.R. Discussion Papers.
    4. Collins, Julie H. & Shackelford, Douglas A., 1997. "Global organizations and taxes: An analysis of the dividend, interest, royalty, and management fee payments between U.S. multinationals' foreign affiliates," Journal of Accounting and Economics, Elsevier, vol. 24(2), pages 151-173, December.
    5. Healy, Paul M., 1985. "The effect of bonus schemes on accounting decisions," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 85-107, April.
    6. Grubert, Harry & Mutti, John, 1991. "Taxes, Tariffs and Transfer Pricing in Multinational Corporate Decision Making," The Review of Economics and Statistics, MIT Press, vol. 73(2), pages 285-93, May.
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