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Book–Tax Conformity: Implications for Multinational Firms

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  • Hanlon, Michelle
  • Maydew, Edward L.

Abstract

This paper examines the implications for multinational firms of recent proposals to conform tax and financial reporting (i.e., book–tax conformity). Proponents of book–tax conformity argue that the current dual system in the U.S. allows firms to simultaneously manage their taxable income downward while managing their book income upward. By requiring book–tax conformity, they contend that firms will be forced to trade off reporting high earnings numbers to shareholders and reporting low earnings to the taxing authority, resulting in improved financial reporting and less tax avoidance. Reduced compliance costs and easier auditing have also been cited as potential benefits of book–tax conformity. However, before one can evaluate the costs and benefits of book–tax conformity it is necessary to understand international implications of conformity, particularly regarding the foreign operations of U.S. multinationals. We describe several possible approaches to implementing book–tax conformity for firms that have both domestic and foreign operations. We discuss issues likely to arise with each approach and conjecture at the behavioral responses to each. Using firm–level financial data from Compustat, we simulate the effects of book–tax conformity on publicly traded U.S. firms. Specifically, we simulate the effects of book–tax conformity on the level and variability of tax payments/collections.

Suggested Citation

  • Hanlon, Michelle & Maydew, Edward L., 2009. "Book–Tax Conformity: Implications for Multinational Firms," National Tax Journal, National Tax Association;National Tax Journal, vol. 62(1), pages 127-153, March.
  • Handle: RePEc:ntj:journl:v:62:y:2009:i:1:p:127-53
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    Cited by:

    1. Evers, Maria Theresia & Finke, Katharina & Matenaer, Sebastian & Meier, Ina & Zinn, Benedikt, 2014. "Evidence on book-tax differences and disclosure quality based on the notes to the financial statements," ZEW Discussion Papers 14-047, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    2. Bradley Blaylock & Fabio B. Gaertner & Terry Shevlin, 0. "Book-tax conformity and capital structure," Review of Accounting Studies, Springer, vol. 0, pages 1-30.
    3. Evers, Maria Theresia, 2015. "Evidence on Book-tax Differences and Disclosure Quality Based on the Notes to the Financial Statements," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113127, Verein für Socialpolitik / German Economic Association.
    4. Evers, Maria Theresia & Meier, Ina & Nicolay, Katharina, 2017. "The implications of book-tax differences: A meta-analysis," ZEW Discussion Papers 17-003, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    5. Evers, Maria Theresia & Meier, Ina & Nicolay, Katharina, 2016. "Book-tax conformity and reporting behavior: A quasi-experiment," ZEW Discussion Papers 16-008, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    6. repec:spr:reaccs:v:22:y:2017:i:2:d:10.1007_s11142-017-9386-2 is not listed on IDEAS

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