Tax aggressiveness as a determining factor of conditional conservatism in Brazil,

Antônio Lopo Martinez · Jorge Luiz de Santana Júnior · Thiago Rios Sena

11 citations0/0 files storedRevista Contabilidade & Finanças

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Auditing, Earnings Management, Governance Taxation and Legal Issues Corporate Taxation and Avoidance

Abstract

ABSTRACT This paper investigates whether the degree of tax aggressiveness is associated with conditional conservatism in Brazil. After a thorough literature review on accounting conservatism by Brazilian academia and a discussion about tax aggressiveness and accounting conservatism, a literature gap was found because the relationship between a firm's degree of tax aggressiveness and its conditional conservatism had not been investigated previously. Taxable income has a relationship with accounting income in the Brazilian corporate income tax system. Hence, tax planning can affect financial information properties. This study offers a partial explanation of accounting conservatism based on tax issues that contribute to the conservatism and taxation literature. The results suggest that tax strategies that aim to avoid tax burden are related to conditional conservative accounting. Hence, the practice of conditional conservatism in Brazil appears to be linked with tax-deductible alternatives of reducing earnings, which would explain tax planning’s association with the degree of conditional conservatism in financial reporting. This finding is relevant to financial reporting users that can consider our results in their analysis and to management that seeks to understand their decisions about tax planning better. For this research purpose, two Basu models (Basu, 1997) were adopted, adapted with tax-aggressiveness controls. The effective tax rate (ETR) was used as a tax-aggressiveness metric, controlling firms with both high and low ETR. The study period was from 2010 to 2019 for Brazilian firms from B3 S.A. - Brasil, Bolsa, Balcão (B3). The findings demonstrate a significant relationship between tax avoidance and conditional conservatism, that is, more tax-aggressive firms tend to use more conservative accounting.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1985Positive Accounting Theory 1997The conservatism principle and the asymmetric timeliness of earnings1 2000The effect of international institutional factors on properties of accounting earnings 2003Conservatism in Accounting Part I: Explanations and Implications 2004Earnings quality in UK private firms: comparative loss recognition timeliness 2009Estimation and empirical properties of a firm-year measure of accounting conservatism 2006The Role of Accruals in Asymmetrically Timely Gain and Loss Recognition

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