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Why do countries mandate accrual accounting for tax purposes?

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Why do countries mandate accrual accounting for tax purposes? / Goncharov, Igor; Jacob, Martin.
In: Journal of Accounting Research, Vol. 52, No. 5, 12.2014, p. 1127-1163.

Research output: Contribution to Journal/MagazineJournal articlepeer-review

Harvard

Goncharov, I & Jacob, M 2014, 'Why do countries mandate accrual accounting for tax purposes?', Journal of Accounting Research, vol. 52, no. 5, pp. 1127-1163. https://doi.org/10.1111/1475-679X.12061

APA

Vancouver

Goncharov I, Jacob M. Why do countries mandate accrual accounting for tax purposes? Journal of Accounting Research. 2014 Dec;52(5):1127-1163. doi: 10.1111/1475-679X.12061

Author

Goncharov, Igor ; Jacob, Martin. / Why do countries mandate accrual accounting for tax purposes?. In: Journal of Accounting Research. 2014 ; Vol. 52, No. 5. pp. 1127-1163.

Bibtex

@article{d5a88d9d54cf4b63820286abcb5db0a9,
title = "Why do countries mandate accrual accounting for tax purposes?",
abstract = "This study investigates why countries mandate accruals in the definition of corporate taxable income. Accruals alleviate timing and matching problems in cash flows, which smoothes taxable income and thus better aligns it with underlying economic performance. These accrual properties can be desirable in the tax setting as tax authorities seek more predictable corporate tax revenues. However, they can also make tax revenues procyclical by increasing the correlation between aggregate corporate tax revenues and aggregate economic activity. We argue that accruals shape the distribution of corporate tax revenues, which leads regulators to incorporate accruals into the definition of taxable income to balance the portfolio of government revenues and expenditures. Using a sample of 26 OECD countries, we find support for several theoretically motivated factors explaining the use of accruals in tax codes. We first provide evidence that corporate tax revenues are less volatile in high accrual countries, but high accrual countries collect relatively higher (lower) tax revenues when the corporate sector grows (contracts). Critically, we then show that accruals and smoother tax revenues are favored by countries with higher levels of government spending on public services and uncertain future expenditures, while countries with procyclical other tax collections favor cash rules and lower procyclicality of corporate tax revenues.",
keywords = "accrual accounting, income smoothing , corporate tax revenues , corporate tax base",
author = "Igor Goncharov and Martin Jacob",
year = "2014",
month = dec,
doi = "10.1111/1475-679X.12061",
language = "English",
volume = "52",
pages = "1127--1163",
journal = "Journal of Accounting Research",
issn = "0021-8456",
publisher = "Wiley-Blackwell",
number = "5",

}

RIS

TY - JOUR

T1 - Why do countries mandate accrual accounting for tax purposes?

AU - Goncharov, Igor

AU - Jacob, Martin

PY - 2014/12

Y1 - 2014/12

N2 - This study investigates why countries mandate accruals in the definition of corporate taxable income. Accruals alleviate timing and matching problems in cash flows, which smoothes taxable income and thus better aligns it with underlying economic performance. These accrual properties can be desirable in the tax setting as tax authorities seek more predictable corporate tax revenues. However, they can also make tax revenues procyclical by increasing the correlation between aggregate corporate tax revenues and aggregate economic activity. We argue that accruals shape the distribution of corporate tax revenues, which leads regulators to incorporate accruals into the definition of taxable income to balance the portfolio of government revenues and expenditures. Using a sample of 26 OECD countries, we find support for several theoretically motivated factors explaining the use of accruals in tax codes. We first provide evidence that corporate tax revenues are less volatile in high accrual countries, but high accrual countries collect relatively higher (lower) tax revenues when the corporate sector grows (contracts). Critically, we then show that accruals and smoother tax revenues are favored by countries with higher levels of government spending on public services and uncertain future expenditures, while countries with procyclical other tax collections favor cash rules and lower procyclicality of corporate tax revenues.

AB - This study investigates why countries mandate accruals in the definition of corporate taxable income. Accruals alleviate timing and matching problems in cash flows, which smoothes taxable income and thus better aligns it with underlying economic performance. These accrual properties can be desirable in the tax setting as tax authorities seek more predictable corporate tax revenues. However, they can also make tax revenues procyclical by increasing the correlation between aggregate corporate tax revenues and aggregate economic activity. We argue that accruals shape the distribution of corporate tax revenues, which leads regulators to incorporate accruals into the definition of taxable income to balance the portfolio of government revenues and expenditures. Using a sample of 26 OECD countries, we find support for several theoretically motivated factors explaining the use of accruals in tax codes. We first provide evidence that corporate tax revenues are less volatile in high accrual countries, but high accrual countries collect relatively higher (lower) tax revenues when the corporate sector grows (contracts). Critically, we then show that accruals and smoother tax revenues are favored by countries with higher levels of government spending on public services and uncertain future expenditures, while countries with procyclical other tax collections favor cash rules and lower procyclicality of corporate tax revenues.

KW - accrual accounting

KW - income smoothing

KW - corporate tax revenues

KW - corporate tax base

U2 - 10.1111/1475-679X.12061

DO - 10.1111/1475-679X.12061

M3 - Journal article

VL - 52

SP - 1127

EP - 1163

JO - Journal of Accounting Research

JF - Journal of Accounting Research

SN - 0021-8456

IS - 5

ER -