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.
Bibliographical noteWe appreciate the helpful comments and suggestions from S.P. Kothari (the editor), Lillian Mills (the referee), and workshop participants at National Taiwan University and 2007 American Accounting Association Annual Meeting. We also thank Tang Feng for his research assistance at the early stage of the study. We acknowledge the financial support from the Research Grants Council of the Hong Kong SAR Government (LU3403/06H).
- Book-tax differences
- Informativeness of book-tax differences
- Tax noncompliance
- Tax-based accounting system