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Do changes in the corporate tax rate result in firms managing their taxable income and does this impact on the quality of externally reported (i.e. accounting) income?

Project Member(s): Taylor, S., Wells, P.

Start year: 2002

Summary: The extent to which taxable income can be managed is a major issue for revenue authorities, with implications for government budgeting and the timing of announcements regarding future tax rate changes. This study focuses initially on the extent to which firms manage taxable income rather than the accounting income numbers that are the focus of external investors, analysts etc. However, to the extent that manipulation of taxable income can also affect reported (i.e. accounting) income, tax-rate induced earnings management is also of concern to regulators of external financial reporting such as the Australian Accounting Standards Board and the Australian Securities and Investment Commission. If managers use their discretion within allowable accounting methods to minimise tax liabilities, then the quality of reported income as a means of making investment decisions is likely reduced.

Keywords: Earnings management; Minimising tax liabilities; Earnings quality; Financial reporting

FOR Codes: Taxation, Financial Accounting, Economic issues not elsewhere classified, Taxation Accounting