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Submission No. 2 Back to full list of submissions
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THE AUSTRALIAN NATIONAL UNIVERSITY

Alfred Tran Ph.D., C.P.A.

Canberra, ACT 0200, Australia

Senior Lecturer

Telephone: (02) 6249 5118 (International +61 2 6249 5118)

Department of Commerce

Facsimile: (02) 6249 5005 (International +61 2 6249 5005)

The Faculties

E-mail: Alfred.Tran@anu.edu.au

 

3 March 1999

 

Dr Alan Preston
The Secretary
Review of Business Taxation
Department of the Treasury
Parkes Place
Canberra, ACT 2600

Dear Dr Preston,

Submission to the Committee for Review of Business Taxation

I refer to the invitation for submissions in A Platform for Consultation published by the Committee for Review of Business Taxation in February 1999 and write to make a submission on the alignment of financial accounting rules and tax rules mentioned in paragraphs 178 to 181 of the Overview (pages 46 and 47 in Volume 1).

Enclosed please find a hard copy of my PhD thesis completed in 1997 with the title "Relationship of Tax and Financial Accounting Rules – An Empirical Study of the Alignment Issue", together with an electronic copy on two IBM compatible diskettes. I hope the work reported in my thesis would provide some useful inputs for the Committee’s deliberation.

In Chapter 2 of my thesis, I review the relationship of tax and financial accounting rules from an international perspective. In particular, I point out the different institutional arrangements in Anglo-Saxon countries and in continental European countries. I trace the historical development of accounting-tax relationship in the USA, the UK and Australia. I identify the sources of divergence of the two sets of rules in Anglo-Saxon countries including Australia. The two sets of rules have been developed by different authorities for different purposes. They are designed to meet different criteria and are based on different principles. For example, the "wherewithal to pay" principle in taxation has generated timing differences between accounting income and taxable income.

In Chapter 3 of the thesis, I present the arguments for and against a complete alignment based on its potential impact on the tax system and the financial reporting regulatory system. I would like to add that Australia’s commitment to harmonizing its accounting standards with International Accounting Standards presents an additional constraint: accounting rules in this country cannot be easily modified to suit the needs of revenue collection.

Three empirical studies are reported in the thesis. The effective tax rate analysis in Chapter 4 shows that companies in three industries benefited from concessional tax treatments of gold-mining income, dividends, and capital gains, and had accounting profit consistently higher than taxable income. After controlling for industry effect, the analysis also identifies a size effect: large firms had a wider book-tax income gap than small firms due to permanent differences.

The analysis of tax disclosure data in Chapter 5 shows that large firms benefited more from tax incentives, dividend rebates, and foreign tax rate differences than small firms. They also had proportionately smaller amounts of booked and unbooked timing differences, and non-deductible expenses. These results show that the book-tax income gap was mainly caused by deliberate government policies and the different objectives and standards of the tax and financial reporting systems. Thus, a complete alignment cannot be achieved unless the government is willing to yield its policy-making power in the tax system, and the objectives and standards of the two systems can be reconciled.

The survey of opinions about alignment reported in Chapter 6 shows that 57 percent of listed companies supported a complete alignment of tax rules with financial accounting rules. Listed companies also estimated total compliance cost savings in the order of 57 percent as a result of alignment. However, only 36 percent of tax practitioners (accountants) supported alignment, even though they did not estimate a substantial negative impact on their earnings as a result of alignment. Further statistical analyses show that fairness was much more influential than simplicity in forming the alignment attitudes and the opinions about compliance level of both groups of respondents. Thus, unless a complete alignment can also improve the perceived fairness and compliance level of the tax system, simplification of the tax system alone does not justify such an alignment.

The conclusion of the thesis is that given the existing institutional arrangements, a complete alignment of tax rules with financial accounting rules is neither feasible nor desirable. However, in areas where there is no conflict between the objectives and the required standards of the two systems, the two sets of rules could be aligned to reduce compliance costs.

I note that the Committee requests two hard copies plus an electronic copy in IBM compatible format for each submission, but I can only supply one hard copy of my thesis. Also, the thesis was originally word-processed with Microsoft Word 5.1 for Macintosh, so the pagination in the electronic copy is different from that of the hard copy due to the Macintosh-IBM conversion and the different softwares that drive the printer.

I would appreciate the return of the hard copy of my thesis when the Committee completes their mission. I intend to have it kept by the National Library for public access.

Sincerely,

 

 

Alfred Tran

Enclosures

 

RELATIONSHIP OF TAX AND FINANCIAL ACCOUNTING RULES

AN EMPIRICAL STUDY OF THE ALIGNMENT ISSUE

by

Alfred Van-Ho TRAN

February 1997

Thesis Submitted  for

the Degree of Doctor of Philosophy of

The Australian National University

 

ABSTRACT

In Anglo-Saxon countries such as Australia and the United Kingdom, two sets of rules are used to measure business profits: one for income taxation and the other for financial reporting. The divergence of these two sets of rules raises the issue of alignment. In this thesis, the relationship of tax and financial accounting rules is reviewed from an international perspective. Arguments for and against a complete alignment are presented based on its potential impact on the tax system and the financial reporting regulatory system. Three empirical studies are reported. A statistical analysis of effective tax rates (ETRs) of Australian companies exposes the gap between accounting profit and taxable income (book-tax income gap). An analysis of tax disclosure data identifies the major causes of the gap. A postal questionnaire survey reveals the opinions of listed companies and tax practitioners about the alignment issue.

The ETR analysis shows that companies in three industries benefited substantially from concessional tax treatments of gold-mining income, dividends, and capital gains, and had accounting profit consistently higher than taxable income. After controlling for industry effect, the analysis also identifies a size effect: large firms had a wider book-tax income gap than small firms. The analysis of tax disclosure data shows that large firms benefited more from tax incentives, dividend rebates, and foreign tax rate differences than small firms. They also had proportionately smaller amounts of booked and unbooked timing differences, and non-deductible expenses. These results show that the book-tax income gap was mainly caused by deliberate government policies and the different objectives and standards of the tax and financial reporting systems. Thus, a complete alignment cannot be achieved unless the government is willing to yield its policy-making power in the tax system, and the objectives and standards of the two systems can be reconciled.

The survey of opinions shows that 57 percent of listed companies supported a complete alignment of tax rules with financial accounting rules. Listed companies also estimated total compliance cost savings in the order of 57 percent as a result of alignment. However, only 36 percent of tax practitioners supported alignment, even though they did not estimate a substantial negative impact on their earnings as a result of alignment. Further statistical analyses show that 'fairness' was much more influential than 'simplicity' in forming the alignment attitudes and the opinions about compliance level of both groups of respondents. Thus, unless a complete alignment can improve the perceived fairness and compliance level of the tax system, simplification of the tax system alone does not justify such an alignment.

The conclusion is that given the existing institutional arrangements, a complete alignment of tax rules with financial accounting rules is neither feasible nor desirable. However, in areas where there is no conflict between the objectives and the required standards of the two systems, the two sets of rules is neither  feasible nor desirable.  However, in areas where there is no conflict between the objectives and the required standards of the two systems, the two sets of rules could be aligned as closely as possible to each other in order to reduce compliance costs.

 

The full submission is available to download in either PDF or RTF format.