The Estimated Error Of Tax Avoidance Indicators Under China Accounting Standards And Tax System And Its Impact

The calculation of tax avoidance indicators commonly used in the existing literature,such as effective tax rate(ETR)and book-tax difference(BTD),is generally used by income tax information data and other financial data in the financial statements of the enterprise.Therefore,the income tax information in financial statements plays a key role in studying the problems in the field of taxation and accounting.First of all,under Chinese Accounting Standards,the disclosure method of enterprise income tax information is in accordance with the Chinese Accounting Standards for Business Enterprises No.18-Income Tax(CAS 18).The income tax information disclosed by enterprises in financial statements mainly includes income tax expense in income statement and deferred income tax assets and deferred income tax liabilities in balance sheet.At the same time,according to the current accounting standards in China,income tax expense is equal to the sum of current income tax expense and deferred income tax expense,so the current income tax expense required in the literature can be calculated by the difference between income tax expense and deferred income tax expense.The income tax expense only accounts for one line in the income statement of the enterprise actually,while the current income tax expense and deferred income tax expense are additionally disclosed in the notes to the financial statements.Second,empirical tax avoidance studies rely heavily on the use of the effective tax rate(ETR)estimated from consolidated financial statements as a reverse measure of corporate tax avoidance.This paper argues that ETR may be overstated for firms with loss-making subsidiaries when consolidation requirements impose more stringent tax reporting requirements than financial reporting requirements.However,in the absence of consolidation,the financial statements of the parent company are not affected by this bias,and the subject of the parent company statement and the subject of tax payment are consistent,so there is no estimation error in the ETR of the parent company statement.Coupled with the fact that the parent company is the most important component of consolidated statements,it is of great interest to study the ETR of parent company statements.Therefore,another research point of this paper starts from China’s tax system to explore whether the use of consolidated statement data and parent company statement data to measure ETR will lead to differences in research results.This paper is divided into six parts to discuss the above issues to be studied.The contents of each part are as follows:The first part is introduction.Based on the description of the research background,this chapter will first propose the problems that this paper intends to study.Secondly,the theoretical significance and practical value of this research are explained.The research idea,research framework and research methods used in this paper are proposed again.Finally,this paper explains the innovation that this research intends to achieve.The second section reviews the literature.This chapter will focus on the three core concepts of the types of corporate tax avoidance indicators,the error analysis of corporate tax avoidance indicators and the necessity of corporate tax avoidance behavior research.On the basis of sorting out the contents of the above three aspects,it leads people to think about the extremely important position of tax avoidance indicators in tax avoidance research,and tries to make the research content of this paper both inherit and make a breakthrough.The third part is the institutional background.This chapter will provide institutional support for the research of this paper.Based on Chinese accounting standards and tax system,this paper firstly expounds the accounting method of enterprise income tax information under Chinese accounting standards,and then lists its disclosure rules.Then starting from the presentation rules of corporate financial statements under the Chinese tax system,it is shown that there are errors in using the income tax expense information in the consolidated financial statements to calculate the effective income tax rate under the consolidated tax system.Finally,the problems brought by the above institutional background are summarized.The fourth part analyzes the cause of estimation error of current income tax expense under Chinese Accounting Standards.Financial statements cover income tax expense information,such as current income tax expense and deferred income tax expense,which are often used in existing studies.This chapter intends to compare the current income tax expense and deferred income tax expense data manually collected from the notes to the financial statements with the current income tax expense and deferred income tax expense data calculated by the method used in the traditional literature(i.e.,directly using the income statement and balance sheet information).Explore whether there are important errors and analyze the reasons for the formation of errors.The fifth part is the research on the impact of current income tax expense’s estimation error under Chinese Accounting Standards,which explores the impact of estimation error on the existing research results from the existing research fields.This chapter starts from the two research directions of corporate tax avoidance and income tax information value,and replicates the existing relevant studies to explore whether the estimation error will affect the existing research results.The sixth part analyzes the cause of estimation error of effective income tax rate under China’s independent tax system.Losses within the consolidated group will result in estimation errors in the effective income tax rate calculated using consolidated pre-tax profits.This chapter empirically studies whether there are estimation errors and the causes of the errors in the effective income tax rate calculated by using the consolidated financial statement data under China’s independent tax system.The seventh part studies the impact of estimation error of effective income tax rate under China’s independent tax system.This chapter explores whether the estimation errors of the previous chapter affect the results of existing research fields.The eighth part is the conclusion,research limitations and research prospects.This part will first summarize the reasons for the estimation errors of the effective income tax rate and the account-tax difference under the accounting standards and tax system of China and the impact on the existing research,then point out the shortcomings in the research process of this paper,and finally look forward to the future improvement.The empirical sample comprises all Chinese listed firms(also known as A-share firms)for the 2007-2020 period,and mainly draws the following conclusions:First,this paper analyzes the estimation error of current income tax expense,a measurement error that has long existed in empirical research on income tax.It can be found that this error is widespread among listed companies,and the amount of the error is economically significant.After that,this paper finds that in the research on corporate tax avoidance,after eliminating the estimation error of current income tax expense,the explanatory power of corporate fundamental characteristics on the degree of corporate tax avoidance has been greatly improved.When the influencing factors of the degree of corporate tax avoidance examined by the researchers are related to the formation of the estimation error of current income tax expense in the statements,the construction of corporate tax avoidance index by using current income tax expense in the statements will lead to serious errors in the research conclusions.Although both the note current income tax expense and the statement current income tax expense can separately provide enterprise valuation information,which is related to stock returns,when the two are added into the model at the same time,the statement current income tax expense loses explanatory power.In general,by revealing this error,this paper hopes that subsequent scholars should pay attention to preventing the impact of error when studying income tax related issues,and eliminate the error by adopting correct data information as much as possible.Second,this study examines the estimation bias of the combined ETR and its causes using data sets at the same company merger and parent level.In addition,this paper reveals its implications for future research on tax avoidance.The paper first documents that the ETR estimated in consolidated financial statements is significantly higher than that estimated in parent financial statements.Importantly,this paper finds that this difference becomes more pronounced when the merged group is more likely to include loss-making subsidiaries.This paper identifies realized subsidiary losses as situations in which parent profit exceeds consolidated profit and finds that the difference between consolidated and parent ETR in these years is significantly larger than in other years.These results are consistent with lossmaking subsidiaries causing inflated ETRs constructed from consolidated statement data.This paper aims to achieve the following three innovations:Firstly,this paper challenges the inherent calculation of measurement indicators in tax avoidance research.This paper does not continue the method used by previous researchers in the calculation of indicators.For example,when researchers examine the determinants of corporate tax avoidance,if this factor is correlated with the probability of loss of corporate subsidiaries,the estimation error of ETR in consolidated statements needs to be considered.Secondly,this paper uses a new data acquisition method to improve the calculation method of indicators in the existing income tax expense research.Compared with the previous cumbersome data acquisition in the notes to the financial statements,the current data processing means can help this paper to obtain the desired information more comprehensively and accurately.The deferred income tax expense disclosed in the notes to the financial statements is completely related to the information of income tax expense.Therefore,compared with the original data acquisition method,new data acquisition methods can help this paper get more accurate information.Finally,this paper provides more accurate data sources and new research ideas for the future study of corporate tax avoidance.The research aims to seek new breakthroughs based on the existing literature.Based on the correction of the estimation errors existing in the measurement of the existing corporate tax avoidance indicators,it will have a new interpretation of the research results of the existing tax avoidance literature and enrich the existing theoretical system and research framework.