Tax-book conformity: Evidence from Hungary

László Péter Lakatos, Eleonóra Tarpataki

Article ID: 11067
Vol 9, Issue 1, 2025

VIEWS - 330 (Abstract)

Abstract


Accounting can be regulated using either a principle-based or rule-based approach; however, profit determined for taxes purposes is invariably subject to rigorous regulation, permitting minimal flexibility. Entities are strongly motivated to utilize same or highly similar tax figures for financial accounting and tax purposes, as it reduces costs and effort. Nevertheless, this form of tax-book conformity frequently results in decreased financial reporting quality, as proven by prior studies. In numerous jurisdictions, governments are developing simplified accounting systems that utilize figures established by accounting regulations, as this facilitates accurate tax calculations and enables entities to optimize efforts and expenses in preparing financial statements. However, these systems result in lower-quality financial statements, which consequently reduce transparency and makes decision-making. more complicated and less accurate. This study examines a specific example from Hungary where a simplified accounting system was introduced in conformity with tax regulations; nonetheless, the principle of true and fair view was replaced by standardization and uniformity. The research investigates if this tradeoff is acceptable as organizations utilizing this legislation (qualifying entities) are those whose scale suggests that such simplification will not significantly compromise public interest. The study reveals that in Hungary, smaller entities typically do not make significant changes to determine their taxable earnings. The introduction of this system is justifiable given the regulations available for smaller organizations. 


Keywords


tax-book conformity; financial accounting; regulation; taxation; small and middle-sized entities

Full Text:

PDF


References


Alexander, D. (1993). A European true and fair view?. European Accounting Review, 2(1), 17–46. https://doi.org/10.1080/09638189300000002 Alsaadi, A. (2020). Financial-tax reporting conformity, tax avoidance and corporate social responsibility. Journal of Financial Reporting and Accounting, 18(3), 639–659. https://doi.org/10.1108/jfra-10-2019-0133 Artsberg, K. (1996). The link between commercial accounting and tax accounting in sweden. European Accounting Review, 5(sup1), 795–814. https://doi.org/10.1080/09638189600000051 Atwood, T. J., Drake, M. S., & Myers, L. A. (2010). Book-tax conformity, earnings persistence and the association between earnings and future cash flows. Journal of Accounting and Economics, 50(1), 111–125. https://doi.org/10.1016/j.jacceco.2009.11.001 Blouin, J., & Born, N. (2024). The Corporate Alternative Minimum Tax: A Congressional Folly. National Tax Journal, 77(2), 413–447. https://doi.org/10.1086/730211 Chan, K. H., Lin, K. Z., & Mo, P. L. L. (2010). Will a departure from tax-based accounting encourage tax noncompliance? Archival evidence from a transition economy. Journal of Accounting and Economics, 50(1), 58–73. https://doi.org/10.1016/j.jacceco.2010.02.001 Chan, K. H., Lin, K. Z., Mo, P. L. L., et al. (2021). Does IFRS convergence improve earnings informativeness? An analysis from the book-tax tradeoff perspective. Accounting and Business Research, 53(2), 158–184. https://doi.org/10.1080/00014788.2021.1946764 Chan, K. H., Lin, K. Z., & Tang, F. (2013). Tax Effects of Book-Tax Conformity, Financial Reporting Incentives, and Firm Size. Journal of International Accounting Research, 12(2), 1–25. https://doi.org/10.2308/jiar-50404 Chen, J. Z., Elemes, A., & Lobo, G. J. (2021). David versus Goliath: The Relation between Auditor Size and Audit Quality for U.K. Private Firms. European Accounting Review, 32(2), 447–480. https://doi.org/10.1080/09638180.2021.1986090 Febrina, F., & Rachmawati, N. A. (2023). Diversity of Book-Tax Conformity in Asean 4: Philippines, Indonesia, Malaysia, and Singapore. Jurnal Akuntansi Dan Bisnis, 23(1), 1. https://doi.org/10.20961/jab.v23i1.976 Filyó, J. (2017). Kis-és középvállalkozások számviteli beszámolási rendszerének elemzése a szabályozás és az alkalmazott gyakorlat tükrében = The analysis of the accounting reporting systems of small and medium enterprises in light of regulation and the applied practice. Available online: http://phd.lib.uni-corvinus.hu/971/ (accessed on 5 May 2024). Floropoulos, S., Tsipouridou, M., & Spathis, C. (2024). Book-tax conformity and earnings management: A research agenda. Journal of International Accounting, Auditing and Taxation, 54, 100603. https://doi.org/10.1016/j.intaccaudtax.2024.100603 Frydlender, A., & Pham, D. (1996). Relationships between accounting and taxation in France. European Accounting Review, 5(sup1), 845–857. https://doi.org/10.1080/09638189600000054 Gallego, I. (2004). The accounting and taxation relationship in Spanish listed firms. Managerial Auditing Journal, 19(6), 796–819. https://doi.org/10.1108/02686900410543903 Guenther, D. A., Maydew, E. L., & Nutter, S. E. (1997). Financial reporting, tax costs, and book-tax conformity. Journal of Accounting and Economics, 23(3), 225-248. https://doi.org/10.1016/S0165-4101(97)00009-8 Hanlon, M., Kelley Laplante, S., & Shevlin, T. (2005). Evidence for the Possible Information Loss of Conforming Book Income and Taxable Income. The Journal of Law and Economics, 48(2), 407–442. https://doi.org/10.1086/497525 Hanlon, M., Maydew, E. L., & Shevlin, T. (2008). An unintended consequence of book-tax conformity: A loss of earnings informativeness. Journal of Accounting and Economics, 46(2–3), 294–311. https://doi.org/10.1016/j.jacceco.2008.09.003 Hanlon, M., & Shevlin, T. (2005). Book-Tax Conformity for Corporate Income: An Introduction to the Issues. Tax Policy and the Economy, 19, 101–134. https://doi.org/10.1086/tpe.19.20061897 Hapsoro, D., Karina, D., Darmawan, M., et al. (2024). The Influence of Profitability, Leverage, Sales Growth, and Book Tax Differences on Corporate Tax Avoidance. Moneter: Jurnal Keuangan Dan Perbankan, 12(2), 258–267. https://doi.org/10.32832/moneter.v12i2.765 Hsu, A., & Liu, S. (2023). The effect of book-tax conformity on the information environment: from the analyst perspective. Review of Quantitative Finance and Accounting, 61(2), 535–565. https://doi.org/10.1007/s11156-023-01160-5 Hung, M. (2000). Accounting standards and value relevance of financial statements: An international analysis. Journal of Accounting and Economics, 30(3), 401-420. https://doi.org/10.1016/S0165-4101(01)00011-8 Istrate, C. (2024). Accounting and taxation in Romania: from connection to disconnection?. Journal of Accounting and Management Information Systems, 23(1). https://doi.org/10.24818/jamis.2024.01001 Kerr, J. N. (2019). The value relevance of taxes: International evidence on the proxy for profitability role of tax surprise. Journal of Accounting and Economics, 67(2–3), 297–305. https://doi.org/10.1016/j.jacceco.2018.10.001 Kuo, N. T., & Lee, C. F. (2016). A potential benefit of increasing book–tax conformity: evidence from the reduction in audit fees. Review of Accounting Studies, 21(4), 1287–1326. https://doi.org/10.1007/s11142-016-9367-x Lakatos, L. P. (2010). A számvitel szabályozása és a pénzügyi kimutatások hasznosságának megítélése = The regulation of accounting and the evaluation of the usefulness of financial statements. Available online: https://phd.lib.uni-corvinus.hu/503/ (accessed on 5 May 2024). Lakatos, L. P. (2014). A számviteli szabályozások eltérésének okairól (Causes of the differences in accounting regulations). Vezetéstudomány/Budapest Management Review, 2–11. https://doi.org/10.14267/veztud.2014.09.01 Lakatos, L. P., & Tarpataki, E. (2024). Az eredmény-adóalap távolsága a magyar gazdálkodóknál. Tanulságok a magyar számviteli szabályozás számára • Tax-Book Conformity in Hungarian Enterprises. Consequences for the Hungarian Accounting Regulation. Magyar Tudomány. https://doi.org/10.1556/2065.185.2024.2.3 Lamb, M. (1996). The relationship between accounting and taxation: The United Kingdom. European Accounting Review, 5(sup1), 933–949. https://doi.org/10.1080/09638189600000060 Lawrence, U. E. (n.d.). Tax Avoidance and Earnings Management of Quoted Non-Financial Firms in Nigeria. Available online: https://iiardjournals.org/get/IJEBM/VOL.%2010%20NO.%202%202024/Tax%20avoidance%20and%20earnings%20292-323.pdf (accessed on 30 November 2024). M Guimarães, G. O., & Macedo, M. A. (2024). Book-Tax Conformity: The Moderating Effect of Aggressive Management Practices on Earnings Persistence. SSRN. https://doi.org/10.2139/ssrn.4827189 Medeiros, J., De Luca, M., & Lopo Martinez, A. (2023). The Effects of Book-Tax Conformity on the Informativeness of Corporate Income Tax Expenses. In: Proceedings of the International Conference on Accounting; 2023. Nobes, C., & Parker, R. H. (2008). Comparative International Accounting. Pearson Education. Pais, C., & Dias, C. A. (2022). The implications of book-tax conformity and tax change for the earnings management of Portuguese micro firms. Journal of International Accounting, Auditing and Taxation, 46, 100448. https://doi.org/10.1016/j.intaccaudtax.2022.100448 Parker, R. H. (2016). Thirteen not out: Nobes & Parker, Comparative International Accounting, 1981–2016. Accounting History, 21(4), 512–521. https://doi.org/10.1177/1032373216661363 Prochazka, D., & Molin, J. (2016). Book-Tax Conformity: The Review of Recent Research and Its Implication for the IFRS Adoption in Europe. Journal of Tax Research. Róth, J., Adorján, C., Lukács, J., & Veit, J. (2024). Számviteli esettanulmányok 2024, 2024th ed. MKVK OK KFT. Samuelson, P., & Nordhaus, W. (2009). EBOOK: Economics. McGraw Hill. Schutte, D. P., & Van der Zwan, P. (2024). An evaluation of book-tax differences of South African firms. Journal of Infrastructure, Policy and Development, 8(8), 5201. https://doi.org/10.24294/jipd.v8i8.5201 Shackelford, D. A., Slemrod, J., & Sallee, J. (2007). A unifying model of how taxes affect the real and accounting decisions of corporations. Available online: http://users.nber.org/~confer/2006/frtf06/shackelford.pdf (accessed on 30 November 2024). Sun, X. S., Habib, A., & Yao, D. T. (2023). Book-tax conformity and the demand for auditor-provided tax services: European evidence. Journal of Accounting Literature, 45(3), 425–457. https://doi.org/10.1108/jal-11-2022-0120 Sundvik, D. (2019). The impact of principles-based vs rules-based accounting standards on reporting quality and earnings management. Journal of Applied Accounting Research, 20(1), 78–93. https://doi.org/10.1108/jaar-05-2018-0063 Whitaker, C. (2005). Bridging the Book-Tax Accounting Gap. The Yale Law Journal.



DOI: https://doi.org/10.24294/jipd11067

Refbacks

  • There are currently no refbacks.


Copyright (c) 2025 László Péter Lakatos, Eleonóra Tarpataki

License URL: https://creativecommons.org/licenses/by/4.0/

This site is licensed under a Creative Commons Attribution 4.0 International License.