Why Do Countries Mandate Accrual Accounting for Tax Purposes?

Posted: 16 Nov 2014

See all articles by Igor Goncharov

Igor Goncharov

Lancaster University - Department of Accounting and Finance

Martin Jacob

WHU - Otto Beisheim School of Management

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Date Written: November 14, 2014


This study investigates why countries mandate accruals in the definition of corporate taxable income. Accruals alleviate timing and matching problems in cash flows, which smoothes taxable income and thus better aligns it with underlying economic performance. These accrual properties can be desirable in the tax setting as tax authorities seek more predictable corporate tax revenues. However, they can also make tax revenues procyclical by increasing the correlation between aggregate corporate tax revenues and aggregate economic activity. We argue that accruals shape the distribution of corporate tax revenues, which leads regulators to incorporate accruals into the definition of taxable income to balance the portfolio of government revenues and expenditures. Using a sample of 26 OECD countries, we find support for several theoretically motivated factors explaining the use of accruals in tax codes. We first provide evidence that corporate tax revenues are less volatile in high accrual countries, but high accrual countries collect relatively higher (lower) tax revenues when the corporate sector grows (contracts). Critically, we then show that accruals and smoother tax revenues are favored by countries with higher levels of government spending on public services and uncertain future expenditures, while countries with procyclical other tax collections favor cash rules and lower procyclicality of corporate tax revenues.

Keywords: accrual accounting; income smoothing; corporate tax revenues; corporate tax base

JEL Classification: M41; H25; H21; M48

Suggested Citation

Goncharov, Igor and Jacob, Martin, Why Do Countries Mandate Accrual Accounting for Tax Purposes? (November 14, 2014). Journal of Accounting Research, Vol. 52, No. 5, 2014. Available at SSRN: https://ssrn.com/abstract=2524496

Igor Goncharov (Contact Author)

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom

Martin Jacob

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
D-56179 Vallendar, 56179

HOME PAGE: http://www.whu.edu/steuer

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