The Value Relevance of Taxes: International Evidence on the Proxy for Profitability Role of Tax Surprise

Abstract

Despite evidence in the United States that tax surprise is incrementally value relevant, the literature has done little to examine those circumstances that enhance or diminish that value relevance, or broaden the investigation to settings beyond the United States. I examine whether tax enforcement has a bearing on the incremental value relevance of tax surprise for a broad cross-country sample of firms. I also extend the evidence on the incremental value relevance of tax surprise to the international setting. I report strong results that tax surprise has greater incremental value relevance when tax enforcement is high, with results suggesting that the value relevance of tax surprise is mostly contained within its interaction with tax enforcement. Overall, these findings highlight the importance of tax enforcement for tax surprise as a proxy for profitability and suggest that extant and future discussions should be broadened to include this important variable.

Keywords: Value Relevance, Tax Surprise, Tax Enforcement, International

JEL Classification: M41