Private Firm Responses to Accounting for Income Tax Uncertainty: Evidence from Loss Accruals by U.S. Insurance Firms

55 Pages Posted: 6 Jun 2019 Last revised: 2 Apr 2020

See all articles by Jiang Cheng

Jiang Cheng

Lingnan University

Travis Chow

Singapore Management University - School of Accountancy

Tzuting Lin

National Taiwan University - Department of Finance

Jeffrey Ng

Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: March 31, 2020

Abstract

Relatively little prior evidence exists on the potential impact of increased guidance on income tax accounting uncertainty on tax planning by private firms. We provide the first evidence that private insurers decrease the use of loss accruals in tax planning in response to the adoption of the Statement of Statutory Accounting Principles (SSAP) 101, which mandates the recognition and measurement of tax contingencies for insurance companies. Using a difference-in-differences design, we find that relative to those of public insurers, loss provisions for private insurers after SSAP 101 adoption decrease by an estimated 0.2–0.29 percent of total assets, implying a forfeited tax benefit of $0.58–$0.85 million per firm per year. We also find that the deterrence effects are concentrated in the first two years of the adoption of the new rule, consistent with the unwinding of prior overprovisioned loss reserves when tax planning costs increase. Additionally, private insurers exhibit increased earnings persistence, suggesting that financial reporting quality improves when incentives to distort earnings for tax purposes are constrained. Overall, our study offers important insight into how accounting for income tax uncertainty affects private insurers’ tax planning and accounting choices.

Keywords: Loss Provisions, Corporate Taxation, Insurance Companies, SSAP 101

JEL Classification: G22, H25, H26, M41

Suggested Citation

Cheng, Jiang and Chow, Travis and Lin, Tzuting and Ng, Jeffrey, Private Firm Responses to Accounting for Income Tax Uncertainty: Evidence from Loss Accruals by U.S. Insurance Firms (March 31, 2020). Available at SSRN: https://ssrn.com/abstract=3390752 or http://dx.doi.org/10.2139/ssrn.3390752

Jiang Cheng

Lingnan University ( email )

8 Castle Peak Road
Lingnan University
Hong Kong, New Territories
China

Travis Chow

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore
+65 6808 5450 (Phone)

Tzuting Lin

National Taiwan University - Department of Finance ( email )

1, Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

Jeffrey Ng (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

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