Financial Derivatives, Hedge Accounting and Tax Aggressiveness in Brazil

27 Pages Posted: 25 Jun 2019

See all articles by Antonio Lopo Martinez

Antonio Lopo Martinez

University of Coimbra; Department of Federal Revenue of Brazil

José Enrique Teixeira Reinoso

affiliation not provided to SSRN

Rafael Moreira Antonio

affiliation not provided to SSRN

Rogiene Santos

affiliation not provided to SSRN

Date Written: June 19, 2019

Abstract

This study investigated the relationship between the use of financial derivatives by non-financial corporations and tax aggressiveness in Brazil. In research on the American market, evidence was identified that non-financial entity users of financial derivatives were more tax aggressive. However, there is no reason to assume that this behavior is replicated in the Brazilian market, since tax legislation does not offer the same economic incentives, i.e., since it imposes limits on the tax deductibility of losses with these financial instruments, except in derivatives’ well-documented and proven use as a hedge tool. To verify this point, companies were classified into users and non-users of first-generation financial derivatives, and associated this classification with tax aggression metrics, such as total and current effective tax rate (ETR), as well as book-taxes differences (BTD). The study focus was 384 non-financial companies listed on the B3 in the period from 2005 to 2015. The results of regression analysis using a probit estimate have pointed, in a distinctly different way than the American reality, that the most tax aggressive companies tend to use fewer financial derivatives. In other words, derivatives are most used by the least tax aggressive companies. However, when the use of derivative instruments as a hedge was controlled, it was found that when a company adopts hedge accounting, it is more likely it will be more tax aggressive. The result is presumably explained by the Brazilian tax treatment that authorizes the deductibility of losses, regardless of earnings, when using the derivative as a hedge tool.

Keywords: Financial Derivatives, Tax Aggressiveness, Effective Tax Rate, Hedge accounting

JEL Classification: K34, G10

Suggested Citation

Martinez, Antonio Lopo and Reinoso, José Enrique and Antonio, Rafael Moreira and Santos, Rogiene, Financial Derivatives, Hedge Accounting and Tax Aggressiveness in Brazil (June 19, 2019). Available at SSRN: https://ssrn.com/abstract=3406683 or http://dx.doi.org/10.2139/ssrn.3406683

Antonio Lopo Martinez (Contact Author)

University of Coimbra ( email )

Pátio das Escolas
Coimbra
Portugal

Department of Federal Revenue of Brazil ( email )

Brazil

José Enrique Reinoso

affiliation not provided to SSRN

Rafael Moreira Antonio

affiliation not provided to SSRN

Rogiene Santos

affiliation not provided to SSRN

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