Book-Tax Conformity: Implications for Multinational Firms

64 Pages Posted: 3 May 2007

See all articles by Michelle Hanlon

Michelle Hanlon

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Edward L. Maydew

University of North Carolina at Chapel Hill

Date Written: December 2006

Abstract

This paper examines the implications for multinational firms of recent proposals to conform tax and financial reporting (i.e., book-tax conformity). Proponents of book-tax conformity argue that the current dual system in the U.S. allows firms to simultaneously manage their taxable income down while managing their book income upward. By requiring book-tax conformity, they contend that firms will be forced to trade-off reporting high earnings numbers to shareholders and reporting low earnings to the taxing authority, resulting in improved financial reporting and less tax avoidance. Reduced compliance costs and easier auditing have also been cited as potential benefits of book-tax conformity.

However, before one can evaluate the costs and benefits of book-tax conformity it is necessary to understand international implications of conformity, particularly regarding the foreign operations of U.S. multinationals. We describe several possible approaches to implementing book-tax conformity for firms that have both domestic and foreign operations. We discuss issues likely to arise with each approach and conjecture at the behavioral responses to each. Using firm-level financial data from Compustat, we simulate the effects of book-tax conformity on publicly traded U.S. firms. Specifically, we simulate the effects of book-tax conformity on the level and variability book earnings and tax payments/collections.

Keywords: book-tax conformity, international tax, multinational firm

JEL Classification: H25, M41, M43, M47

Suggested Citation

Hanlon, Michelle and Maydew, Edward L., Book-Tax Conformity: Implications for Multinational Firms (December 2006). Available at SSRN: https://ssrn.com/abstract=983907 or http://dx.doi.org/10.2139/ssrn.983907

Michelle Hanlon (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-668
Cambridge, MA 02142
United States
617-253-9849 (Phone)

Edward L. Maydew

University of North Carolina at Chapel Hill ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-843-9356 (Phone)

HOME PAGE: http://www.kenan-flagler.unc.edu/faculty/directory/accounting/edward-maydew

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