The relationship between deferred taxes and current income tax accruals

Abstract

Introduction. Accounting standards currently apply the principle imposing a 100 % probability of the existence of tax cash outflows on balance sheet deferred tax liabilities. However, this relationship has not been proven either theoretically or empirically in the accounting research literature, which determines the relevance of this study. Purpose. The paper aims at testing the hypothesis which states that the reversal of deferred tax liabilities always increases income tax accruals. In order to achieve this goal, among other things, the relationship between the reversal of deferred tax assets and the change in current tax accruals was examined. Materials and Methods. Traditional statistical analysis and standard techniques of econometric analysis were used – linear regressions and correlation matrices were constructed. Hypothesis was tested in the Russian organizations which reported under the 2012–2018 Russian accounting rules. Results. At the “assets” scaling base, a 1 % increase in taxable temporary differences on average reduces taxable profit of the Russian organizations by almost 60 % (with a one-year lag – by 43 %). Restoration of deductible temporary differences at the “accounting profit before taxation” scaling base by 1 % on average leads to a 53.7 % decrease (with a one-year lag – by 67.8 %) in the taxable profit of the Russian organizations. Conclusion. Recovery of an active deferred tax position has a more tangible impact on the change in taxable profit than reversal of a passive position. The developed methodological schemes assess the deferred tax position of companies, as well as compare them with each other by the level of accruals of profit tax and determine the reasons for their relative overstatement or understatement. Theoretical significance consists in the refutation of the principle laid down in paragraph 16 of IAS 12 Income Taxes, which indicates the relevance of clarifying the economic content of deferred taxes in accounting standards. Keywords: accounting gaps, temporary differences, tax cash flows, deferred taxation, deferred tax liabilities, taxable income, reversal of temporary differences, taxable temporary differences