Effects of digital economy involvement on book-tax differences in Malaysia

Abstract

Malaysian government provides tax incentives to firms that involve in digital economy to increase digital economy activities in the country. This, however, can enlarge the country’s tax gap. This study, therefore, attempts to investigate the effects of firms’ digital economy involvement on book-tax differences (BTD), and its components, comprising permanent, temporary and statutory tax rates differences. A total of 846 firm-year data of Malaysian-listed firms from 2013 to 2018 were analysed. The relationships between digital economy involvement and temporary differences, and statutory tax rates differences were found positive and significant. This suggests that firms, through temporary differences, are leveraging on the usage of ICT to enjoy the incentives provided by the Government. The firms are also benefiting from cross-border businesses to secure tax benefits from differences of tax rules between jurisdictions. This study contributes to literature by providing further empirical evidence to support theory of tax incentives within the context of technology acceptance model. This study also contributes to the authority by providing insights on the extent the digital economy-related incentives can affect the country’s tax gap. Firms can also be benefited from this study in their attempts to gauge the effects of digital economy activities on their tax position.

Keywords

• book-tax differences
• digital economy
• permanent differences
• temporary differences
• statutory tax rates differences
• malaysia