A Study On The Relationship Between Corporate Income Tax And Earnings Management

In the background which earnings management and tax avoidance problems arequite prominent, we research the relationship between corporate income tax andearnings management on two aspects, the income tax obligation of earningsmanagement research and the earnings management for tax avoidance research. Withthe questions that weather the listed companies avoid income tax obligation of earningsmanagement through the manipulation of non-taxable book-tax differences, and weatherthe listed companies transfer profits cross period in the background of new corporateincome tax law, we analyze the related research on the relationship between corporateincome tax and earnings management at home and abroad, then we test our model andhypothesis by empirical research.The main propositions of this paper are as follows.①Weather the listed companiesavoid income tax obligation of earnings management when conducting earningsmanagement?②Weather the companies in the higher tax rate group are more likely toescape the tax obligation of earnings management through non-taxable book-taxdifferences?③Weather the listed companies transfer profits cross period in thebackground of new corporate income tax law?The main conclusions of this paper are as follows.①Book-tax differences arepositively related with earnings management.②The listed companies usually have theincentives to manipulate non-taxable book-tax differences to avoid the tax obligation ofearnings management, but we also find that the tax evasion through non-taxablebook-tax differences is quite limited. For one dollar manipulated earnings, only4.8cents are exempted from tax obligation, which implies that managers would rather paytax for earnings management in order not to induce the suspicion of capital market ortax authority.③The companies in the higher tax rate group are more likely to escape thetax obligation of earnings management through non-taxable book-tax differences. Forour sample, when income tax rate increase one percent point, the ratio of book-taxdifferences to total assets will increase by0.02.④There are significant positiverelationship between asset size, auditor, return on assets and non-taxable book-taxdifferences; and there are significant negative relationship between the actual controllertype, growth and non-taxable book-tax differences.⑤The companies with reduced taxrate managed earnings obviously in response to tax reform; but companies with increased tax rate didn’t, this may be due to the transition period for the companies withpreferential tax policies. In addition, the listed companies transfer profits cross period ingeneral to reduce the current income tax expenses in the first three years after theimplementation of new corporate income tax law.