Empirical Study On Income Tax Reform And Earnings Management

The new enterprise income tax law was implemented on1st January,2008. The new income tax law, through unification of income tax, reduction of tax rate, specification of tax base, adjustment of preferential policy guidance and other measures, took drastic reform on the original enterprise income tax law. This had great impact on corporates’earnings management, tax planning, and book-tax differences. This income tax reform provides a great opportunity for our research.Managers provides separate reports to the tax authorities and owners, which deliver different contents of accounting information, namely, tax returns and financial statements, to realize different objectives. Using earnings management to increase profit is often accompanied by the increase of income tax. Managers are faced with financial statements cost and tax cost trade-offs. In order to get rid of the dilemma, a company has motive by manipulating accounting profit and taxable income differences (hereinafter referred to as book-tax differences), that is, adjusting the non-taxable profit, raising accounting profit and remaining taxable profit unchanged at the same time, to avoid the tax cost of earnings management.In this paper, I review and summarize classical literatures and related theories at home and abroad, regarding the research of earnings management behavior, the relation between earnings management and book-tax difference, and the relation between earnings management and income tax. On the basis of theoretical analysis, I put forward the hypothesis that managers manipulate book-tax differences to avoid the tax obligation of earnings management, but after the income tax reform, the cost of this behavior increased. I select data of listed companies from2007to2011, build model to study the relation between book-tax differences and earnings management, and draw following conclusions through empirical study:Profitable listed companies of our country do manipulate book-tax difference to avoid tax obligation of earnings management, and haven’t paid income tax for all managed accounting profits. The new income tax law’s intention to strengthen anti tax avoidance has been realized in certain level. After the reform, listed companies earnings management behaviors lead to a decrease in book-tax difference, and the cost of this behavior increased.At the same time, the avoided tax obligation through manipulation of book-tax difference is relatively limited. On average, only0.118RMB of every1RMB accrued profit manipulation can evade tax cost.This paper studies earnings management behavior, taking income tax reform into consideration, finds that the book-tax difference caused by earnings management decreased while the cost of earnings management has increased after income tax reform. This helps tax management of relevant government departments, as well as investors and other external information users to gain a better understanding of company information.