Investigating Tax Avoidance Applying Accounting Information from Financial Statements

Abstract

Nowadays, there is a vivid discussion related to tax planning and the way financial statements become a core tool for managers, to achieve targeted tax basis. Recently, there has been significant research being done on analyzing covenants useful to detect managers’ discretionary accounting policy decisions to align with more aggressive tax-related firm policies. Our study is aimed to address this essential topic, but is limited to the Romanian environment. For this purpose, we have carried out an empirical econometric analysis, on a sample of 200 firms reporting to the NAFA. The study analyzes the financial statements submitted to NAFA in the period of 2010–2016. The analysis consists of two levels of discussion. First, we have tested the relevance of several financial indicators, in modeling the risk of tax evasion, as per NAFA methodology. Second, we have addressed the problem of the marginal effect of some fundamental balance sheet elements on the tax level reported through financial statements. The results of the study confirm the relevance of financial information disclosed by financial statements. Therefore, seems that even in a Romanian environment, with an accounting regulation highly polluted by tax framework, managers tend to practice earnings management with the purpose of tax basis minimization. A fundamental tool used by managers is the level of discretionary accruals, frequently enclosed into the SG&A expenses.