The Impact of Adopting IFRS on Corporate ETR and Book-Tax Income Gap

This study examines the impact of the adoption of the Australian equivalents to International Financial Reporting Standards (AIFRS) on the corporate effective tax rate and book-tax income gap in Australia. Book-tax income gap is measured by the differences between a firm’s effective tax rate (ETR) or current effective tax rate (CETR) and the statutory tax rate (STR). The difference between ETR and STR measures permanent book-tax income gap only, while the difference between CETR and STR measures the total (permanent and temporary) book-tax income gap. This study also examines whether the major accounting rule changes from the previous Australian Generally Accepted Accounting Principles/Practices (AGAAP) to AIFRS, as measured by their respective adjustment to profit before tax and tax expense deflated by the total assets of the firm, affect the changes in ETR and CETR on the adoption of AIFRS in 2005. The results show that, first, the adoption of AIFRS has lowered the CETR only and widened the total (hence temporary) but not permanent book-tax income gap. Total book-tax income gap has been widened by 1.51 percentage points caused by changes in temporary differences. Second, the impact of adopting AIFRS on CETR and ETR does not vary significantly across firm sizes and industry affiliations. Third, among the ten major accounting rule changes, it is found that total book-tax income gap has been widened because the positive impacts due to the rule changes of goodwill, intangibles (other than goodwill) and provisions outweigh the negative impacts brought by the rule changes of impairment of assets and tax expense.