The Impact of Accruals on Tax Avoidance

This paper was motivated by the idea that having an income with a high portion of accruals induces tax avoidance, which is inferred from the fact that increased accruals degrade the ability to pay taxes. Likewise, accrual, a non-cash part of earnings, impacts the investor’s decision and may also impact the taxpayer’s strategy. If firms have high accruals in their incomes, their ability to pay taxes will be reduced. Because taxes should be paid in cash. Hence, the tax avoidance may be considered. Therefore, this study investigates the relations between the portion of accruals in income and the tax avoidance. In accordance with prior literatures, this research measures tax avoidance as ETR in two ways; which are CashETR, cash tax paid divided by pretax earnings and SCashETR, cash tax paid divided by sales. CashETR measures nonconforming tax avoidance and SCashETR measures conforming tax avoidance. The regression of accruals on the tax avoidance measure shows significant responses. EBTT, the accruals divided by the pretax net income showed a negative response to the cash effective tax rate in the whole sample, as opposed to a positive response in the cash effective tax scaled by the sales (SCashETR). It means that when EBTT goes up, the ability of tax payment goes down in non-conforming perspectives, however, the ability of tax payment goes up in conforming perspectives. This finding implies that the ability to pay taxes is an important matter in relation to tax compliance.