The relationship between tax and accounting rules.docx
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Therelationshipbetweentaxandaccountingrules
Therelationshipbetweentaxandaccountingrules‐theSwedishcase
Author(s):
JohnBlake(ProfessorintheDepartmentofAccountingandFinancialServices,UniversityofCentralLancashire,Preston,UK)
KatarinaAkerfeldt(SkattemyndigheteniStockholmslan,Haninge,Sweden)
HilaryJ.Fortes(SchoolofAccountingandFinance,MiddlesexUniversityBusinessSchool,TheBurroughs,London,UK)
CatherineGowthorpe(DepartmentofAccountingandFinancialServices,UniversityofCentralLancashire,Preston,UK)
Abstract:
Tracesthehistoryoftheimpositionofacomprehensivetax‐accountinglinkinSweden,identifyingwaysinwhichprofessionalaccountantshavesoughttocircumventtheimpactofthelinkandconsideringtheeffectofthelinkonthethreebodiesinSwedeninvolvedinformulatingaccountingregulationsandrecommendations.AnalysestherangeofargumentsputforwardintheliteratureinSwedenforandagainstthebindinglink.ReportsoninterviewswithleadingSwedishaccountingpractitionersontheirexperienceandviewsofthelink.
Keywords:
Accounting,Rules,Sweden,Taxation
Type:
Generalreview
Publisher:
MCBUPLtd
Article
Objectives
WhileboththeEuropeanUnionandtheInternationalAccountingStandardsCommitteepursuetheobjectiveofharmonizingnationalaccountingpractices,majordifferencesbetweennationalaccountingapproachesremain.OneimportantdifferenceisbetweencountrieslikeGermany,whereacomprehensivebindinglinkbetweentaxandaccountingrulesisfundamentaltotheaccountingsystem,andcountriesliketheUK,wherethereisnosuchcomprehensivelink,albeittaxinfluencesmaybeanimportantfactorinsomeareasofaccountingpolicychoice.
Swedenoffersusanunusualexampleofacountrytornbetweenthetwoapproaches,withaformallegalaccountingsystembasedonabindingtax‐accountinglinkandaprivate‐sector,standard‐settingbodyseekingtobreakthatlink.Inthisarticlewereportonastudyofthedebateoverthetax‐accountinglinkinSweden,basedonaliteraturereviewandinterviewswithpractitioners.
Thelinkbetweenaccountingandtaxation
Twocountries,GermanyandtheUK,canbeseenasleadingdistinctiveandcontrastingaccountingtraditionsintheEuropeanUnion.Generalaccountingfeaturesofthesetwoaccountingmodelshavebeencharacterizedasfollows(adaptedfrom[1]):
Anglo‐Saxon(includingUK)
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fair;
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shareholderorientation;
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disclosure;
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taxrulesseparate;
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substanceoverform;
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professionalstandards.
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Continental(includingGermany)
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legal;
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creditororientation;
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secrecy;
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taxdominated;
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formoversubstance;
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Governmentrules.
TheEuropeanUnion’sexperienceofattemptingtoachieveharmonizationofaccountingpracticethroughoutthecommunityillustratesthedifficultyofreconcilingthesetwotraditions.Thefirstdraftofthefourthdirectiveoncompanylaw,relatingtotheharmonizationofcompanyaccountingrequirements,wasproducedin1971.ItreflectedtheaccountingtraditionsofFranceandGermanyinbeingbasedonrigidprescription.Following1January1973,whentheUKjoinedtheCommunity,theconcernsoftheaccountancyprofessionweresummarizedbyoneoftheUK’sleadingacademicaccountants:
ThemostimportantfearofBritishaccountantsseemstobethattheDirective,ifimplementedinitspresentform,woulddiscounttheimportancewhichweintheUKattachtothe“trueandfairview”provisionoftheBritishlegislation,whichleavesroomforthenecessaryflexibilityinpreparingandreportinguponcompanyaccounts[2].
UnderpressurefromtheUKGovernmenttheseconddraftofthedirectivewasamendedbothtoincorporatethe“trueandfairview”conceptandtoallowmoreflexibility.AsapartnerinaleadingUKfirmofaccountantsobserved:
Thisisamostimportantchangeinemphasisweakeningasitdoestheoriginalprescriptiveapproachofthefirstdraft[3].
WithinthefourthdirectiveboththeUKandGermanyhavesoughttominimizechangefromtheirtraditionalapproach.Thus,whentheUKGovernmentintroducedlegislationtoimplementthedirective,theministerstatedthathewas“atpainstoimposetheminimumchangenecessaryinactualaccountingpractice”[4].SimilarlyinGermanythepreambletothelegislationimplementingthefourthdirective,alludingtothetrueandfairview,states:
Inspiteofthepretentiousformulationitissupposedthatforpracticetherewillbenoprinciplechanges[5].
Akeydifferencebetweenthetwocountrieshasbeenidentified:
UKaccountingpracticeshavedevelopedseparatelyfromtaxlaw...whereasGermanaccountinghasbeensignificantlyaffectedbytaxrules[6].
InGermanytheMassgeblichkeitsprinzip,translatedasthe“principleofbindingness”(seeforexample[7,pp.8‐9])orthe“principleofcongruency”[8]laysdowntherelationshipbetweentaxandaccountinglaw:
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Accountingruleslaiddownbycommerciallawapplytothefinancialaccountsand,providedtheyarenotspecificallycoveredinsomeotherwayintaxlaw,alsoapplytothetaxaccounts.
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Wheretaxregulationsofferopportunitiestoreducetaxableincome,thesebenefitsmaybeenjoyedonlyiftheyarerecognizedinthefinancialaccountsaswellasthetaxaccounts,soinpracticefirmswillacceptthesetaxregulationsasaconstraintontheirchoiceofaccountingpolicyinthefinancialaccounts.
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Incertainspecialcasesthetaxregulationsmayincreasetaxableincomecomparedtotheprovisionsofcommerciallaw.InthesecasesthetaxregulationsmustapplyinthetaxbalancesheetsothattheMassgeblichkeitsprinziphasnoeffect.
Whatissignificanthereisthatthedominanceoftaxlawoveraccountingpracticeiscomprehensive.IntheAnglo‐Saxontradition,bycontrast,taxfactorsmayinfluencespecificaccountingpolicychoices[9,10],butonlyonapiecemealbasis;overall,thebasisofcomputationoftaxableincomeandreportedaccountingincomemaydiffersubstantially.
Consequenceswhichfollowonfromacomprehensivetaxaccountinglinkinclude:
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Companieswishingtoenjoyspecialtaxallowancesmustreportequivalentexpenditureinthepublishedaccounts,sothatreportedprofitstendtobedepressed.Thus,whenasetofaccountingdatawassenttotheUKandGermantechnicalpartnersofaninternationalaccountingfirm,theestimatedprofitaccordingtoUKpracticewas192millionECU,accordingtoGermanpractice133millionECU[11].ALondoninvestmentanalysthassuggestedthat,onaverage,UKreportedprofitsshouldbereducedbyone‐quartertobecomparablewithGermanfigures“becauseofinventiveaccountantsandahistoryofinflation”[12].
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Incountrieswithacomprehensivetax‐accountinglink,thetendencytowardsconservatismwillnotnecessarilyapplyconsistentlyfromyeartoyear.Inyearswhenalossismadeexcessivelyconservativeprovisionsagainstprofitinpreviousyearsmaybewrittenbacktoprofitinordertobenefitfromtaxlosses.Thusan“incomesmoothing”effectarises,wherebyprofitisunderstatedingoodyearsandoverstatedinbadyears.Anexamplewasrevealedin1993whenDaimler‐BenzreportedaprofitofDM615millionbasedonGermanaccountingrulescomparedtoalossofDM1,839millionbasedonUSaccountingrules.Thecontinuedavailabilityoflarge“secretreserves”,arisingfromexcessprovisionsmadefortaxpurposesinpreviousyears,isillustratedbyadifferencebetweenreportedequityonaGermanbasisofDM18,145millionandonaUSbasisofDM26,281millionasattheendof1993[13].
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Incountrieswherethereisnotacomprehensivetax‐accountinglinkasystemofprovisionfor“deferredtaxation”isneededtoaccountfortimingdifferencesbetweentherecordingofexpensesfortaxandaccountingpurposes.CountrieswheredeferredtaxationhascausedmajorcontroversyincludetheUK,TheNetherlandsandtheUSA.Bycontrast,incountrieswithatraditionofastrongtax‐accountinglinksuchasGermanyandFrance,nocontroversyhasarisenbecausesuchtimingdifferencesarefewandtrivial(see[14]).
InbothGermanyandtheUKthereseemstobeabroadconsensusamongthoseconcernedwithaccountingtopreservetheirtradition.InGermanythelinkisseenasunderpinningakindofsocialcontract,wherebygeneroustaxallowancesleavecashresourcesavailabletoreinvestinthebusiness,andtheacceptanceofcorrespondinglylowprofitsreducessimilarlytheclaimsofcapitalfordividendsandlabourforwages(see[15]);indeed,implementationoftheEUdirectivesonaccountinginGermanyappearstohavebeendelayedtoallowtimetodevisewaysofcomplyingwithoutchangingthetax‐accountinglink[16].IntheUKtheaccountingprofessionhasbeensimilarlyattachedtotheirtraditionalapproach,lobbyingvigorously,forexample,tobringtheUK“trueandfairview”requirementintotheEUdirectives[17,pp.84‐5]..
WithinSweden,bycontrast,theissueastowhetheracomprehensivetax‐accountinglinkshouldcontinuehasstimulatedconsiderablecontroversy.Astudyofthatdebate,therefore,boththrowslightontheargumentsforandagainstthetax‐accountinglinkandillustratesthecontrastbetweentheAnglo‐SaxonandtheContinentalaccountingmodels.
AccountingregulationinSweden
In1928theMunicipalIncomeTaxActwaspassed,creatingtheSwedishlinkbetweentaxandaccounting.ItisnotsurprisingthatSwedentookthisroute,giventhatthefirstprofessorsofaccountinginSwedenwereeitherGermanoreducatedinGermany(see[18]).In1929anAccountingActwaspassed,sothatthetax‐accountinglinkwasformedbeforeabasiclegalaccountingframeworkwasputinplace.
Fromthe1960sonwardstheinfluenceoftheleadi