Tax Planning and Book-Tax Difference

This study investigates factors for the difference between financial accounting (book) income and taxable income (i.e. book-tax difference) of publicly-listed Malaysian firms during the years 2002 to 2004. Extant literature has discussed the divergence of the two incomes since late 1990s. However, the cause for the difference is not known. Researchers argued that in tax planning strategies, managers of firms opportunistically take advantage of the difference rules between Generally Accepted Accounting Principles (GAAP) and tax laws to report higher financial accounting income to shareholders and lower taxable income to tax authorities. Hence, this study uses the firm-level financial data to measure corporate tax planning strategies of 212 public listed firms (636 firm-years) from 2002 to 2004. Five accounting variables are used to examine the tax planning strategies used by firms as follows: exempt income, disallowable expenses, tax incentives, business losses and deferred tax expense. The study found that firms divesting its line of business in a tax-favored manner to effectively benefits from exempt income, tax incentives and deferred tax expenses. Hence, this study contributes to tax literature the impact of the dual reporting systems on corporate income tax liabilities which can be used by the policymakers, accounting standards regulatory bodies and tax authorities to narrow the gap between the two incomes.