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TitleEarnings management induced by tax planning : the case of Portuguese private firms
Author(s)Marques, Mário
Rodrigues, Lúcia Lima
Craig, Russell
KeywordsEarnings management
Income tax
Special payment on account
Issue date2011
JournalJournal of International Accounting, Auditing and Taxation
Abstract(s)In Portugal, a concept of taxable income associated closely with reported accounting income is used to determine the tax liability of firms. Recently, the Portuguese government legislated to introduce a system of “special payment on account” (SPA). Firms were required to pay an amount of income tax in advance that varied between a promulgated minimum and maximum. Although such a tax is unique to Portugal, other countries have tax arrangements that are similar in intent. Thus, Portugal’s experience with the introduction of a SPA regime is likely to be instructive in fiscal policy deliberations in other settings. We assess the extent to which the SPA tax policy measure encouraged private Portuguese companies to manipulate earnings. We find that earnings manipulation appears to have been motivated by desire to minimize SPA. Firms whose estimate of SPA liability fell within the range of minimum and maximum limits of the SPA had higher levels of discretionary accruals than firms whose estimate was (equal to or) above the ceiling imposed by the new legislation. Firms with higher rates of income tax were found to reduce earnings to near zero. Firms with higher average income tax rates were more likely to manipulate their earnings than other firms. Our results reinforce the importance for auditors, stakeholders, and tax policy advisors to be alert to the close association between tax planning considerations and reported earnings in their monitoring, analysis, and policy advising activities.
Publisher versionThe original publication is available at
AccessRestricted access (UMinho)
Appears in Collections:iMARKE - Publicações em Revistas (com revisão por pares) / Articles in Journals (peer reviewed)

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