Abstract

Prior researches independently use book-tax income differences, temporary and permanent differences, income-related tax differences and effective tax rates such as GAAP ETR and current ETR. This paper discuss mathematically and verify empirically relations between these tax variables to be helpful for proper selection of tax variables, estimation of results‘ direction, improvement of test power. Temporary and permanent differences are net amount of tax income-decreasing differences minus tax income-increasing differences and income-related tax differences are total tax expense minus current tax expense. GAAP ETR is defined as total tax expense divided by book income and current ETR is defined as current tax expense divided by book income. 2004-2007 years' data of 283 listed nonfinancial firms are used in analysis. The empirical results support mathematical relations as follows. First, book-tax income differences, temporary and permanent differences have positive relations to income-related tax differences. Second, book-tax income differences and permanent differences have negative relations to both GAAP ETR and current ETR. Temporary differences have a negative relation to current ETR, but have no direct relation to GAAP ETR. Third, income-related tax differences are positively related to GAAP ETR and negatively related to current ETR.

Keywords

• Book-Tax Income Differences
• Temporary Differences
• Permanent Differences
• Income-Related Tax Differences
• Effective Tax Rates

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