Do commercial accounts and the tax base have to be aligned?

Aguiar, Nina

http://hdl.handle.net/10198/6348

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Authors

Aguiar, Nina

Abstract(s)

A “formal linkage” between taxable income and commercial annual accounts forms a pillar of corporate tax. Its rationales are practicability; the annual accounts as a meaning of proof as to discretionary accounting judgments; and the notion that commercial income as a basis for taxation matches the ability to pay principle. These rationales assume that commercial income features suit the ability to pay requirements, an idea that has been contested recently on the basis that the IAS/IFRS normative system is conceived for purposes very different from those of taxation and therefore the “formal linkage” rule should be abandoned. In this paper the author sustains that the measurement of income under IAS/IFRS has all the necessary features to match ability to pay, including prudence. But even when the tax legislator considers that taxable profit must deviate widely from commercial profit, such deviation is technically compatible with a “formal linkage” between taxable income and commercial annual accounts, and such a “formal linkage” is totally justified by proof requirements concerning discretionary accounting judgements. This paper attempts to demonstrate this last point through the examples of Italy, Spain and Portugal current legislations.