Book-tax differences. The case of Greek legal entities according to accounting standards and the tax framework

¹Grigorios Lazos, ²Andreas Koutoupis, ³Michail Pazarskis, ⁴Leonidas Davidopoulos

¹Hellenic Open University, ^{2, 4}University of Thessaly, ³International Hellenic University

 Extended abstract

The aim of this work is to investigate the differences between the accounting and tax bases of legal entities operating in the Greek economy, and to compare them with the corresponding differences that companies operating in developed economies show. According to accounting theory and practice, the financial results (profits/losses) of a company arise based on what is defined in the accounting standards (IFRS or Greek Accounting Standards), thus constituting the accounting basis. On the other hand, the tax basis stems from the tax legislative and regulatory framework, which in several cases defines different rules for recognizing income and expenses in relation to the accounting standards. The discrepancy between the two bases of accounting and tax creates the so-called book-tax differences. The differences between the accounting and tax bases are distinguished in two main categories: a) permanent differences that are not reversed in the future and are mainly due to expenses that are not tax deductible (fines, penalties, income tax, entertainment expenses, etc.) and to income that is permanently exempt from taxation, and b) temporary differences that are reversed in the future and which are due to the different time of recognition of income and expenses, as a result of e.g. different depreciation rules between the accounting and tax framework, or the different way of recognizing provisions, resulting in the creation of deferred tax liabilities/receivables. In the context of this work, the official data of the Greek Tax Administration (Independent Authority for Public Revenue) concerning the subject under consideration, from 2015 to 2023 (the last year for which official data are available), were examined in detail for all legal entities operating in the Greek economy. In particular, both permanent differences and temporary differences were examined separately in terms of the accounting result (profits/losses) and turnover. Furthermore, corresponding relevant studies for developed countries (USA, United Kingdom, Canada, Australia, Germany, Netherlands, etc.) were searched in the international scientific literature. The analysis showed that both permanent differences and the absolute values of temporary differences as a percentage of accounting results, as well as a percentage of turnover, are moving for the entire reference period at a much higher level than the average of the developed countries with which the comparison was attempted. In particular, the highest values were observed in 2015 and 2016, which are essentially the first years of the full implementation of the new income tax code (Law 4172/2013), and in 2020 (the year of the Covid-19 pandemic). Therefore, the book-tax conformity index, which shows how close accounting and tax results are, is particularly low in Greece, due to the large differences between accounting and tax bases. This fact has the effect of limiting transparency, due to difficult comparison of accounting and tax bases, strong fluctuations in tax adjustments mainly due to temporary differences, increased risk for investors due to greater uncertainty about any future tax burden, and increased incentives for tax aggressiveness and earnings management, due to the use of temporary differences as a tool for managing financial results. Finally, in order to address the above-described situation and increase the book-tax conformity index, it is proposed that the tax framework become more stable with fewer adjustments and a long-term horizon, converging more towards accounting standards, especially in cases of calculating depreciation and provisions, to limit cases of permanent differences, which the tax administration can apply with greater security due to the ongoing digital transformation (myDATA, electronic invoicing, etc.), and to link the tax recognition of expenses to the business purpose to a greater extent, as is the case in other developed OECD countries.

JEL classification: H25, M40, M41, M48