Phd. dissertation summary: A study of the relationship between accounting and tax in Vietnam

To investigate the relationship between accounting regulations and tax rules in Vietnam. To investigate the moderating effect of corporate tax activities and earning management on Book-tax differences of Vietnamese listed firms.; Analyzing the factors affecting the book-tax differences; proposing policy implications.

THE UNIVERSITY OF DANANG

UNIVERSITY OF ECONOMICS

TRUONG THUY VAN

A STUDY OF THE RELATIONSHIP BETWEEN ACCOUNTING AND TAX IN VIETNAM

Major: Accounting Major code: 62.34.03.01

PHD DISSERTATION SUMMARY

DANANG, 2019

A dissertation submitted for the Degree of Doctor of Accounting of:

University of Economics, The University of Da Nang

Scientific suppervisors:

1 Assoc Prof Ngo Ha Tan, PhD

2 Assoc Prof Nguyen Cong Phuong, PhD

- Reviewer 1: Assoc Prof Hà Xuân Thạch, PhD

- Reviewer 2: Assoc Prof Chuc Anh Tu, PhD

This dissertation will be protected at the dissertation doctoral council, it met at University of Economics, The University of Da Nang at

The dissertation can be found at:

- National Library of Vietnam, Hanoi, Vietnam

- Learning Information Resource Center, The University of Da Nang

INTRODUCTON

1 Urgency of the dissertation topic

There was a close link between accounting profit and taxable income existed in continental European countries, only a loose association could be observed in Anglo-Saxon countries (OECD, 1987) Therefore, two essentially different structures of relationship between accounting and taxation can be distinguished The first structure will be labelled ‘independence’, the second structure

‘dependence’

Within the international accounting liturature, the relationship between tax and financial reporting differs widely among countries and envolves over time because of tax reforms and of the process of modernization of accounting systems The international comparative literature on the link between tax and financial reporting has rarely treated the Vietnamese case Nonetheless, for various reasons, the issue deserves attention

Vietnam has been currently in the process of finalizing its entry into the ASEAN Economic Community (AEC) and signing the Comprehensive Partnership Agreement and Progressive Trans-Pacific (CPTPP) In this context, the decision to extend the compulsory use of IFRS to the unconsolidated financial statements

of certain types of companies raised the question of how to manage the transition process from a tax perspective In particular, principles such as the prevalence of cubstance over legal form and fair value accounting, which entailed a significant degree of judgment, would have brought and excessive volatility of the tax base and would have reduced the certainty of tax law, causing many disputes between companies and government tax auditors and the accounting – tax

linkage will be change

Futhurmore, the liturature is rich in presenting the identification the relationship between accounting and tax in many develop countries but there is little evidence regarding the model or the link between accounting and tax in Vietnam (excepted Nguyen Cong Phuong, 2010)

As previously mentioned about the lack in theoretical literature review, the requirement new research method and the changing trend

in Vietnamese context, I have decided chose the following topic for

my Ph.D dissertation: "A study of the relationship between accounting and taxation in Vietnam" This study will help the relevant policymakers identify the ongoing linkages between accounting and taxation, thereby offering implications for the future development of the accounting and taxation system in Vietnam

3 Research questions

- What is the linkage between the accounting regulations and tax rules in Vietnam? How has the relationship between accounting and taxes been evolved during the last few years?

- Does the tax planing activities impact on accounting profit? Is there any connection between accounting and tax in practice What are the main factors influence the relationship between accounting

and taxation?

4 Research subjects and scope

Research subjects: The research subject of the dissertation is

the relationship between accounting and tax in Vietnam

Research scopes:

Content: This study sets out to examine whether or not such a

relation between accounting regulations and corporate income tax rules in Vietnam, and their application in practice

Space: This dissertation uses research data collected from the

financial statements of listed companies (Hanoi Stock Exchange and

Ho Chi Minh Stock Exchange)

Time: The accounting regulations and tax rules have been

collected and evaluated since 1995 (on policy issuanced time) The empirical research data has been collected 10 years from 2007 to

2016

5 Research methodology

Qualitative research: This approach (Deductive method) uses a

combination of document analysis, classification and systematization methods, as well as historical and logical methods to understand, compare, and evaluate the relationship between accounting regulations and tax rules Specifically:

Document analysis, classification, and systematization methods:

Through similarities, disparities, and major changes in regulations on accounting and taxation from 1995 to now on, this dissertation divides the progress of the relationship into three stages for comparison

Historical and logical methods: Historical methods relate to the

past, combined with a logical approach to assessing the evolution of

this relationship, in order to determine a trend of future linkages between accounting and taxation It combines with the logical methods to assess the evolution of the relationship between accounting and tax, finds out the trend of development in the relationship between accounting and tax in the future in Vietnam

Quantitative research: The dissertation is based on the

differences between accounting profit and taxable income It proposes a regression model to assess the factors affecting the relationship between accounting and taxation in Vietnam in practice The panel data is collected in the financial statements of 185 listed companies on Vietnam's stock market for a period of 10 years (from

2007 to 2016) The affecting factors are proposed based on economic theories, such as earning management, tax affecting, and control variables

6 Research Framework

7 New contributions of the dissertation

Theoretical contributions: This dissertation identifies the

relationships between accounting and tax in Vietnam, contributes to enriching the theoretical basis about the relationship between accounting and tax in the world and Vietnam The results of this dissertation provides the scientific basis about the relationship between accounting and tax for later researchers in Vietnam, paves the ways for continuing investigate and verify various aspects of the

relationship between accounting and tax

Practical contributions:

This dissertation has summarized, analyzed and assessed the relationship between accounting and tax, based on the measurement rules and regulations about accounting profit and taxable income,

combined with the empirical analysis to find the main factors affecting the relationship between accounting and tax in Vietnam This dissertation results provides scientific arguments for state managers to make the decisions and development policies in the future In terms of training, the results of this dissertation provides systematic documentations of accounting and tax for helping graduate students and postgraduate training students in accounting majors

8 Structure of the dissertation

The structure of the dissertation is organized into 4 chapters: Chapter 1: Theoretical basis of th relationship between accounting and tax

Chapter 2: The relationship between accounting regulations and tax rules in Vietnam

Chapter 3: Empirical research on the relationship between accounting and tax in Vietnam

Chapter 4: Conclusions and policy implications

CHAPTER 1 THEORETICAL BASIS OF THE RELATIONSHIP BETWEEN

ACCOUNTING AND TAX 1.1 Introduction

1.2 Accounting and tax

1.2.1 Accounting and accounting profit

1.2.2 Tax and taxable income

1.3 The relationship between accounting and tax

1.3.1 Theoretical basis of investigation the relationship between accounting and tax

Expenditure – Revenue accounting theory

Political cost theory

Contingency theory

Diffusion of innovation theory

Some theoretically of the relationship between accounting and tax

1.3.2 Aspects of the assessment the relationship between accounting and tax

1.3.3 Sources of divergence of two set of rules

The main reason for the difference between accounting and taxation is diferently purpose

1.3.4 Two divergency international accounting systems 1.3.5 The advantages and disadvantages of the relationship between accounting and taxation

1.4 The overview of local and international studies

1.4.1 Prior research about the linkages of accounting regulations and tax rules

Blake et al (1993) used the divergency of business environment, source of regulations and rules, conducted an descriptive analyze of the relationship between accounting and taxation in Germany, Spain, and UK, the authors related that the relationship between accounting and tax of three countries are differences

Hoogendoorn (1996) based on the signal of deferred tax income and realized an overview of the relationship between accounting and taxation those thirteen European countries In the article showed that the distinction between accounting and taxation dependence, and accounting and taxation was independence Thirteen countries were seperated to seven groups by classifing the level of relation changing

from independence to dependence

Lamb et al (1998) used Causality theory to propose a model for studying the relationship between accounting and taxation The model used 15 typical arenas related to measuring accounting profit and taxable income, to assessing according to 05 levels of the link from Disconnection to Connection There was one case show the independent relationship between accounting and taxation - Disconnection; There are four cases show the variety of close linkages between accounting and taxation - Connection This study conducted the assessment and classification on four countries: USA,

UK, France and Germany The results showed that Anglo-Saxon countries (the UK and USA) have independent relation between accounting and taxation than Continental European countries (France and Germany)

From the twenty-first century onward, many academic researchs followed the definite directions The first direction investigates the developing of linkage and diverge over time and countries; the second direction demonstrates on the relationship between accounting and taxation in different country; the third direction illustrates the advantages and disadvantages of the relationship between accounting and tax; the final direction analyzes the linkage between accounting and tax in practice

1.4.2 Reviewing the empirical research on the relationship between accounting and tax in practice

1.4.2.1 Reviewing the empirical research on the impact of tax

on accounting

In the preceding section, research gaps emerged from the case of tax domination in the study of Lamb et al (1998) That raises the

question of whether the taxation of the tax or the effect of the tax on the practice of accounting policy choice arises A number of studies

on the practicality of this issue are considered, in particular:

Chauveau (1995) argued that the influence of state factors causes tax dominance Hanlon et al (2008) investigated the behavior of tax changes in financial reporting The results conclude that as the links between financial statements and taxes become stronger, the accounting role of the accounting profit is reduced.Cuzdiriorean et al (2010) assessed tax and accounting factors The study combined with Jones' proposal (1991) on the Panel Data model to propose a model for assessing the impact of taxes on accounting

macro-1.4.2.2 Reviewing the empirical research on the factors affecting Book-Tax Differences

State-controlled businesses or economies with closer links between accounting and taxation are more likely to have tax aggressive than non-state firms ( Desai and Dharmapala, 2009; Wilson, 2009) There are some studies that provide evidence of the role of the difference between EBT and BTD, as part of assessing the overlap of financial accounting (Philips et al., 2003) Hanlon, 2005)

In contrast, Desai (2003) argued that the increase in BTD was consistent with the increase in the level of tax avoidance activities (the more proportional the tax avoidance activities are, the greater the BTD) Wilson's research (2009) expanded the use of BTD as a proxy for tax dominance and provided evidence that makes BTD a useful proxy for Tax aggressiveness on the relationship between accounting and tax in the practice of the business It also shows that the difference between accounting profit and taxable income (BTD)

is a common and important indicator for assessing the two accounting and taxation systems (Desai, Desai & Dharmapala, 2009; Direng et al., 2010; Armstrong et al., 2012; Lennox et al., 2013)

1.4.2.3 Context in prior research

1.4.3 Overview Vietnamese research about the relationship between accounting and tax

A study on the relationship between accounting and taxation in Vietnam was conducted by Nguyen Cong Phuong (2010) This study focused on assessing the relationship between accounting and taxation in Vietnam Based on the methodology of Lamb et al (1998) to investigate the status and development of the linkage between accounting and tax is in line with Vietnamese principles and regulations In addition, Nguyen Cong Phuong (2010) clarified the similarities and differences between the current regulations, because

of temporary difference and the permanent difference, labelled 'dependence' for the relationship between accounting and taxation in Vietnam In 2012, Pham Thi Bich Van used the ETR (Effective Tax Rate) method to assess the impact of taxable income and accounting profit through a survey The results confirm that the dependency model is maintaining (confirming the research results of Nguyen Cong Phuong, 2010)

1.4.4 The present research orientation

1.5 Summary

CHAPTER 2 THE RELATIONSHIP BETWEEN ACCOUNTING REGULATIONS AND TAX RULES IN VIETNAM 2.1 Introduction

2.2 Approaches and methodology

In order to investigate the evolution of the links between tax and financial reporting i use the methodology proposed in Lamb et al (1998) and enhanced in Nobes and Schwencke (2006) and Nguyen Cong Phuong (2010) Their methodology classifies the operational links between the two systems on the basis of the different degree of connection or disconnection There are 4 degree for classification be used, case I (Disconection) refer to those cases where tax and financial reporting are independently regulated, while Case II (Identify) consists of the arenas in which there are two identical sets

of tax and financial rules Case III (Accounting leads) arises when accounting rules are more detailed than tax rule, so that tax practice adheres to accounting practice Vice versa, the link is classified as Case IV (Tax Leads) if a tax rule is applied instead of a vague or not sufficiently detailed accounting rule Case V (Tax Dominates) will

be test in chapter 3

This researches identify and analyze 18 accounting arenas on the basis that thay affect the computation of taxable income and accounting profit in 3 periods (1996-2006, 2006-2014, 2015-2017)

2.3 The evoluation of the relationship between accounting and tax in Vietnam

The period before 1995: At this stage, accounting and taxation were only considered as a tool to support the state planning The independency level of accounting and taxation was very low

The period from 1996 to early 2006: Second-stage tax reform started through the European Community (EC), replacing the Sales Tax and Profit Tax by Tax Value Added and Corporate Income Tax

in 1997 In this period, the interaction between accounting and taxes

is more clearly, such as the depreciation of fixed assets, the cost of inventory, and so on There is a parallel between accounting and tax This is partly due to the fact that accountants have made significant progress (formulating the Accounting Act of 1995) with the emergence of clearer accounting and measurement principles In contrast, taxes are also heavily based on accounting to help tax control, tax inspections, such as financial statements of enterprises (based on accounting principles) to be submitted to the tax authorities Since then, taxes and accounting have been considered as two mutual instruments and together help the State manage the macroeconomy

The period from 2006 to now (detailed from 2006 to 2014 and from 2015 to now): Along with the development of political institutions, the Vietnamese Constitution in 2013 came into being in the place of the 1992 Constitution with clearer directions on the ownership of property With regard to accounting, implementing guidelines, seminars with the active participation of accounting professional organizations, the role of professional organizations with increasing demands for taxation The tax administration system had been developed in a neat, compact and modern way Especially, from 2014 onwards, there were many the drastic moves of the State

to help the tax system to be strengthened in order to meet the request

of ASEAN Economic Community

2.4 Assessement the linkage of Accounting and Tax rules

2.4.1 The degree of alignment between the mearurement regulations of accounting profit and taxable income

2.4.1.1 A method of assessing linkage

The method of assessing the linkage of accounting and tax is the

methodology proposed in Lamb et al (1998) and enhanced in Nobes and Schwencke (2006) and Nguyen Cong Phuong (2010) It based on the relationship between regulations, rules and many policies promulgated on measurement accounting profit and taxable income Eighteen transactions and arenas are used to evaluate the four level links betweem accounting and tax, from ‘independence’ to

‘dependence’ tructure

2.4.1.2 The resuls of assessing linkage

Table 2.4 shows that the number of Case I in the total number of cases analyzed in Stage 1 (1996-2006) was 5/27, corresponding to 18.52%, the second phase (2006 - 2014) was 11/28, corresponding to 39.29%, phase 3 (2015 - 2017) is 20/28, corresponding to 71.43% It can be seen that the ratio is increasing, showing the independence between the principles and regulations in accounting and taxes over time Increased independence leads to the gradual reduction of tax based accounting or tax-related accounting due to lack of relevant regulations, which results in gradual reversal of accounting policies and taxes The accounting and tax regulations are becoming more comprehensive

In comparison with previous research by Nguyen Cong Phuong (2010), the relationship between accounting and taxation in our country no longer follow the dependent model but gradually moved

to the independent model (in the direction of policy aspect) In comparison with the rate of 55% of IFRS 2008 (Gavana et al., 2013, IASB, 2008), the accounting independence ratio between Vietnam and Vietnam is currently 71.43% These sesults are suiltable with the progress of the developing in Vietnamese economic from time to time Accounting and tax systems were designed to serve the needs