Tax Impact of International Financial Reporting Standards: Evidence from a Sample of Italian Companies

Does the adoption of IFRS (International Financial Reporting Standards) by E.U. countries result in a reduction or in an increase of the degree of alignment between tax and financial reporting? What are the potential tax effects if IFRS were used as the basis for corporate taxation? We address these issues in the context of the Italian accounting and taxation systems. Italy is one of the European countries with a closer linkage between financial and tax accounting and where there are relevant conceptual differences between the domestic accounting framework and the IFRS framework. As a consequence, the choice of extending IFRS to the annual accounts of certain types of companies has immediately implied a problem of mismatch between the new set of accounting standards and tax rules. After a three years parenthesis of tax neutrality, Finance Act 2008 established that the tax base of regional business tax (Irap) is exclusively driven by financial reporting, regardless of the set of accounting standards adopted, domestic Gaap or IFRS. The paper compares the recognition and measurement criteria proper to Italian Gaap and IFRS potentially responsible for a different Irap tax burden among taxpayers. We propose a framework to detect the expected effects that, in principle, might affect the measure of the specific items included in the Irap base; afterwards, using a sample of Italian listed companies, we empirically test the departure from the tax neutrality principle