An exploratory study of the tax rate reconciliation disclosures of JSE listed companies

Abstract

Background: Tax rate reconciliations provide stakeholders (investors, analysts and regulatory bodies) with an understanding of the relationship between accounting profits and tax expenses as well as assist researchers in understanding the sources of variation in effective tax rates.

Aim: This study analysed disclosed tax rate reconciliation data to identify possible explanations for fluctuations in effective tax rates.

Setting: The study exploited hand-collected tax rate reconciliation data of companies listed on the Johannesburg Stock Exchange (JSE) in South Africa for the financial reporting periods ranging from 2015 to 2022.

Methods: The exploratory study employed descriptive statistics and a mixed-model analysis of variance in pursuit of three objectives: (1) to describe the trend in tax rate reconciling items from 2015 to 2022 to identify possible sources of fluctuations, (2) to analyse variances in effective tax rates based on fair value adjustments and (3) to analyse variances in effective tax rates based on disclosure format (numeric vs. percentage).

Results: The main reconciling item category identified over the reporting periods was permanent differences that could be indicative of aggressive tax planning and warrant further research. The importance of both positive and negative permanent differences in explaining the fluctuation of effective tax rates of listed companies is highlighted for further research. Industry classification, fair value adjustments and disclosure format were also found to be significant factors in explaining fluctuations in effective tax rates.

Conclusion: The descriptive findings of this study provide insights into possible fluctuations in effective tax rates.

Contribution: The findings of this study highlight the importance of industry classification, permanent differences, fair value adjustments and disclosure format as explanations for fluctuation in effective tax rates. Furthermore, this study contributed to existing literature in support of the consistent and detailed tax disclosures by listed companies that support the use of such data in future research.