The David R. Tillinghast Lecture the Odd Couple: A Common Future for Financial and Tax Accounting?

Summary

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Book-tax conformity is an old issue; the international dimension is the new issue. The gradual international convergence of accounting standards leads to the question whether the gradual evolution of a common set of standards in the financial accounting world will provide additional reasons to opt for a closer alignment of taxable income and business profits. First, a common relationship between taxable income and international accounting standards in different parts of the world would lead to more transparency for investors. It would also be valuable for the resolution of transfer pricing conflicts if tax authorities in the involved states could start from a similar set of accounts for the parent and the subsidiary or branch in order to find common ground for the identification and resolution of specific deviations. From the perspective of the EC, the framing of a common consolidated tax base starting from the recently adopted International Accounting Standards might even pave the way for far-reaching integration of corporate tax systems in Europe.

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The David R. Tillinghast Lecture the Odd Couple: A Common Future for Financial and Tax Accounting?

I. INTRODUCTION

In the 1968 movie "The Odd Couple"1 actors Walter Matthau and Jack Lemmon are forced to share their daily life in the same apartment although their characters and ways of life could not be more different. Matthau plays Oscar, who is proletarian, down to earth, his habits a bit shabby, with a big mouth and a big heart-just like a tax lawyer. Lemmon is Felix, a middle-class office employee, who cares about every detail of his surroundings, a timid but morally impeccable character who cleans up Oscar's poker cards. For him, every deviation from his well-planned daily routine makes him feel nervous-just like an accountant. Is it possible that these types can get along together? On the face of it one would answer this question in the negative. So does the movie: Oscar throws Felix out of the house. But not for a long time. Television made "The Odd Couple" one of the most successful long-running sitcoms of the 1970's, which has been rebroadcast every year since.

The same holds true for the issue of book-tax conformity when it comes to the computation of business profits for tax reasons. There is a longstanding and prevalent opinion in many countries that the different goals of taxation and accounting render it impossible to rest the assessment of a person's taxable income on the results of financial accounting.2 Nevertheless, comprehensive or limited book-tax conformity is not only a common feature in many tax laws around the globe but its introduction (or abolition) is subject to debate nearly everywhere. The pros and cons include both political and technical issues and cover the full range of law and economics. Moreover, as tax and accounting rules and principles themselves have changed over the years, the issue of book-tax conformity has proven to be a moving target.

The current debate on book-tax conformity has heated up in different parts of the world for quite different reasons. I take as examples the ongoing controversies in Germany, the United Kingdom, and the United States. This comparative view shows the broad range of perspectives taken on this issue. Moreover, international developments, in particular a recent initiative by the European Commission, provide ample reason for a launch of the book-tax conformity debate at the international level. Stretching beyond the boundaries of the European Union are other aspects of book-tax conformity that address global issues like transfer pricing or corporate governance, both of which are discussed in OECD circles.

II. THE GLOBALIZATION OF ACCOUNTING RULES

The analysis of the current tax debate on book-tax conformity has to start from the fact that we are witnessing an accelerated global convergence of financial accounting rules. At the beginning of this development in financial accounting, in the early 1990's, the assumption was widely shared in the European corporate sector that access to international capital markets-most notably the New York Stock Exchange-would be a basic prerequisite for economic success in the future.3 In order to get access to the NYSE or NASDAQ, a foreign company is obliged to file consolidated accounts conforming to U.S. GAAP with the sec.4 Multinational companies from Europe soon learned that full compliance with U.S. GAAP (and additional sec rules) led to hefty overhead costs as they were not relieved from the obligation to draw up their accounts back home under the rules harmonized by the Fourth and the Seventh European Company Law Directive.5 In addition to this doubling of compliance costs, companies found it hard to explain the diverging results to capital markets. When Daimler Benz was admitted to the NYSE in 1993, the difference between U.S. and EU results accumulated to several hundred mil...

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