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3.0 Main research question addressed in the article

As mentioned above, there are a series of issues existed in tax and financial reporting systems. According to a crucial line of accounting research conducted by Dworin, (1985); Hanlon (2003); Plesko, (2003); Plesko, (2004); McGill and Outslay, (2004); and Lisowsky, (2009), the results of them were all intended to reveal issues on the capability to predict taxable income as well as other tax properties based on disclosures made within the financial reporting statements of publicly - traded firms.

From an investor or an analyst’ perspective, the difficulties on estimating a company’s actual tax liability makes it more complex for a company’s capability on assessing the influences of the tax system on the value of a company with confidence.

However, from the tax authorities’ perspectives, till the recent introduction of Schedule M-3, the reporting rules have always made it more difficult to relate both the domestic economic activities which based on firms income tax disclosures to the international entity which generated such income with each other.

As a question of the policies, the debate usually around the tax treatment of multinational corporations that have paid more of their attentions on the extent to which income gained from foreign businesses should be subject to domestic taxation.

The framework need for taxation change, for instance, through completely or primarily exempting foreign income from taxation, the capability to evaluate the influences of such a policy which change on the value of publicly - traded companies will rely on the capability to distinguish exempted income from other types of income reported in the financial statements.

In order to solve these problems, the main goal of this article is to emphasize the relation between a variety of academic resources and tax measures of firms income for a panel of publicly - traded companies. Moreover, this article also aims to gain a better understand of “the magnitudes of, and the relation among, the different measures of corporate income under the separate jurisdictions, levels of consolidation, and rules for measuring and recognizing income to which U.S. multinational corporations are subject” (Caitlin Bokulic, 2012, P. 934).

Based on the analysis above, the main research questions of this article could be summarized as follows:

l How to figure out the actual income of a company?

l Why multinational corporations should transfer their attentions from foreign operations to domestic taxation? How could these processes be achieved?

l What causes the main gap between tax and financial reporting systems?

l How to improve the ability of firms on estimating and infer actual taxation?

l What is the advantages and disadvantages of the introduction of M - 3? And what is the relationship between M - 3 and IRS?

l What is the relation between of all of the entities of a firm? How to gain a better and more clearly understand about the relations?

l How to establish detailed reconciliation to solve problems such as lack of additional information?

4.0 The relationship between research questions and economics

As mentioned above, the issues existing in both tax and financial report systems have been examined by lots of researchers with a wide range of studies, “a signifi cant line of accounting research (Dworin, 1985; Hanlon, 2003; Plesko, 2003; McGill and Outslay, 2004; Plesko, 2004; and Lisowsky, 2009)” (Caitlin Bokulic, 2012, P. 933)could display it has been a crucial problem for in accounting field for several decades, besides, as author illustrated in the article, “For most of its history, the U.S. tax and financial reporting systems operated in parallel yet distinct environments. While each system provided a tailored set of performance measures to satisfy the information needs of their respective users, the lack of detailed reconciliation made it difficult to determine the full relation of all of the entities” (Caitlin Bokulic, 2012, P. 955).

In addition, currently trends within domestic and global area that “income as reported on the tax return closely follow those reported on, or estimated from, financial statements” (Caitlin Bokulic, 2012, P. 955). Therefore, figure out the relations between tax and financial systems and attempt to narrow their gaps through detailed reconciliation could not only make contribution to the firms themselves, but also could benefit the improvement of domestic and global tax and financial systems.

Moreover, through in - depth analysis, this article proved that the introduction of Schedule M - 3 could make contributions for better understanding of the relationship between different entities, the address of this research question could make the companies more clearly about their current economic situation. The benefits of M - 3 has also been mentioned by author in the article “The evidence from our sample of firms filing the Schedule M-3 suggests that aggregate measures of income from the reporting systems are more closely aligned than previously documented”. (Caitlin Bokulic, 2012, P. 955)

5.0 Examine the way this article try to answer the research question

In this article, author firstly analysed the macro conceptions of income, in this part, through demonstrating financial and tax reporting environment author attempted to answer how to figure out the actual income in practice, it could be shown that because “as each company has many different amounts of income to report depending on the income statement prepared and jurisdiction in which income is earned” (Caitlin Bokulic, 2012, P. 935), therefore, the income could be vary based on different point of views and different reporting systems. In this part, author briefly review and contrast the rules which link to financial and tax reporting as well as Schedule M-3’s role in reconciling these two different types of income reports. In addition, this part also sets 4 measures of firm income which use to achieve the objectives of this study.

Then author used publicly-traded corporations as examples to illustrated that the main purpose of their financial reporting is to offer information for the performance of company’s business to external users. Therefore, the rules could be evolved over time, both their business activities have changed and as a response users’ need for better information to assess business operations have also changed. This illustration proposed a real case to show why reporting systems should be seen from different point of views based on different needs.

After demonstrating the different reporting environment, author also analysed the differences of different types of reporting systems to display why there are gaps between financial statement income and taxable income, as he said “Arising from these fundamental differences in the purpose and audience of each reporting system are three major types of differences between financial statement income and taxable income” (Caitlin Bokulic, 2012, P. 936), author used three words to describe these differences which are “when” “how” and “whose”. Based on these investigation, why there are gaps between tax and financial reporting system is clearly for audiences.

Then author comprehensively and critically introduced the application of Schedule M-3, the article linked company income constructs from financial statements to the use of M - 3 to show the how M - 3 effectively work within both global and domestic  reporting process. As author said “From the information provided on publicly filed financial statements and privately disclosed corporate income tax returns, we are able to reconcile global financial reporting to domestic taxation by taking the critical intermediary step of determining the book income of the tax reporting group” (Caitlin Bokulic, 2012, P. 938). Therefore, through the information offered by the Schedule M-3, it is able to measure each of the firms income constructs for “both the financial statement consolidated group and the tax return consolidated group”. (Caitlin Bokulic, 2012, P. 938).

After examining these concepts, author proposed a wide range of actual cases to show the measurements of incomes under different reporting systems over time based on their observations. During this part, a series of samples with data could show a visible outcome of author’s study, for instance, in Fig 3.(See Appendix 1), “Interestingly, aggregate taxable income inferred from publicly filed financial statements and actual taxable income measured from a firm’s privately filed tax return follow a similar pattern throughout our sample period” (Caitlin Bokulic, 2012, P. 946). Through comprehensively comparison, it turned out that tax and financial reporting system have both similarities and differences over time. Besides, author also found that “GAAP financial statement income to the financial statement income of the tax reporting group over time to gauge reporting consolidation differences, some very interesting patterns emerge” (Caitlin Bokulic, 2012, P. 947), these results showed that differences within both worldwide and domestic income based on the GAAP and tax

reporting groups could contribute to the difficulties of investors, analysts, and researchers in estimating a corporate’s tax status.

6.0 Discussion and Recommendations

Through comprehensively literature review as well as case studies based on observation of data resources, the main research questions of this article has been solved to some extent, for instance, author referenced different literature and theories over time to show the primary differences between tax and financial reporting systems, and these differences could be seen as the main reasons causes the gaps between tax and financial income within corporate, in addition, GAAP and different tax reporting groups also could be seen as the reasons for different worldwide and domestic income and they bring difficulties to investors, analysts, etc. Furthermore, the introduction and analysis of Schedule M - 3 provide audiences a consolidation method for  domestic and worldwide income which are reported on tax return based on financial statement.

However, as the reporting environments are vary, global tax policy on company’s valuations are changing and mixed, even consolidation differences are considered, the solution for the gap between these two system needs a more detailed, flexible approach based on book-tax differences.

7.0 Conclusion

This essay deeply examined the contents of the article and summarized the key research questions, besides, the process how author attempted to solve these issues have also been displayed, therefore, the main goals of this essay are achieved.

8.0 Reference

Caitlin Bokulic, Erin Henry, and George A. Plesko (2012) RECONCILING GLOBAL FINANCIAL REPORTING WITH DOMESTIC TAXATION, National Tax Journal, December 2012, 65 (4), 933–960

Dworin, L. (1985). On estimating corporate tax liabilities from financial statements. Tax Notes, 29(2), 965-971.

Hanlon, M., & Shevlin, T. (2005). Book-tax conformity for corporate income: An introduction to the issues. In Tax Policy and the Economy, Volume 19 (pp. 101-134). MIT Press.

Plesko, G. A. (2004). Corporate tax avoidance and the properties of corporate earnings. National Tax Journal, 729-737.

McGill, G. A., & Outslay, E. (2004). Lost in translation: Detecting tax shelter activity in financial statements. National Tax Journal, 739-756.

Lisowsky, P. (2009). Inferring US tax liability from financial statement information. Journal of the American Taxation Association, 31(1), 29-63.

Appendix 1