The correlation between deferred taxes, tax accruals and cash fl ows of Russian companies

Abstract

This paper confirms the informational value of deferred taxes for assessing tax accruals and their corresponding cash flows. Currently, many experts point out that recording tax effects distorts the perception of financial reality and does not lead to optimal business decisions, and modern research denies the connection of balance sheet deferred taxes with future cash flows at all. The above aspects are considered and tested for Russian organizations for the period of 2012–2018 using standard econometric analysis techniques. The inclusion of deferred tax factors leads to significant volatility in both tax accruals and tax cash flows, depending on which net deferred tax position is held by the economic entity. The findings show that with active positions, national organizations accrue almost 7.8–10.0% more and at the same time pay 8.1–8.7% less tax to the budget relative to other situations. Based on the confirmed hypotheses, the study develops a conceptual scheme to link tax accruals with deferred tax positions, which allows us to analyze the current corporate tax behavior of a company and its potential tax opportunities. The results show that the change in tax accruals in the structure of financial profit before tax on average increase tax cash flows 1.28–1.41 times, while tax accruals increase 0.46–0.54 times with a 1% increase in tax cash flows. The statistical significance of dividend (income payments to business owners) and investment policy (acquisition of non-current assets) factors for the evaluation of tax accruals and cash flows is also established. The findings provide a wide range of tools for further research in profit stability analysis, bankruptcy signs, and solvency of Russian organizations.