Financial Derivatives, Hedge Accounting and Tax Aggressiveness in Brazil

Abstract

This study investigated the relationship between the use of financial derivatives by non-financial corporations and tax aggressiveness in Brazil. In research on the American market, evidence was identified that non-financial entity users of financial derivatives were more tax aggressive. However, there is no reason to assume that this behavior is replicated in the Brazilian market, since tax legislation does not offer the same economic incentives, i.e., since it imposes limits on the tax deductibility of losses with these financial instruments, except in derivatives’ well-documented and proven use as a hedge tool. To verify this point, companies were classified into users and non-users of first-generation financial derivatives, and associated this classification with tax aggression metrics. The study focus was 384 non-financial companies listed on the B3 in the period from 2005 to 2015. The results of regression analysis using a probit estimate have pointed, in a distinctly different way than the American reality, that the most tax aggressive companies tend to use fewer financial derivatives. Nevertheless, when the use of derivative instruments as a hedge was controlled, it was found that when a company adopts hedge accounting, it is more likely it will be more tax aggressive. The result is presumably explained by the Brazilian tax treatment that authorizes the deductibility of losses, regardless of earnings, when using the derivative as a hedge.