An examination of the informativeness of corporate income tax provision to explain future tax cash flows: Evidence from UK

As corporate income taxes possess a material proportion of earnings, understanding the relationship between income tax provision and future cash tax consequences can help users of financial statement in evaluating firms’ future commitment for internal funds (Ciconte et al. 2013). This is consistent with the contention of standard setters and regulators that reported financial information should facilitate users to assess the ‘amount, timing and uncertainty’ of firms’ future net cash flows. However, there is a lack of empirical evidence with respect to the ability of income tax provision to explain future tax cash flows, particularly the evidence in the U.K. setting. This study examines the informativeness of corporate income tax provision to explain future tax cash flows in the UK setting. Results of this study indicate that income tax accruals are incrementally informative over cash tax paid in explaining future tax cash flows in the UK setting. The incremental informativeness of income tax accruals is significantly lower for firms that 1) engage in tax planning activities or; 2) exhibit strong incentives to avoid reporting an apparent decline in the post-tax profits. Higher levels of analysts coverage and institutional shareholding are found to play a significant role in attenuating the negative relation between the informativeness of income tax accruals and the managements’ incentives to avoid reporting an apparent decline in the post-tax profits. However, corporate governance mechanisms examined in this study are not significantly important in attenuating the negative impact of tax planning activities on the informativeness of income tax accruals. In addition, this study finds a significant downward trend in the informativeness of income tax accruals to explain future tax cash flows over the past three decades in the UK