The relationship between taxation and financial accounting in Finland

Abstract

This study deals with the historical development and the current situation of the relationship between taxation and accounting in Finland. The emphasis is on the major changes in accounting and tax regulation. Financial accounting and taxation in Finland have been based on ‘expenditure-revenue’ accounting theory. In fact, the Company Income Tax Law (1968) institutionalized the usage of this accounting theory. Taxation has been linked strictly to book-keeping in formal and material terms in Finland. Extensive income smoothing due to the flexible depreciation and inventory undervaluation practices has characterized Finnish accounting until the beginning of the 1990s. The concept of deferred taxation has not been the central issue in Finnish accounting and there is no detailed regulation regarding accounting for it. Since the 1992 amendements, it has been allowed in group accounts to divide depreciation difference between tax and financial accounts and untaxed reserves into equity and deferred tax liability in balance sheets. To conclude, there has been very interesting interplay between the harmonization efforts, needs for international comparability, remaining tax dependence and the role of accounting theory in Finland.