Unconditional Accounting Conservatism and Corporate Tax Avoidance: Evidence from Listed Insurance Firms in Nigeria

Abstract The article explores the unique place of unconditional accounting conservatism in the formation of corporate tax avoidance plans in the insurance industry of Nigeria. In contrast to its conditional counterpart, unconditional conservatism involves an ex-ante systematic understatement of net assets, based on accounting procedures that do not depend on the news about economic performance in the future. The study is based on the Positive Accounting Theory and, particularly, on the taxation discussion of the conservatism, and it states that the unconditional conservatism is the tool of strategic deferral of the tax payments in the long term. The study uses the Autoregressive Distributed Lag (ARDL) bounds testing model using a panel dataset of ten insurance companies that are listed on the Nigerian Exchange Group (NGX) between 2010 and 2023. Unconditional conservatism is measured using the Market to Book (MTB) ratio and tax avoidance is measured using the Cash Effective Tax Rate (Cash ETR) and the measure of Henry and Sansing (H&S). The results show that there is a complex, two-dimensional association: unconditional conservatism shows significant negative correlation with the Cash ETR and significant positive correlation with the H&S metric. This implies that unconditional conservatism is successful in the sense that it lowers the existing tax burden (reduces cash ETR) but, at the same time, it increases the gap between the book and tax income, the H&S measure. The paper concludes that unconditional conservatism is a planned, tactical tax planning practice in the Nigerian insurance sector, which allows companies to postpone tax payments and earn incomes in a seamless manner in the long run. Such perceptions are important to tax authorities, regulators and standard-setters in interpreting the tax implications of conservative financial reporting.