TAX AVOIDANCE AND TRADE CREDIT: ACCOUNTING CONSERVATISM AS MEDIATOR IN SMES

Abstract

The relationship between tax avoidance and trade credit: Investigating the role of accounting conservatism Constraint in resource, reliance on external financing and regulatory pressure has turn into something pressing for small and medium sized enterprises, Meanwhile, trade credit is a vital means of financing especially for SMEs who have only limited access to banking loan. The aim of our study is to examine whether conservative accounting treatment may reduce risks relating to aggressive tax planning and thus affects firms ‘ability in obtaining trade credit. A quantitative method was applied, using survey and archival research from SMEs in various sectors: 300PESTCubicMetre Ltd. Model structure association analysis was performed using SEM. The findings further show that tax avoidance is significantly negatively related to trade credit because suppliers view it as creating financial opacity and risk. Nevertheless, accounting conservatism is substantially driven by the mechanism that more reliable and verifiable financial reporting can mitigate supplier's concerns and improve access to trade credit. It seems that SMEs can reconcile the tension between tax planning strategy and financial reporting approaches to ensure long-term finance. Contribution This paper adds to the tax behavior, trade finance and financial reporting literature by emphasizing accounting conservatism as a stabilizing force. These findings have relevance to policy makers, managers and creditors looking for ways to enhance the financial resilience of SMEs.

Keywords: tax avoidance, trade credit, accounting conservatism, SMEs, financial reporting, financing constraints