Cash Effective Tax Rate as a Criterion of Tax avoidance or Earnings Management

The purpose of this paper is to examine whether cash effective tax rate is a suitable criterion for measuring tax avoidance? The sample includes 102 firms (including 714 firm-year observations) with positive pre-tax income and listed in Tehran Stock Exchange (TSE) for the period from 2005 to 2912. To test hypotheses, panel data method is used. Results suggest that the cash effective tax rate is not a suitable criterion to measure tax avoidance; because, this rate reflects two distinct effects of tax avoidance and upward earnings management at the same time. This is due to the pre-tax income in denominator which can be affected by activities designed to manage pre-tax income. Using this rate for measuring tax avoidance in researches affected also by earnings management, may distort the results.