Inflation Influence on Income Tax of Corporates listed in Tehran Stock Exchange

In this research, we study the relationship between corporate income tax and inflation, when accounting historical cost income is the basis for calculating corporate taxes. Because tax deductions are based on historical cost and are not inflation-indexed, therefore in inflationary periods, depreciation and cost of goods sold will be less than actual and income will be higher, and hence the amount of tax will be distorted. But taxable income increase with inflation rate, as a result it is expected that corporate tax would be higher than actual tax (tax in the absence of inflation). On the other hand, the full amount of nominal interest expense is usually deductible from income, while part of the interest expense is to compensate for the devaluation of the real debt. As a result, it reduces profits and reduces the real tax. In the present research, in order to investigate the effect of inflation on corporate income tax, as a result using historical cost accounting, information of 354 companies during the years 1384-1394 was investigated using ordinary least squares regression method. The result showed that failure to adjust historical-cost-based tax deductions for inflation increases the real tax for capital- and inventory-intensive firms, but deductibility of nominal interest offset part of the consequences of using historical cost tax methods.