When Do Firms Highlight Their Effective Tax Rate?

TRR 266 Accounting for Transparency Working Paper Series No. 37 (2020)

WU International Taxation Research Paper Series No. 2020-11

57 Pages Posted: 17 Sep 2020 Last revised: 28 Oct 2020

See all articles by Vanessa Flagmeier

Vanessa Flagmeier

University of Passau

Jens Mueller

Paderborn University

Caren Sureth-Sloane

Paderborn University; Vienna University of Economics and Business

Date Written: September 1, 2020

Abstract

This study examines the visibility of the GAAP effective tax rate (ETR) in firms’ financial statements as a distinct disclosure choice. Applying a game-theory disclosure model for voluntary disclosure strategies of firms to a tax setting, we argue that firms face a trade-off in their ETR disclosure decisions. On the one hand, firms have an incentive to enhance their ETR disclosure when the ratio offers shareholders “favourable conditions”, for example in terms of higher expected after-tax cash-flows. On the other hand, the disclosure of a favourable low ETR could attract the attention of tax auditors and the public and ultimately result in disclosure costs. We empirically test disclosure behaviour by examining the relation between disclosure visibility and different ETR conditions that reflect different stakeholder specific costs and benefits. While we find that unfavourable ETR conditions are not highlighted, we observe higher disclosure visibility for favourable ETRs (smooth, close to the industry average, decreasing). Additional analyses reveal that this high visibility is characteristic of firm-years with only moderately decreasing ETRs at usual ETR levels, while extreme ETRs are not highlighted. Interestingly and in contrast to our main results, a subsample of family firms do not seem to highlight favourable ETRs.

Keywords: Effective tax rate, Cost-benefit trade-off, Disclosure decision, Reputational costs, Tax disclosure

JEL Classification: H25, H26, M41, M49

Suggested Citation

Flagmeier, Vanessa and Mueller, Jens and Sureth-Sloane, Caren, When Do Firms Highlight Their Effective Tax Rate? (September 1, 2020). TRR 266 Accounting for Transparency Working Paper Series No. 37 (2020), WU International Taxation Research Paper Series No. 2020-11, Available at SSRN: https://ssrn.com/abstract=3693374 or http://dx.doi.org/10.2139/ssrn.3693374

Vanessa Flagmeier

University of Passau ( email )

Innstrasse 27
Passau, 94032
Germany

Jens Mueller (Contact Author)

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

Caren Sureth-Sloane

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
58
Abstract Views
322
rank
406,066
PlumX Metrics