When Do Firms Highlight Their Effective Tax Rate?

60 Pages Posted: 17 Sep 2020 Last revised: 20 Jul 2021

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; TRR 266 Accounting for Transparency

Date Written: July 2021

Abstract

This study examines GAAP effective tax rate (ETR) visibility as a distinct disclosure choice in firms’ financial statements. By applying a game-theory disclosure model for the voluntary disclosure strategies of firms, in 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, 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, and decreasing ETRs). 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 does 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? (July 2021). TRR 266 Accounting for Transparency Working Paper Series No. 37, 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

TRR 266 Accounting for Transparency ( email )

Warburger Straße 100
Paderborn, 33098
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
169
Abstract Views
1,076
rank
239,171
PlumX Metrics