Tax avoidance and geographic earnings disclosure

This study tests the relation between corporate tax avoidance and disclosure of geographic earnings for U.S. multinational companies. We find that after the adoption of Statement of Financial Accounting Standards No. 131 in 1998, firms opting to discontinue disclosure of geographic earnings in their...

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Bibliographic Details
Published in:Journal of accounting & economics 2013-11, Vol.56 (2-3), p.170-189
Main Authors: Hope, Ole-Kristian, Ma, Mark (Shuai), Thomas, Wayne B.
Format: Article
Language:English
Subjects:
Corporate income tax
Corporate taxes
Disclosure
Earnings
FASB statements
Financial accounting
Financial reporting
Geographic earnings disclosure
Multinational corporations
Multinational enterprises
Schedule M-3
SFAS 131
Studies
Tax avoidance
Tax rates
U.S.A
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Summary:This study tests the relation between corporate tax avoidance and disclosure of geographic earnings for U.S. multinational companies. We find that after the adoption of Statement of Financial Accounting Standards No. 131 in 1998, firms opting to discontinue disclosure of geographic earnings in their financial reports have lower worldwide effective tax rates. These results are consistent with managers perceiving that non-disclosure of geographic earnings helps mask tax avoidance behavior. However, the relation between tax avoidance and non-disclosure reduces after implementation of Schedule M-3 in the annual corporate tax filing beginning in 2004. Schedule M-3 requires a detailed reconciliation of book income to tax income and aims to make firms' tax avoidance activities associated with shifting profits to lower-tax foreign jurisdictions more apparent to the IRS. This study contributes to our understanding of the relation between financial reporting behavior and tax reporting behavior. •We test the relation between corporate tax avoidance and disclosure of geographic earnings for U.S. multinational companies.•After the adoption of SFAS 131 in 1998, firms no longer disclosing geographic earnings have lower worldwide effective tax rates.•The results are consistent with managers perceiving that non-disclosure of geographic earnings helps mask tax avoidance behavior.•The relation between tax avoidance and non-disclosure reduces after implementation of Schedule M-3 in the annual tax filing in 2004.•This study contributes to our understanding of the relation between financial reporting behavior and tax reporting behavior.
ISSN:0165-4101
1879-1980
DOI:10.1016/j.jacceco.2013.06.001