No. 40: Qualitative information disclosure: Is mandating additional tax information disclosure always useful?

Abstract

Firms are facing progressively more stringent tax disclosure requirements. In this paper, we examine whether increased qualitative tax transparency leads to intended outcomes using, as an exogenous shock, the 2016 UK reform that mandated the disclosure of a tax strategy for firms above a certain size threshold. We find that firms that have to publish a separate tax strategy report significantly increase their voluntary tax disclosure in the annual reports, but we show no widespread effect on tax avoidance, measured by changes in effective tax rates. We document two mechanisms through which mandating a tax strategy report affects overall tax disclosure. First, we find large changes in disclosure for firms facing high public scrutiny. Second, firms with higher quality of tax strategy reports increase the qualitative discussion of their tax affairs in their annual reports by larger amounts, while firms with lower quality reports show increases in tax avoidance. Our results demonstrate the difficulty of generating a standard that effectively incentivizes desirable behavior when the disclosure mandate is asking for purely qualitative information.

Participating Institutions

TRR 266‘s main locations are Paderborn University (Coordinating University), HU Berlin, and University of Mannheim. All three locations have been centers for accounting and tax research for many years. They are joined by researchers from LMU Munich, Frankfurt School of Finance and Management, WHU – Otto Beisheim School of Management, ESMT Berlin, Goethe University Frankfurt and Carl von Ossietzky University Oldenburg who share the same research agenda.