When do firms highlight their effective tax rate?

Year: 2023

Type: Journal Publication

Journal: Accounting and Business Research

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.

Publication Information

TRR 266 researchers

Vanessa Flagmeier University of Passau

Jens Müller Paderborn University

Jens Müller is Professor for Business Administration, especially Tax Accounting at Paderborn University. He is member of the Scientific Committee of the Annual Congress of the European Accounting Association. Other memberships include the American Accounting Association, arqus, working group quantitative business taxation, Center for Tax Research (CETAR), European Accounting Association and INTACCT as well as the German Academic Association for Business Research (VHB).

Caren Sureth-Sloane Paderborn University

Prof. Caren Sureth-Sloane is Professor of Business Administration, especially Business Taxation at Paderborn University and is the spokesperson of the DFG-funded Collaborative Research Center TRR 266 Accounting for Transparency. She studies the effects of taxation on corporate decisions, especially on risky investments, as well as international business taxation and tax complexity. Since 2010, she has been Guest Professor at the Vienna University of Economics and Business and Principal Investigator of the FWF Doctoral Program in International Business Taxation (DIBT). She received offers from the University of Graz, the Humboldt University of Berlin, the Goethe University of Frankfurt, and the University of Cologne. She is a member of the working group “taxes” and “transfer prices” of the Schmalenbach-Gesellschaft, of which she has been vice president since 2019. In 2013 Caren Sureth-Sloane was appointed a full member of the North Rhine-Westphalian Academy of Sciences, Humanities and the Arts. She is also a member of the DFG-Senate since 2021. Sureth-Sloane received an honorary doctorate from the Faculty of Business, Economics and Social Sciences at the University of Graz in 2021 and an honorary doctorate from the Faculty of Business Studies and Economics at the University of Bremen in 2022.

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To cite this article

Flagmeier, V., Müller, J., & Sureth-Sloane, C. (2023). When Do Firms Highlight Their Effective Tax Rate?. Accounting and Business Research, 53 (1), 1-37. https://doi.org/10.1080/00014788.2021.1958669.

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