Featured Research

from universities, journals, and other organizations

Non-disclosure of geographic earnings can be a marker of tax avoidance

Date:
October 16, 2012
Source:
University of Toronto, Rotman School of Management
Summary:
Policy makers, lobby groups and citizens should take note -- those who understand corporate tax avoidance behavior will be in a better position to deter it. A recent study indicates that non-disclosure of geographic earnings can be a marker of tax avoidance.

Policy makers, lobby groups and citizens should take note -- those who understand corporate tax avoidance behavior will be in a better position to deter it.

A recent study by Prof. Ole-Kristian Hope, who holds the Deloitte Professorship of Accounting at the Rotman School of Management at the University of Toronto, along with Mark (Shuai) Ma and Wayne B. Thomas from the Michael F. Price College of Business at the University of Oklahoma, indicates that non-disclosure of geographic earnings can be a marker of tax avoidance.

Starting in 1998 it was no longer mandatory for U.S. multinational companies to disclose geographic earnings in their financial reports -- disclosure was optional under the Statement of Financial Accounting Standards No. 131 (SFAS 131). The study shows that between 1998 and 2004, firms that chose not to disclose geographic earnings had worldwide effective tax rates that were 4.1 (5.2) percentage points lower than firms that continued to disclose geographic earnings (controlling for numerous other factors that are known to affect tax avoidance).

Coincidence? The study proves not. Before implementation of SFAS 131 -- when all firms were required to disclose geographic earnings in their financial reports -- eventual non-disclosers' effective tax rates were on par with those that continued to disclose these numbers voluntarily.

It appears that under SFAS 131 managers were able to (legally or illegally) shift profits from high- to low-tax foreign jurisdictions without much risk of exposure (a practice that ultimately diminished the tax revenues of governments in high-tax jurisdictions). To conceal their behavior, they avoided voluntarily disclosing any information related to these activities. "If you care about tax avoidance then you want as much transparency about these activities as possible," says Hope.

In 2004, the implementation of new tax-reporting regulations (Schedule M-3), which required businesses to disclose significantly more detailed information regarding foreign profits to the Internal Revenue Service, shone a light on the problem. With the introduction of this new regulation, geographic segment disclosures are less important in terms of masking tax avoidance behavior (at least to the IRS). Specifically, controlling for other factors, after Schedule M-3 came into effect the role of non-disclosure of geographic earnings in explaining tax avoidance is diminished.

"The key takeaway is that there is clear value to greater transparency regarding firm's foreign activities," explains Hope. "As an outsider, this is the only way that we can learn about how [businesses] are conducting themselves, including monitoring the extent to which firm's avoid taxes."


Story Source:

The above story is based on materials provided by University of Toronto, Rotman School of Management. Note: Materials may be edited for content and length.


Journal Reference:

  1. Ole-Kristian Hope, Mark (Shuai) Ma, Wayne B. Thomas. Tax Avoidance and Geographic Earnings Disclosure. SSRN Electronic Journal, 2012; DOI: 10.2139/ssrn.2021157

Cite This Page:

University of Toronto, Rotman School of Management. "Non-disclosure of geographic earnings can be a marker of tax avoidance." ScienceDaily. ScienceDaily, 16 October 2012. <www.sciencedaily.com/releases/2012/10/121016141659.htm>.
University of Toronto, Rotman School of Management. (2012, October 16). Non-disclosure of geographic earnings can be a marker of tax avoidance. ScienceDaily. Retrieved October 1, 2014 from www.sciencedaily.com/releases/2012/10/121016141659.htm
University of Toronto, Rotman School of Management. "Non-disclosure of geographic earnings can be a marker of tax avoidance." ScienceDaily. www.sciencedaily.com/releases/2012/10/121016141659.htm (accessed October 1, 2014).

Share This



More Science & Society News

Wednesday, October 1, 2014

Featured Research

from universities, journals, and other organizations


Featured Videos

from AP, Reuters, AFP, and other news services

Japan Looks To Faster Future As Bullet Train Turns 50

Japan Looks To Faster Future As Bullet Train Turns 50

Newsy (Oct. 1, 2014) Japan's bullet train turns 50 Wednesday. Here's a look at how it's changed over half a century — and the changes it's inspired globally. Video provided by Newsy
Powered by NewsLook.com
US Police Put Body Cameras to the Test

US Police Put Body Cameras to the Test

AFP (Oct. 1, 2014) Police body cameras are gradually being rolled out across the US, with interest surging after the fatal police shooting in August of an unarmed black teenager. Duration: 02:18 Video provided by AFP
Powered by NewsLook.com
Ebola Cases Keep Coming for Monrovia's Island Hospital

Ebola Cases Keep Coming for Monrovia's Island Hospital

AFP (Oct. 1, 2014) A look inside Monrovia's Island Hospital, a key treatment centre in the fight against Ebola in Liberia's capital city. Duration: 00:34 Video provided by AFP
Powered by NewsLook.com
Ebola Puts Stress on Liberian Health Workers

Ebola Puts Stress on Liberian Health Workers

AP (Oct. 1, 2014) The Ebola outbreak is putting stress on first responders in Liberia. Ambulance drivers say they are struggling with chronic shortages of safety equipment and patients who don't want to go to the hospital. (Oct. 1) Video provided by AP
Powered by NewsLook.com

Search ScienceDaily

Number of stories in archives: 140,361

Find with keyword(s):
Enter a keyword or phrase to search ScienceDaily for related topics and research stories.

Save/Print:
Share:

Breaking News:

Strange & Offbeat Stories


Science & Society

Business & Industry

Education & Learning

In Other News

... from NewsDaily.com

Science News

Health News

Environment News

Technology News



Save/Print:
Share:

Free Subscriptions


Get the latest science news with ScienceDaily's free email newsletters, updated daily and weekly. Or view hourly updated newsfeeds in your RSS reader:

Get Social & Mobile


Keep up to date with the latest news from ScienceDaily via social networks and mobile apps:

Have Feedback?


Tell us what you think of ScienceDaily -- we welcome both positive and negative comments. Have any problems using the site? Questions?
Mobile: iPhone Android Web
Follow: Facebook Twitter Google+
Subscribe: RSS Feeds Email Newsletters
Latest Headlines Health & Medicine Mind & Brain Space & Time Matter & Energy Computers & Math Plants & Animals Earth & Climate Fossils & Ruins