Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

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

17.10.2012
Multinational corporations that choose not to disclose geographic earnings are more likely to engage in income-shifting activities, says a study from UofT’s Rotman School.
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.”

The paper is online at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2021157.

For the latest thinking on business, management and economics from the Rotman School of Management, visit www.rotman.utoronto.ca/NewThinking.

The Rotman School of Management at the University of Toronto is redesigning business education for the 21st century with a curriculum based on Integrative Thinking. Located in the world’s most diverse city, the Rotman School fosters a new way to think that enables the design of creative business solutions. The School is currently raising $200 million to ensure that Canada has the world-class business school it deserves. For more information, visit www.rotman.utoronto.ca.

For more information:
Ken McGuffin
Manager, Media Relations
Rotman School of Management
University of Toronto
Voice 416.946.3818
E-mail mcguffin@rotman.utoronto.ca
Follow Rotman on Twitter @rotmanschool
Watch Rotman on You Tube www.youtube.com/rotmanschool

Ken McGuffin | EurekAlert!
Further information:
http://www.utoronto.ca

Further reports about: Non-disclosure Open Book Accounting Rotman SFAS Schedule School financial report tax rate

More articles from Studies and Analyses:

nachricht Physics of bubbles could explain language patterns
25.07.2017 | University of Portsmouth

nachricht Obstructing the ‘inner eye’
07.07.2017 | Friedrich-Schiller-Universität Jena

All articles from Studies and Analyses >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Abrupt motion sharpens x-ray pulses

Spectrally narrow x-ray pulses may be “sharpened” by purely mechanical means. This sounds surprisingly, but a team of theoretical and experimental physicists developed and realized such a method. It is based on fast motions, precisely synchronized with the pulses, of a target interacting with the x-ray light. Thereby, photons are redistributed within the x-ray pulse to the desired spectral region.

A team of theoretical physicists from the MPI for Nuclear Physics (MPIK) in Heidelberg has developed a novel method to intensify the spectrally broad x-ray...

Im Focus: Physicists Design Ultrafocused Pulses

Physicists working with researcher Oriol Romero-Isart devised a new simple scheme to theoretically generate arbitrarily short and focused electromagnetic fields. This new tool could be used for precise sensing and in microscopy.

Microwaves, heat radiation, light and X-radiation are examples for electromagnetic waves. Many applications require to focus the electromagnetic fields to...

Im Focus: Carbon Nanotubes Turn Electrical Current into Light-emitting Quasi-particles

Strong light-matter coupling in these semiconducting tubes may hold the key to electrically pumped lasers

Light-matter quasi-particles can be generated electrically in semiconducting carbon nanotubes. Material scientists and physicists from Heidelberg University...

Im Focus: Flexible proximity sensor creates smart surfaces

Fraunhofer IPA has developed a proximity sensor made from silicone and carbon nanotubes (CNT) which detects objects and determines their position. The materials and printing process used mean that the sensor is extremely flexible, economical and can be used for large surfaces. Industry and research partners can use and further develop this innovation straight away.

At first glance, the proximity sensor appears to be nothing special: a thin, elastic layer of silicone onto which black square surfaces are printed, but these...

Im Focus: 3-D scanning with water

3-D shape acquisition using water displacement as the shape sensor for the reconstruction of complex objects

A global team of computer scientists and engineers have developed an innovative technique that more completely reconstructs challenging 3D objects. An ancient...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

Clash of Realities 2017: Registration now open. International Conference at TH Köln

26.07.2017 | Event News

Closing the Sustainability Circle: Protection of Food with Biobased Materials

21.07.2017 | Event News

»We are bringing Additive Manufacturing to SMEs«

19.07.2017 | Event News

 
Latest News

New 3-D imaging reveals how human cell nucleus organizes DNA and chromatin of its genome

28.07.2017 | Health and Medicine

Heavy metals in water meet their match

28.07.2017 | Power and Electrical Engineering

Oestrogen regulates pathological changes of bones via bone lining cells

28.07.2017 | Life Sciences

VideoLinks
B2B-VideoLinks
More VideoLinks >>>