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 Climate change and air pollution damaging health and causing millions of premature deaths
30.11.2018 | International Institute for Applied Systems Analysis (IIASA)

nachricht Reading rats’ minds
29.11.2018 | Institute of Science and Technology Austria

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: Researchers develop method to transfer entire 2D circuits to any smooth surface

What if a sensor sensing a thing could be part of the thing itself? Rice University engineers believe they have a two-dimensional solution to do just that.

Rice engineers led by materials scientists Pulickel Ajayan and Jun Lou have developed a method to make atom-flat sensors that seamlessly integrate with devices...

Im Focus: Three components on one chip

Scientists at the University of Stuttgart and the Karlsruhe Institute of Technology (KIT) succeed in important further development on the way to quantum Computers.

Quantum computers one day should be able to solve certain computing problems much faster than a classical computer. One of the most promising approaches is...

Im Focus: Substitute for rare earth metal oxides

New Project SNAPSTER: Novel luminescent materials by encapsulating phosphorescent metal clusters with organic liquid crystals

Nowadays energy conversion in lighting and optoelectronic devices requires the use of rare earth oxides.

Im Focus: A bit of a stretch... material that thickens as it's pulled

Scientists have discovered the first synthetic material that becomes thicker - at the molecular level - as it is stretched.

Researchers led by Dr Devesh Mistry from the University of Leeds discovered a new non-porous material that has unique and inherent "auxetic" stretching...

Im Focus: The force of the vacuum

Scientists from the Theory Department of the Max Planck Institute for the Structure and Dynamics of Matter (MPSD) at the Center for Free-Electron Laser Science (CFEL) in Hamburg have shown through theoretical calculations and computer simulations that the force between electrons and lattice distortions in an atomically thin two-dimensional superconductor can be controlled with virtual photons. This could aid the development of new superconductors for energy-saving devices and many other technical applications.

The vacuum is not empty. It may sound like magic to laypeople but it has occupied physicists since the birth of quantum mechanics.

All Focus news of the innovation-report >>>

Anzeige

Anzeige

VideoLinks
Industry & Economy
Event News

New Plastics Economy Investor Forum - Meeting Point for Innovations

10.12.2018 | Event News

EGU 2019 meeting: Media registration now open

06.12.2018 | Event News

Expert Panel on the Future of HPC in Engineering

03.12.2018 | Event News

 
Latest News

Small but ver­sat­ile; key play­ers in the mar­ine ni­tro­gen cycle can util­ize cy­anate and urea

10.12.2018 | Life Sciences

New method gives microscope a boost in resolution

10.12.2018 | Physics and Astronomy

Carnegie Mellon researchers probe hydrogen bonds using new technique

10.12.2018 | Life Sciences

VideoLinks
Science & Research
Overview of more VideoLinks >>>