Tax Strategy Disclosure: A Greenwashing Mandate?

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.

On the Determinants and Effects of Corporate Tax Transparency: Review of an Emerging Literature

“…In a study prepared for Tax Justice Network, Belnap (2019b) applies corresponding techniques to around 600 reports of US-based MNEs subject to UK regulation. In contrast to Bilicka et al (2020), he finds an average similarity level of 30%. He also highlights a striking example of two very large US companies whose reports are 86% alike.…”

“…of Belnap (2019b) and Bilicka et al (2020) differ, both studies indicate that the tax strategy reports of at least some firms may be rather uninformative about their tax planning behavior.…”

“…Other studies show that a firm's business model is associated with the level of tax transparency. For example, Bilicka et al (2020) report in a supplemental test that firms operating in consumer-oriented industries voluntarily provide more qualitative information on their tax strategies, potentially due to greater stakeholder attention on tax issues. Examining the relation between geographic segment aggregation and firm characteristics, Akamah et al (2018) also find that firms in retail, extractive, and in less competitive industries disclose, on average, more granular information about their geographic activities.…”

“…As opposed to financial statements and CbCR disclosures, it demands that firms state explicit information on their attitude towards tax planning. Bilicka et al (2020) examine the content of about 260 reports published by MNEs headquartered in the UK. They conduct natural language processing analyses based on plagiarism software to identify common phrases across the different documents.…”

“…Finally, we know little about how the introduction of qualitative tax disclosure requirements affects corporate behavior, despite the growing importance of such reporting regimes. One exception is the study by Bilicka et al (2020), who find heterogeneous effects of mandatory tax strategy reports on corporate tax aggressiveness. While the level of tax avoidance remains unaffected on average, the authors document that previously tax-aggressive firms decrease their cash ETRs even further relative to non-tax-aggressive firms.…”