Income Shifting and Geographic Disclosure Quality

• In Event: Disclosure Compliance and Quality

Abstract

Many are concerned with multinational firms’ ability to avoid taxes by shifting profits to low-tax foreign jurisdictions. Calls have been made to improve financial disclosures to better reveal these firms’ income shifting behavior. Currently, however, firms are afforded some discretion in their disclosure of operations by geographic area. Some choose to provide country-level disclosures, while others disclose geographic operations at a much more aggregated level, such as by continent or even a single total foreign segment. I develop novel measures of geographic disclosure quality by matching the countries of firms’ foreign subsidiaries listed in Exhibit 21 of the Form 10-K to the aggregation level of geographic disclosures. I find evidence that firms with the opportunity to shift income have a stronger tendency to aggregate their geographic disclosures (i.e., provide lower-quality disclosures). The evidence is consistent with managers attempting to conceal the extent of their tax avoidance activities. This study offers evidence relevant to policy makers and others who are concerned with the potential role of financial reporting in helping to understand the tax avoidance activities of multinational firms.

Author

• Herita Akamah, Oklahoma University