Finance & Accounting

Does the Disclosure of Tax Payments Create More Transparency?

Why mandating the public disclosure of bottom-line tax numbers may backfire

To reveal to the public whether firms pay their “fair share,” policymakers and regulators increasingly require firms to disclose how much taxes they pay. The research study, “Public Tax Disclosures and Investor Perceptions,” finds that such disclosures can be misleading: Not all firms that pay little taxes (e.g., startups) are necessarily ”bad“ corporate citizens, but the details get lost more easily when disclosures emphasize tax payments only.

Policymakers and regulators have long debated whether to mandate the public disclosure of corporate tax payments. Proponents argue that such forms of corporate tax transparency encourage firms to pay their “fair share” of tax, improve accountability, and allow the public to act against aggressivetax avoiders. Opponents argue that mandating these disclosures creates compliance burdens for firms and forces them to divulge sensitive, proprietary information to competitors. Leaks and scandals, such as LuxLeaks and the Paradise Papers, have illustrated that many firms can still withhold tax-related information from public scrutiny. These incidents have increased the call to halt aggressive tax avoidance and led to debates on achieving this. Next to the global minimum tax rate recently proposed by global leaders at the G7, mandating the public disclosure of corporate tax information is one of the key instruments for policymakers and regulators to improve corporate tax compliance.

Milestone deal for corporate tax transparency

At the beginning of June 2021, EU lawmakers struck a milestone deal for corporate tax transparency after years of deadlock. The deal requires large multinational corporations to disclose profits and tax payments in each EU country and several tax-havens. However, the EU is not the first to mandate public tax disclosures. In 2013, the Australian government enacted a law that mandated the Australian taxation office to disclose for large firms how many taxes they effectively paid in Australia.

The idea behind this type of policy is simple: If the public has easier access to how much corporate taxes firms pay, then it should be easier for them to identify aggressive tax avoiders and distinguish them from less aggressive ones. One important stakeholder group is retail investors because they may choose to divest or refrain from investing in firms that do not pay their fair share of taxes in their country while prioritizing investing in firms that do. This prospect could, in theory, lead firms to restrict themselves to less aggressive tax avoidance methods.

Retail investors may misinterpret the disclosed information

However, anecdotal evidence from Australia suggests that retail investors and other members of the public may misinterpret the information featured in these public tax disclosures. For instance, the media picked up on the public tax disclosures in Australia and reported to the public that Qantas Airways had not been paying tax for almost ten years. However, Qantas paid zero taxes in Australia because it suffered losses during the financial crisis and used tax loss carryforwards. Governments tend to offer tax loss carryforwards to offset losses against future profits, which is one way to lower corporate taxes legitimately. This raises the question of whether important members of the public, such as retail investors, can disentangle firms that reduce taxes using legitimate means from firms that aggressively avoid taxes and whether public tax disclosures may help or hinder retail investors in doing so.

A recently conducted research study aims to answer this question. Specifically, it examined the impact of mandating the public disclosure of corporate tax payments on retail investor perceptions. The study features a hypothetical firm that paid corporate taxes below the statutory rate in a particular jurisdiction and asked retail investors whether this firm paid its “fair share.” However, it varied how this firm lowered its corporate taxes. It either used less aggressive means (i.e., tax credits offered in the firm’s primary jurisdiction) or more aggressive means (i.e., it shifted profits from its primary jurisdiction to a tax haven). It also distinguished whether the primary jurisdiction had a public tax disclosure policy in place that required the firm to separately and publicly disclose corporate tax payments in that jurisdiction. Although retail investors could always uncover how the firm lowered its corporate tax payments, they separately received information about the firm’s corporate tax payments in its primary jurisdiction in the presence of the public tax disclosure policy.

The figure above displays the main finding of the study. Specifically, mandating the public disclosure of corporate taxes can make it more difficult for retail investors to differentiate among firms. Specifically, in the absence of the public tax disclosure policy (LHS), retail investors differentiate among firms because they spend more time uncovering how the firm lowered its corporate tax payments in its primary jurisdiction. However, this differentiation disappears in the presence of the public tax disclosure (RHS). Additionally, the lack of differentiation subsequently affects retail investors’ willingness to invest in the firm.

The results suggest that retail investors unconsciously over-rely on the corporate tax payments central to the public tax disclosure. The public tax disclosure makes these bottom-line tax numbers more accessible to retail investors, leading them to rely less on other sources of information which may also help them infer whether the firm aggressively avoids taxes. These other sources of information could be information contained in financial statements, other financial disclosures, or tax information originating from other tax jurisdictions.

What can policymakers and firms do?

Although the study provides a cautionary note to policymakers and regulators, it also presents a way forward. That is, if retail investors realize that the disclosed information is only a limited proxy for whether the firm pays its fair share of taxes, they may not be so quick to judge firms on this proxy alone. If regulators and policymakers, such as the EU, choose to mandate public disclosure of select tax information, they should make it clear to the public that the information is most likely incomplete. Also, if firms find themselves subject to having to disclose select pieces of tax information, they could choose to voluntarily disclose transparency reports that explain why their corporate taxes may differ from the statutory tax rate.

Tips for practitioners
  • Be cautious when interpreting numbers without context, such as the corporate taxes paid by firms!
  • Watch out for corporate tax transparency plans both nationally and internationally. Make sure to understand the consequences for your firm!
  • If your firm manages taxes using legitimate means, consider voluntarily disclosing it to the public.
Literature reference and methodology

The study “Public Tax Disclosures and Investor Perceptions” discussed in this article is conducted by Prof. Dr. Bart Dierynck, Prof. Dr. Martin Jacob, Prof. Dr. Maximilian Müller, Christian Peters MSc, and Dr. Victor van Pelt. The study examines changes in the perceptions of 421 retail investors in response to public tax disclosure.


Professor Dr. Martin Jacob

Martin Jacob is an expert on the effects of taxation on individuals and companies at WHU – Otto Beisheim School of Management. His research interest is the influence of tax policy on firms and their investment decisions. Since 2019, he has held the adidas Chair of Finance, Accounting, and Taxation at WHU.

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Professor Dr. Maximilian Müller

Maximilian Müller is an expert on capital markets and deals with matters of disclosure, regulation, and taxation. He received his doctoral degree at WHU, was then appointed assistant professor, and finally became holder of the Chair of Financial Reporting at WHU until 2019. Since 2020 he is a faculty member of ESMT in Berlin. As academic advisor he supports Othoz GmbH in the development of quantitative investment strategies.

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Dr. Victor van Pelt

Victor van Pelt is an Assistant Professor who applies experimental research methods to accounting topics and questions. His research predominantly focuses on understanding how people produce, use, and respond to disclosure, accounting information, performance measures, and controls.

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Professor Dr. Bart Dierynck

Bart Dierynck is Full Professor of Accounting at Tilburg University.  Bart is mainly interested in developing a better understanding of business problems at the intersection between management accounting on the one hand and organizational behavior, operations management, and corporate responsibility on the other hand. Bart has publications in top journals in accounting, operations management, and organizational behavior. He won several teaching awards for his teaching on management accounting and corporate responsibility. 

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Christian Peters

Christian Peters is a PhD researcher in Accounting at Tilburg University. He has a keen interest in judgment and decision-making in accounting. In his research, he integrates research in auditing and behavioral science to find out how and under what conditions auditors, audit teams, and audit firms, can perform their best. To address these research questions he designs experiments using programming packages such as oTree or conduct analysis using field data.

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