The tax affairs of large corporations have recently come under intense scrutiny. One symptom of this scrutiny has been increasing disclosure requirements, both to the public and to taxing authorities. One form of increased disclosure includes putting more information about the firm’s tax affairs in the hands of the public. For instance, public release of tax data in the form of public country-by-country reporting is a possibility in the U.S. and all European Union member states by 2018.  In 2013, the Australian legislature began debating making public certain tax-return data that were previously available only to the taxing authority. Amid growing concerns that companies, especially foreign-owned firms operating in Australia, were implementing aggressive tax strategies that allowed them to escape taxation (in some cases, entirely), the legislature passed the Tax Laws Amendment (2013 Measures No. 2) Bill 2013. The law eventually mandated disclosure for both foreign-owned firms and Australian publicly traded firms with total income reported on the Australian company tax return over 100 million AUD, with disclosure occurring on December 17, 2015, for the first year covered by the legislation (2013-2014). After some legislative twists and turns, the same policy went into effect for Australian private firms with total income over 200 million AUD, with disclosure occurring on March 22, 2016.

We use this setting to examine the impact of public tax-return disclosure.  Specifically, we are investigating the effect of public disclosure of information from corporate tax returns filed in Australia on consumers, investors, and the corporations themselves that were subject to public disclosure.

One potential impact of tax-return disclosure is changes in consumer sentiment toward the firm. We use two sources of consumer sentiment data generated from surveys. Our first source is data obtained from YouGov, an international pollster that regularly asks questions about perceptions of brands worldwide. We use these data to search for changes in brand perception following the disclosure on December 17, 2015. We find no evidence of changes in brand perception, reputation of the brand, or general “buzz” about the brand after the disclosure. One possibility is that disclosure does not substantially alter the transparency of these firms’ financial affairs, given that many of them are publicly traded and have very large, established brands.

To obtain our second source of consumer sentiment data, we designed and administered a survey of Australian consumers surrounding the March 22, 2016, release of tax data for Australian private firms. We measure consumer sentiment using responses to questions about individual views towards these businesses along five dimensions: overall impression, business practices, firm ethics, tax practices, and negative news. We find consistent evidence of a small decline in consumer sentiment after a disclosure for firms that are subject to disclosure, providing empirical support for the notion that tax-return disclosure, and negative tax publicity in general, can generate (at least short-term and small) consumer backlash, especially among smaller firms.

Our second set of tests explore investor reaction towards publicly traded firms that are subject to disclosure by examining market returns around the disclosure event itself and around a relevant legislative date leading up to the disclosure. On December 17, 2015, the Australian Taxation Office made available on its website the total Australian income, taxable Australian income, and tax payable to Australia for 1,538 of the largest companies operating in Australia, 553 of which are Australian public companies. We conduct tests both on the date of the first announcement of the law that had the specific threshold (on April 3, 2013) and on the actual disclosure date.  In both cases, we examine the set of firms expected to disclose (or that actually disclosed) and compare firms that were expected to disclose that they  paid no tax (or that actually disclosed that they paid no tax), and find negative market reactions for these firms, compared with firms that paid tax.  Our results suggest that the market did anticipate a reduction in firm value because of the disclosure.

Our final set of tests examines the effects of disclosure on firm behavior. First, we examine whether firms sought to avoid disclosure and its anticipated costs. Using aggregated data prepared for us by the ATO, we examine the distribution around the applicable disclosure threshold of total income reported on the Australian company’s tax return. We find evidence of an increase in the frequency of reported total income just below the disclosure threshold, which is consistent with some firms adjusting their reported income to fall below the threshold. This pattern is stronger among private companies, and is concentrated among taxpaying firms in both public and private companies, suggesting that firms are perhaps more concerned about divulging sensitive information to competitors about income, rather than tax payments, pertaining to Australia.

Collectively, our evidence points to several notable effects of company tax return disclosure on companies as well as their stakeholders. First, consumers appear to respond, at least in the short term, by holding a slightly more negative view towards relatively small private companies that are subject to disclosure. Investor response towards Australian public firms appears to be negative surrounding the disclosure event, suggesting capital markets anticipate that disclosure will be costly. Finally, we find that private firms appear to preempt disclosure by reducing reported income around the disclosure threshold and those for which disclosure is unavoidable show evidence of increasing tax payments. This implies firms anticipate that, all in all, disclosure will be costly, consistent with many of our findings surrounding consumer and investor perceptions.

These results should be of interest to managers, academics, and policymakers.  Surveys of tax directors have found that one pervasive fear is that tax planning will result in negative media attention (Graham et al. 2014). Our results confirm the negative reputational consequences of negative tax events being made known to the public.  However, our findings add nuance to the prevailing wisdom—we fail to find that disclosure affects well-established, public firms. Rather, our strongest results show up in private firms. Next, our evidence contributes to the literature on tax disclosure (Blank 2014; Bø et al. 2015; Hasegawa et al. 2013; Lenter et al. 2003) and the reputational effects of taxes (Austin and Wilson 2015; De Simone et al. 2016; Dyreng et al. 2016; Gallemore et al. 2014; Graham et al. 2014; Hanlon and Slemrod 2009). Finally, policymakers designing or considering disclosure systems should find our evidence useful. The consequences we document should be considered in the decision to adopt disclosure, keeping in mind that we can assess only a subset of the ramifications.

This post comes to us from Professor Jeffrey Hoopes of the University of North Carolina at Chapel Hill, Professor Leslie Robinson at Dartmouth’s Tuck School of Business and Professor Joel Slemrod at the University of Michigan’s Stephen M. Ross School of Business. It is based on their recent article, “Public Tax-Return Disclosure,” available here.