The influence of company characteristics on
tax transparency: the case of high
environmentally sensitive industries
Master’s Thesis, MSc Accountancy & Controlling, University of Groningen, Faculty of
Economics and Business
Helène Erdsieck
Prof. dr. I.J.J. Burgers, Supervisor
Dr. B. Crom, Co-supervisor
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The influence of company characteristics on tax transparency: the case
of high environmentally sensitive industries
Personalia
Name Helène Erdsieck
Date of birth 05-12-1989
Student number 1844326
E-mail h.erdsieck@student.rug.nl
Address Idastraat 29, Groningen
Postal code 9716 HB
Phone number +31 (0) 641 23 25 42
Study program MSc Accountancy & Controlling
Supervisor prof. dr. I.J.J. Burgers
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Abstract
Tax transparency is a relatively new subject in both society and in scientific literature. This study sets out a first framework in analyzing the extent of tax transparency reporting in high environmentally sensitive industries. In doing so, voluntary disclosure was reached out to find similarities in determinants of the extent of the disclosure. Four firm characteristics were identified to be of influence on the extent of tax transparency, namely consumer visibility (positive), financial leverage (positive or negative), profitability (positive or negative) and size (positive) controlled by three variables which are board composition, ownership diffusion and auditor. Tax transparency is quantified using content analysis and these findings are analyzed against the independent variables by multiple regression analysis. Financial leverage and ownership diffusion were found to be of significant positive influence on tax transparency, were the other variables were not found significant.
Key words: tax transparency, tax disclosure, voluntary disclosure, determinants, firm characteristics Word count including references: 17.348
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Contents
Abstract ... 2 Contents ... 3 Foreword ... 4 1. Introduction ... 5 2. Literature Review ... 7 2.1 Tax Transparency ... 7 2.1.1 Definition ... 72.1.2 Tax Transparency Initiatives ... 8
2.1.3 Profit ... 10
2.1.4 Income Tax Standards ... 10
2.2 Voluntary Disclosure Theory ... 12
3. Theoretical Framework ... 13 3.1 Legitimacy Theory ... 13 3.2 Stakeholder Theory ... 14 4. Hypotheses Development ... 15 5. Research Method ... 19 5.1 Sample ... 19 5.2 Dependent Variable ... 19 5.3 Independent Variables ... 22 5.4 Control Variables ... 23 6. Results ... 25 6.1 Descriptive Analysis ... 25 6.2 Statistical Results ... 27 7. Discussion ... 28 8. Conclusion ... 31
9. Limitations & Future Research ... 31
9.1 Limitations ... 31 9.2 Future Research ... 32 Bibliography ... 35 Appendix A ... 42 Appendix B ... 45 Appendix C ... 46
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Foreword
This thesis takes a look at the extent of tax transparency disclosed in annual reporting by multinational corporations operating the environmentally sensitive industries and is written in order to complete my study Accountancy & Controlling at the University of Groningen, where I started in 2008 with the BSc A&C. During this study I substantively learned most aspects needed to become an auditor but more importantly, I developed myself in different ways. As this study was hard sometimes I succeeded by being perseverance, this count as well to writing this thesis. In the beginning of writing this thesis, I experienced a lot of difficulties but thanks to my supervisor prof. dr. I.J.J. Burgers I was able to finish this thesis. Despite the experienced difficulties I had a great time performing this research and I am satisfied with the result. My specials thanks therefore goes to my supervisor prof. dr. I.J.J. Burgers and my fellow team members who helped me completing this thesis properly. Besides that, I want to thank KPMG NV for giving me the opportunity to write this thesis there. And last but not least, I want to thank my parents and my boyfriend who supported me unconditionally during my study and in writing this thesis.
Helène Erdsieck
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1. Introduction
The era we live in today is featured by globalization. Corporations do not only operate in a single country anymore, but extended their actions all over the world. As a result of this, “it became easier for all tax payers to make, hold and manage investments through foreign financial institutions” which has led to “vast amounts of money being kept offshore and go untaxed to the extent that taxpayers fail to comply with tax obligations in their home jurisdiction” (OECD, 2013). This phenomenon is a serious problem for tax jurisdictions all over the world as they miss large amounts of taxes paid which could otherwise be reinvested in society (The Tax Justice Network, 2006). One segment of taxpayers which is highly criticized these days are the multinational companies (MNCs). It is argued that MNCs follow a certain tax strategy to lessen their tax burden, which is legal but in some ways unethical. They take advantage of complex tax rules in combination with the lack of cooperation between governments and companies.1 Due to this,
much profit is being shifted to tax havens in order to reduce taxes paid2, also known as tax avoidance. It
is because of the countries itself that this is possible. Some countries do not use their taxes as a way to generate income, but they see low tax rates as a mean of competitive advantage to attract large MNCs to settle in their country. These MNCs lower their tax burden by shifting the tax basis to group members settled in tax havens or hollow the tax basis by using the differences in definitions in certain transactions or legal forms (Kruithof, 2013). From a legal perspective there is no basis to object if these MNCs uses this strategy to lower their tax burden as long as they keep compliant with the tax rules of the jurisdiction(s) they are settled in. As these applied strategies are legal, it seems unfair to the society of the jurisdiction were the company actually operates. This is especially the case in resource-rich developing countries where tax revenues could serve against poverty and for economic growth if managed properly (Deveruex, 2011). Tax payment is argued not to be just a duty. It is also an obligation due to society in exchange for limited liability for the risk that a society is exposing itself by hosting the activities of MNCs (Murphy, 2012). As Valdis Dombrovskis (Vice-President for the Euro and Social Dialogue3) stated:
“Everyone has to pay their fair share of tax. This applies to multinationals as to everyone else.”4
1 http://europa.eu/rapid/press-release_IP-15-4610_en.htm?locale=en 2 http://www.oxfamnovib.nl/uitgelicht-Belastingontwijking.html
3 The Euro and Social Dialogue refers to discussions, consultations, negotiations and joint actions involving
organizations representing the two sides of industry (employers and workers). Retrieved from: http://ec.europa.eu/social/main.jsp?catId=329&langId=en
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This quote underlines the fact that MNCs need to pay their ‘fair share’ taxes as all individuals do. Such a fair share is defined as a righteous distribution of the tax rate or tax expenses over all individuals, this counts for MNCs as well. Although, the taxes paid by MNCs will eventually end up by the individuals in the society dependent if and how these taxes are being shifted to investors and employees (Stevens, 2014). On the other hand, the tax income needs to be divided equally between tax jurisdictions. If the MNCs succeed in profit shifting from a high tax jurisdiction to a tax haven this will be profitable for the shareholders of such MNCs. As most of these shareholders life in rich countries, they will grow richer at the expense of developing countries which are often tax havens (Stevens, 2014). Paying a fair share to the tax jurisdiction where the MNC actually operates can therefore contribute to an equal distribution of wealth.
As an answer to this debate, several (independent) organizations designed models, standards or frameworks for both tax jurisdictions and corporations in order to enhance tax transparency. As will be discussed in more detail in section 2.1, tax transparency is interpreted differently by economic and fiscal professionals resulting in different models for tax transparency. The Organization and Economic Cooperation and Development (OECD) for example, fights against the aforementioned lack of cooperation between tax jurisdictions itself and tax jurisdictions and corporations. Other organizations concerning tax transparency champion for more tax transparency by MNCs to society. All these ‘new’ insights encourage the public debate about the lack of tax transparency by MNCs and because of the attention for more tax transparency it is likely that MNCs will answer to this need by being more transparent about their tax strategy. This can be achieved by voluntary disclose a tax paragraph in order to open up about this question to the stakeholders in general. Similarities can be found in the debate about environmental disclosure. Deegan & Gordon (1996) found a significant increase in environmental disclosure across time, especially at companies operating in environmentally sensitive industries. This change is linked to the increased societal concern relating to environmental issues. Concluding from this study, it seems that MNCs operating in environmentally sensitive industries are sensitive for societal debate concerning a certain issue. They therefore take the lead in disclosing these social issues.
In this study I will examine if companies operating in high environmentally sensitive industries are tax transparent, where the perspective of economic professionals is followed. This study will answer the question:
Which company characteristics of companies operating in high environmentally sensitive industries are of influence to tax transparency.
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To my knowledge this topic has not been studied before. By clarifying which company characteristics influence tax transparency, it can be determined which companies are more sensitive for transparent tax reporting. If the identified firm characteristics will be found of significant influence, it can help the (international) organizations concerned with tax transparency to set standards on tax disclosure and by what extent these standards should be mandatory.
This study will proceed in section 2 with a literature review about tax transparency and voluntary disclosure followed by section 3 where the theoretical framework will be discussed. The relevant hypotheses will be developed in Section 4 and statistically tested using the method outlined in section 5. Section 6 presents and interpret the results of the data analysis which will be discussed in section 7. The overall conclusion will be drawn in section 8 followed by limitations and future research in section 9.
2. Literature Review
2.1 Tax Transparency
2.1.1 Definition
As tax transparency might appeal to the imagination, it is good to take a closer look at this subject. Spies & Petruzzi (2014) state that tax transparency is not the purpose itself, but it is used as a tool in order to prevent corporations from minimizing their tax burden on a large scale. This can be achieved by organizations communicating their tax approaches and the taxes paid to provide clarity in this complex area (EY, 2013). The explanation mentioned here is the definition of tax transparency used by economic professionals. They see tax transparency as a way for MNCs to communicate their tax compliance to the society. The definition of tax transparency by fiscal professionals on the other hand, is more concerned to the transparency of tax information available to tax jurisdictions. The Global Forum “which is the continuation of a forum created in the early 2000s in the context of the OECD’s work to address the risks to tax compliance posed by tax havens”5 works on a model containing “internationally agreed standards
of transparency and exchange of information in the tax area”5. They seek a way to implement
international standards for countries to exchange information on request. As stated by the Global Forum itself “this refers to the situation where one tax authority is carrying out an audit or investigation and seeks information located in another country that is foreseeably relevant to that investigation” (OECD, 2013c). This quote reflects the purpose of tax transparency by fiscal professionals, which is to fight against
5 http://www.oecd.org/tax/transparency/
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profit shifting by MNCs in order to generate more tax income. Several other models, frameworks and standards will be briefly discussed below.
2.1.2 Tax Transparency Initiatives
The Organization and Economic Cooperation and Development (OECD) is working on an Action Plan which is focused on Base Erosion and Profit Shifting (BEPS). This plan identifies four main issues (OECD, 2013a) as is mentioned in the BEPS report (OECD, 2013b) were it calls for the development of “instruments to put an end to or neutralize the effects of hybrid mismatch arrangements and arbitrage”, in other words it is an action plan which purpose it is to reduce the ability of MNCs to move profits away from the high tax jurisdiction where the company actually operates to tax havens in order to lower their tax burden6.
Through this plan the OECD wants to enhance the ability for tax authorities in exchanging tax information where a mandatory disclosure regime can provide this information in a comparable manner. The main objectives of such a mandatory disclosure are: (1) obtaining early information about tax avoidance schemes, (2) identifying schemes (and the users and promoters of such schemes) and (3) acting as a deterrent to reduce the promotion and use of avoidance schemes (OECD, 2015). So, for a tax authority a mandated tax disclosure is a helpful manner to obtain information regarding the aforementioned subjects and to compare this information mutually. On the other hand, a mandated tax disclosure needs to be applicable in all tax jurisdictions where it needs to leave some space for the different tax rules in these jurisdictions. In case of voluntary disclosure this last problem is no longer raised but new problems arise which are obtaining the tax information by tax authorities and the diminishing of the comparability. Resulting from this, a dichotomy can be found in voluntary and mandatory disclosure. For the tax authorities a mandatory tax disclosure is best used and, as will be discussed in section 2.2, a voluntary approach in tax transparency can be applied in tax transparency to society.
Another report issued by the OECD (2013) concerns the automatic exchange of information (AEOI) through a broad framework legislation, by selecting a legal basis for the exchange, determining the information to be exchanged and related procedures and by developing common IT standards. This last suggestion is aimed at exchanging tax information between tax jurisdictions. Another suggestion for more tax transparency reporting arises from the Tax Justice Network which introduced the Country-by-Country Reporting. A MNC should record several issues related to taxes and the dispersion of their activities worldwide according to the Country-by-Country Reporting (Murphy, 2012) where they “demands that
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MNC publish a profit and loss account and limited balance sheet and cash flow information for almost every jurisdiction in which they trade as part of their annual financial statements” (Murphy, 2012). This framework of enhancing tax transparency is adopted by the OECD in their BEPS Action Plan7. The Publish
What You Pay (PWYP) published their initiative to increase tax transparency in (annual) reporting. This initiative is more focused on extractive companies in resource-rich countries. It “campaigns for transparency and accountability in the extractive process preceding payments, so that the decision to extract (…) is made in a transparent and accountable manner, to the benefit of all citizens (…).”8 Similar
to PWYP is the Extractive Industries Transparency Initiative (EITI) which “underlines the importance of transparency by governments and companies in the extractive industries and the need to enhance public financial management and accountability.”9 This initiative was discussed at G8 meetings in 2013 where
France, the US and the UK sought candidacy status by 2014 (PWC, 2013a). Companies operating in extractive industries registered by the SEC are required to file an annual SEC report disclosing all payments made to US Federal and foreign governments from the company itself and its subsidaries, as is included in the Dodd-Frank Act section 1504 issued in August 2012 (PWC, 2013a). In response to the Dodd-Frank Act issued in the US, the European Commission developed the EU Accounting Directive. This Accounting Directive covers “EU public interest entities and large EU undertakings in the extractive industries and the logging of primary forests” (PWC, 2013a). Companies that meet the criteria set by the Directive are required to disclose the payments made to governments in each country they operate in, besides that they have to disclose this as well for each project where the payment has been attributed to a certain project and when material to the recipient government (PWC, 2013a).
As tax transparency is more and more discussed, the scientific literature has also increased regarding tax transparency. Lenter et al. (2008) and Devereux (2011) looked for example more closely to issues concerning tax disclosure where VDBO (2014) and Neuman et al. (2013) relate tax transparency to corporate governance and/ or sustainability. Others researched the current accounting standards regarding tax disclosure, where it seems that these standards are quite limited in requirements of tax disclosure (Freedman, 2008; Kvaal & Nobes, 2013; Baker, 2015) as will be discussed below in section 2.1.4.
7 http://www.oecd.org/tax/transfer-pricing/public-consultation-transfer-pricing-documentation.htm 8 http://www.publishwhatyoupay.org/about/objectives
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2.1.3 Profit
Most countries have their own General Accepted Accounting Principles (GAAP). For the US, where this study focuses on (see section 5.1) this is the US GAAP which is adopted by the Securities and Exchange Commission (SEC)10. The US GAAP sets accounting standards which are applicable in the U.S.. Quite similar
to these standards are the standards set by the International Financial Reporting Standards (IFRS) in response to the globalizing accounting experienced the last couple of decades. The IFRS designs accounting standards which are applicable all over the world in order to enhance the comparability, transparency, accountability and efficiency of financial statements across the world11. In the U.S. the US
GAAP and IFRS exist next to each other resulting in complex financial accounting. Especially when the US GAAP begins to converge their standards with the IFRS (PWC, 2013). The existence of two (or more) different accounting standards results in different ways to calculate accounting profit (or losses). Some examples of such differences are the way how assets and inventory are valued, the depreciation method used, how to revalue certain assets and how income taxes needs to be calculated. However, the differences in the calculated accounting result differs in their turn from the taxable result. The standards for U.S. tax accounting are set by the Internal Revenue Code (IRS) in section 44612. This section treats
certain aspects of financial accounting differently for tax purposes resulting in different financial reports for society, i.e. the annual report and the financial report issued for tax returns to the IRS. The actual taxes paid are based on the financial report issued for the IRS, which can vary greatly from the accounting results. As the financial statements to the IRS are confidential and not available for the public, the public interprets a low amount of taxes paid as a form of tax avoidance where the corporation actually is compliant with tax rules but shows a lower taxable result than accounting result and therefore do not have to pay that much tax. The differences between accounting profit and taxable profit lead to deferred tax assets and/ or liabilities on the balance sheet. Dependent on which accounting standard is used to draft the financial statement, these deferred taxes needs to be recorded and valued on the balance sheet.
2.1.4 Income Tax Standards
The ASC 740 Income Taxes (US GAAP) and IAS 12 Income Taxes (IFRS) contains the standards regarding income taxes. As there are some similarities between these standards, there are also some significant
10 The SEC is an agency of the US Federal government which mission it is to protect investors, maintain fair, orderly
and efficient markets and facilitate capital information. Retrieved from http://www.sec.gov/about/whatwedo.shtml
11 http://www.ifrs.org/About-us/Pages/IFRS-Foundation-and-IASB.aspx 12 http://www.irs.gov/uac/The-Agency,-its-Mission-and-Statutory-Authority
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differences i.e. defining the tax basis, taxes on intercompany transfers of assets, uncertain tax positions and recognition or calculation of deferred tax assets (EY, 2012). Besides these differences in accounting standards the IAS 12 received a lot of criticism on the standards for Income Taxes in its entirety. An project group of the European Financial Reporting Adivosry Group (EFRAG) leaded by the U.K. Accounting Standards Board (ASB) and the German Accounting Standard Board (GASB) think that these critics are seated so deep that it is not possible to reform them easily. They suggest to fundamentally review the IAS 1213. Users of the financial statements often say they cannot find the information needed produced with
the IAS 12. As taxes are complex, clear and transparent information is required which is not sufficiently provided using the accounting standard for Income Taxes issued by the IFRS. One main objective for users to revise the IAS 12 is the lack of “information related to an entity’s income tax charge and potential future cash flow impacts” as tax expenses are mostly one of the largest amounts an entity has to pay (EFRAG, 2011). Other commentaries include the lack of guidance on uncertain tax positions and the inadequate information about deferred taxes. For users it is important to understand the entity’s tax strategy and to be provided with clear explanations of why the effective tax rate and tax expenses differ from the statutory tax rate (EFRAG, 2011) where this last one is included in the IAS 12. The IAS 12.81(c) proscribes a disclosure which explain the relationship between tax expense (income) and accounting profit in two forms: (1) a numerical reconciliation between tax expense (income) and the product of accounting profit multiplied by the applicable tax rate, disclosing also the basis on which the applicable tax rate is computed, or (2) a numerical reconciliation between the average effective tax rate and the applicable tax rate, disclosing also the basis on which the applicable tax rate is computed where the effective tax rate is computed as the tax expense (income) divided by the accounting profit (IAS 12.86). Disclosing explanations of the effective tax rate (ETR) enables users of financial statements to understand why the relationship between tax expense (income) and accounting profit is unusual. This relationship may be affected by several factors that are i.e. exempt from taxation and are not deductible in determining taxable profit (EY, 2006). Obviously, these explanations are not enough which could be a result of how the IAS 12 is prepared. The IAS 12 is designed focusing on accounting technologies such as temporary differences instead of the demands of the users. One cannot expect that the users of the financial statements have technical accounting knowledge to make sense of complex tax issues (EFRAG, 2011). On the other hand, preparers of the financial statements complain that the accounting requirements for income tax are too complex to apply in practice, are unclear and they sometimes question the relevance
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and understandability of the information provided. Besides that, they criticize the IAS 12 because of the recognition of liabilities that will not be settled in the foreseeable future as a result of the mechanical approach of the standard (EFRAG, 2011). These critics are in line with the critics Cairns (2006) identified. According to Cairns the IAS 12 provides little definitions of assets and liabilities that differ from those used in all other cases. It requires for example, an organization to record taxes based on future income while other IFRS’s prohibit the recognition of future income. For this and more reasons, it is argued to revise the IFRS-standard IAS 12. The standard has become outdated, is complex and does not provide the requirements of investors and analysts (Van den Ende et al., 2012). There appears to be a need of greater tax transparency and therefore also a need to update the IAS 12 to the requirements concerning tax disclosure.
2.2 Voluntary Disclosure Theory
Although there are several initiatives to help MNCs being more tax transparent, tax disclosure is still not a mandatory disclosure. Therefore, the literature around voluntary disclosure is helpful to define company characteristics which influence tax disclosure. Voluntary disclosure theory is used as a tool of communication in order to reduce the information asymmetries between managers and investors (Verrecchia, 1983; Lang & Lundholm, 1993). From the social-political perspective Gray et al. (1995) argue that disclosure is more used as a tool of impression management to reduce the social and political pressures. Extensive research has been done to several aspects of voluntary disclosure, of which a few will be discussed here after. Eng & Mak (2003) looked at the impact of ownership structure and board compisition on voluntary disclosure. They found that lower managerial ownership and significant government ownership increase the extent of voluntary disclosure, where an increase in outside directors reduces voluntary disclosure. Chau & Gray (2002) performed a similar study based on voluntary disclosure behavior by Hong Kong and Singapore listed companies. They found a positive association between wider ownership and voluntary disclosure and a negative relation with strong ‘insider’ and family-controlled companies, which seems in line with Eng & Mak (2003). Darrough & Stoughton (1990) studied the influence of competition on voluntary disclosure, with the implication that competition through threat of entry encourages voluntary disclosure. This in contrast to Verrecchia (1983) who suggested a positive association between less competitive industries and voluntary disclosure. Another determinant of voluntary disclosure is performance, where the level of disclosure is positively correlated to past, current and future periods performance (Lundholm & Lang, 1992). Lundholm & Lang (1992) also found when the disclosure costs and information asymmetry decreases, the level of disclosure increases. Firm
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characteristics has also been a favorite subject of research by several authors, where this study is based on. Uyar et al. (2013) found positive association between voluntary information disclosure and the several firm characteristics as firm size, auditing firm size, proportion of independent directors on the board, institutional/ corporate ownership and corporate governance. However, they found a negative association with leverage and ownership diffusion. Some other characteristics were found insignificant, like profitability, listing age and board size. Mahfoudh & Mohammed (2014) either did not find a significant association between voluntary disclosure and profit margin and return on equity (ROE). In his study Kumar (2013) argues that firms with lower leverage and high-technology industry firms provide higher voluntary disclosures. A different trend in research is the correlation between cost of capital and voluntary disclosure. Botosan (1997) provides evidence of an association between these two, and found also an indication of the magnitude of this effect. Sengupta (1998) takes a closer look at the role of cost of debt at voluntary disclosure. His findings support the idea that lenders and underwriters consider the disclosure quality in estimating the default risk. Financial analysts favor the degree detail, timeliness and clarity of disclosures and therefore perceive a lower default risk which results in lower cost of borrowing. Besides that, they rely more on disclosures if the market is uncertain in which the organization operates. Francis et al. (2005) studied the relation between the firm’s need for external financing and the level of voluntary disclosure and the relation between cost of capital and the firm’s voluntary disclosure level. They found that firms which depend on external financing are likely to undertake an expanded disclosure policy and that a higher disclosure level leads to lower cost of external financing. As Einhorn & Ziv (2008) argue, most of these theories analyzes disclosure choices within single-period frameworks. However, the firm’s voluntary disclosure strategy is not time isolated, “it is rather an integral part of its past and future strategic disclosure behavior” and could therefore be an indicator to record voluntary disclosure (Einhorn & Ziv, 2008). This study will elaborate on studies focused on firm characteristics as a influence on voluntary disclosure, with the difference that tax transparency will apply as dependent variable instead of voluntary disclosure.
3. Theoretical Framework
3.1 Legitimacy Theory
When explaining corporate motivations for reporting on social and environmental accounting, the legitimacy theory is the most used theory (Islam & Deegan, 2010). This theory contains the actions that organizations’ management will undertake with the intention to show the community that their
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organizations’ value system is congruent with that of the larger social system where the organization is part of (Lindblom, 1994). As mentioned above, tax disclosure can also be qualified as a form of social reporting because of the relationship between society and organization and the so called ‘social contract’ (Deegan & Rankin, 1996). For that reason, this research will be based on the legitimacy theory defined by Lindblom (1994) and cited by Lanis & Richardson (2013) as “a status, which exists when an entities value system is congruent with the value system of the larger social system of which an entity is part. When a disparity, actual or potential exists between the two value systems there is a threat to the entity’s legitimacy.” When society expectations are not met by corporate actions, according to the legitimacy theory management will record a disclosure in order to harmonize the society concerns and the corporate actions (Lindblom, 1994; Lanis & Richardson, 2013) to demonstrate that the organization is fulfilling its social contract and justify its continued existence (Chelli et al., 2014). These concerns may change over time and therefore companies need to respond to such changes (Islam & Deegan, 2010). Some changes we experienced the last decades are for example the focus on sustainability, corporate governance and nowadays it is the emphasis on (unethical) tax strategies. Communities, governments and international organizations do not accept any longer the tax avoidance strategy of MNCs and therefore they need to disclose a tax paragraph in their reports14. Such changes in society standards are one reason to voluntary
disclose the responsibilities taken in order to be ‘legitimate’ again. Evidence on this topic is found by Islam & Deegan (2010) where they concluded that negative media attention on doubtfully corporate actions is related to actions undertaken by a MNC to restore their legitimacy, for example by voluntary disclosure.
3.2 Stakeholder Theory
Another theory, which is mutually consistent with the legitimacy theory is the stakeholder theory (Beattie & Smith, 2012). This theory connects ethics and strategy with each other (Phillips et al., 2003) what actually is the case with tax strategies. Many research has been done to stakeholder theory resulting in a lot different interpretations (Phillips et al., 2003). One interpretation is the ‘instrumental’ variation of stakeholder theory where managers attend to stakeholders to achieve profit of shareholder wealth maximization (Phillips et al., 2003). But actually it is more than that. Managers need to seek ways to serve the interest of a broader group of stakeholders in order to create value over time, not monetary value alone (Campbell, 1997; Freeman et al., 2007). As Mitchell et al. (1997) argue, by not undermining the
14 http://langleveeuropa.nl/2014/12/eu-gaat-belastingontduiking-multinationals-aanpakken-gelooft-u-het/;
belastingontduiking-multinationals~a3802629/; http://www.volkskrant.nl/economie/duitsland-frankrijk-en-italie-eisen-aanpak-belastingontduiking-multinationals~a3802629/
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attributed possessions of stakeholders can affect the relationship among the stakeholders and the organization. The attributed possessions of stakeholders can be classified as (1) the stakeholder’s power to influence the organization, (2) the legitimacy of the stakeholder’s relationship with the organization, as discussed in section 3.1 and (3) the urgency of the stakeholder’s claim to the organization. Stakeholders, i.e. all interested parties in the company recognize the lack of tax transparency as critical and claims immediate attention and thereby practise their power on organizations to disclose a more transparent tax disclosure. An example of this is the EITI (see Appendix C), which involves a multi-stakeholder coalition of governments, companies, investors, civil society organisations and partner organisations. This multi-stakeholdergroup is responsible for the EITI process in each country that decides to voluntary implement the EITI (PWC, Tax transparency and country-by-country reporting: an ever chancing landscape, 2013a).
4. Hypotheses Development
The stakeholder theory proposes that different interested groups are concerned by the companies activities (Freeman, 1984). Organizations are aware of the need of transparent reporting to the stakeholders and society (Van Riel, 2000). One of the highlighted subjects these days is concerned to tax compliance. The decision to draft a tax report is depended on the pressure of specific stakeholders. Fernandez et al. (2013) analyzed how such pressure of stakeholders affects the transparency of Corporate Social Responsibility (CSR). They found that companies in environmentally sensitive industries, companies with high consumer proximity and with high pressure from investors and employees are significant positively related to higher levels of transparency reporting, where transparency is defined by a principal component of four variables; frequency of CSR reporting, level of application, declaration of the level and assurance of CSR. Another aspect of interest like tax transparency can be found in environmental disclosure. Deegan & Gordon (1996) found a significant increase in environmental disclosure which is linked to an apparent increase in societal concern relating to environmental issues. As tax transparency is becoming a societal concern as well nowadays, it might be argued to expect the same trend regarding tax transparency. Tagesson et al. (2009) found a correlation between industries in which companies operate and the extent and content of disclosure. These findings are congruent with Gamerschlag et al. (2011) who found that companies under pressure disclose the interests of the group which exert the pressure. As high environmentally sensitive industries are highly dependent on their environment, they disclose on average more then other industries.
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As mentioned above, the extractive industry initiated an own standard regarding tax transparency, the EITI Standard which goal is formulated “to ensure full disclosure of taxes and other payments made by oil, gas and mining companies to governments”15. To become a member of this initiative, a country can
voluntary apply for the EITI. In line with their goal, most members of the EITI are countries located in developing countries16. As the initiative is focused on companies operating in the extractive industry. In
this study, the extractive industry will be broadened to high environmentally sensitive industries operating in agriculture, automotive, aviation, chemical, construction, construction materials, energy, energy utilities, forest and paper products, logistics, metal products, mining, railroad, waste management and water utilities (Fernandez et al., 2013). The inducement for this broader definition is the fact that these industries have a serious impact on the resources of the hosting country and therefore need to report their ‘fair share’ to the jurisdictions they operate in. Pled & Iatridis (2012) performed a study on the quality of Corporate Social Responsibility (CSR) in high environmentally senstive industries. They found that companies operating in business products carrying harmful or negative attributes for human health or society, with high consumer visibility or with intense competition are likely to show a higher degree of CSR. The reason for this relationship is that these industry sectors experience political and social pressure to resume a good social and environmental role, especially those industries identified as environmentally sensitive in order to provide assurance to society (KPMG, 2011). In line with these findings, this research will focus on company characteristics determining the extent of tax transparency in annual reporting because companies operating in high environmentally sensitive industries experience pressure from society to be transparent about their tax strategy in order to determine if those companies pay their ‘fair share’ to the society in exchange for the resources. As will be discussed below, several studies found significant relationships between company characteristics and the extent of voluntary disclosure. The following hypotheses will capture these findings and relate them to tax transparency.
The first characteristic in explaining tax transparency considers high proximity. Some see ‘high-profile industries’ as a broader concept of environmentally sensitive sectors (Patten, 1991; Roberts, 1992) where they define companies with public pressure, consumer visibility, high level of political risk or concentrated intense competition as environmentally sensitive sectors. One of these concepts, consumer visibility is found to be of influence on environmental reporting (Haddock-Fraser & Tourelle, 2010) and on CSR reporting (Fernandez et al., 2013). So, companies with a high consumer visibility e.g. consumer proximity
15 https://eiti.org/eiti
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are supposed to experience greater pressure from society. Within the high environmentally sensitive industries, the companies who produce for the consumer market will experience higher pressure for being transparent on their taxes than they would experience if they produce for the business market. The hypothesis is formulated as:
H1 High consumer visibility in environmentally sensitive industries is positively related to tax transparency.
Much research has been done to expose the relation between financial leverage and voluntary disclosure. Francis et al. (2005) and Lan et al. (2013) found empirical evidence that firms depending on external financing are likely to undertake expanded disclosure. However, Chow & Wong-Boren (1987) and El-Gazzar et al. (2008) did not find a significant increase in voluntary disclosure due to financial leverage. Raffournier (1995) and Behn et al. (2010) argue that companies with large debts are more likely to extent the disclosure to solve monitoring problems between stockholders and creditors. However, they did not find a significant positive correlation between these two. Raffournier (1995) reproaches this to the fact that leverage is a poor surrogate for external financing. More precise measures like entering the European capital market (Choi, 1973) or diversified firms obtaining external long-term capital (Salamon & Dhaliwal, 1980) show a significant positive relation. In this study, financial leverage as a surrogate for external financing will be appropiate because all of the companies included in the sample are traded on the stock market and therefore they do not meet the qualifications made by Choi (1973). Because of these conflicting results, the next hypothesis is:
H2 Financial leverage in environmentally sensitive industries is related to tax transparency.
Subramanyan (1996) found evidence of discretionary accruals predicting future profitability in order to reduce information asymmetry between managers and outsiders. Kolsi (2012) confirmed this by finding a significant positive correlation between firm profitability and voluntary information indicating that higher levels of voluntary information get more investors’ confidence which result in positive share price variation. On the other hand, Uyar et al. (2013) found an insignificant relation between profitability and voluntary information disclosure as well as Mahfoudh & Mohammed (2014) who either did not find a signifanct contribution of profitability and return on equity in providing voluntary disclosure. Camfferman & Cooke (2002) found even a significantly negative relation between the profit margin and the extent of the disclosure and no significant relationship between the return on equity and the extent of disclosure. Alsaeed (2006) studied three aspects of performance-related variables as an explanation of the disclosure
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level variation, namely profit margin, return on equity and liquidity. None of these variables were found to have a significant influence on the disclosure level. From these studies may be concluded that the direction of relationship between performance and disclosures is rather unclear. This undefined relationship between profitability and voluntary disclosure will also be followed for tax transparency. As mentioned in section 2.1.3 the final taxes paid are based on the taxable profit and therefore these taxes will be the most important part of taxes paid. The amount of taxable profit is however confidential to the IRS, where the accounting profit is presented in the annual report issued by the corporation. A lower taxable profit leads to a lower amount of taxes paid, which could cause confusion by the public if a corporation presents high accounting profit. Therefore the taxes paid seem not in line with the profit presented which cause the opinion that a corporation try to avoid taxes. In order to eliminate this confusion a corporation can decide to disclose a tax report where it explains being compliant with the tax rules and give reasons why the actual taxes paid differ from the accounting profit. On the other hand, a corporation can make the decision for not being transparent on taxes to not draw the attention on the little profits. For that reason, the fourth hypothesis is formulated as:
H3 Higher profitability in environmentally sensitive industries is related to tax transparency
The last hypothesis is concerned to firm size in relation to tax transparency. Many researchers examined the correlation between firm size and voluntary disclosure and found a positive relationship between those two for several reasons. Larger firms are more exposed to public scrutiny, possess more resources for collecting, analyzing and presenting disclosures at minimal costs (Alsaeed, 2006), reducing agency costs (Watts & Zimmerman, 1983) and larger firms are more susceptible to lawsuits where voluntary disclosure can suppress litigation costs (Kasznik & Lev, 1995; Leung & Srinidhi, 2006). As mentioned here, larger companies are more often scrutinized by the public as is the case with tax transparency nowadays. The society is becoming more aware of the impact of taxes paid by companies that they force them to be more transparent about this subject. Besides that, companies want to avoid litigation costs resulting from inappropiate or illegal tax strategies and chose to disclose a tax paragraph in order to be transparent. In line with these results, the last hypothesis yields:
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5. Research Method
5.1 Sample
To empirically test the hypotheses, data were collected from 95 high environmentally sensitive companies in the S&P 500 (see Appendix A)17. Three companies had to be excluded from this sample as the required
data was not available, resulting in a final sample of 92 high environmentally sensitive companies. High environmentally sensitive industries are defined using the Standard Industry Classification Code (SIC code) issued by the Securities and Exchange Commission (SEC)18 for the following industries: agriculture,
automotive, aviation, chemical, construction, construction materials, energy, energy utilities, fishing/ hunting, forest and paper products, logistics, metal products, mining, oil & equivalents, railroad, waste management and water utilities (see Appendix B). The S&P 500 is chosen because it is based on the market capitalizations of the 500 largest companies in the U.S. and can be considered as the best representation of the U.S. stock market. Besides that, large companies are known to be more proactive than smaller firms (Arora & Cason, 1996; Alvarez et al., 2001; Brammer & Pavelin, 2008; Haddock, 2005) and will therefore most likely be the first to record tax transparency in their reports. The selected companies are obliged to publish their annual report and from here the required data can be obtained, especially the data needed for the dependent variable. The independent variables were mainly collected from COMPUSTAT and Orbis. This study focuses on the last fiscal year, which is 2013 in order to analyze the most recent data.
5.2 Dependent Variable
The aim of this study is to determine which company characteristics in high environmentally sensitive industries are of influence on tax transparency, where tax transparency is used as a mean to clarify tax strategies applied by MNCs. These strategies do not always lead to the ‘fair prices’ companies need to pay to the tax authorities and by being more transparent about taxes ‘fair price’ can be enhanced.
Analyzing annual report narratives can be performed by several methods. One of such methods is the content analysis which involves coding words, phrases, and sentences against a schema of interest (Bowman, 1984), in this case tax transparency. This kind of analysis will be used to quantify tax transparency in this study. Content analysis is a helpful tool to categorize items of text and can be used in qualitative studies with large amount of data (Holsti, 1969) to establish relationships that are otherwise difficult to reveal and yet can be tested for validity (Bowman, 1984). Hsieh & Shannon (2005) identified
17 S&P 500 is withdrawn from Datastream 18 http://www.sec.gov/info/edgar/siccodes.htm
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three approaches of content analysis, namely conventional, directed and summative content analysis. The conventional approach is generally used in studies aimed to describe a phenomenon, where data is collected through interviews and open-ended questions. Distinctive for this method is achieving the data through reading it in its entirety. For the conventional content analysis it is important to see everything in its entirety in order to describe an phenomenon. When such a phenomenon is further explored, the directed content analysis is mostly used. An existing theory or prior research is used to identify key concepts or variables as initial coding categories (Potter & Levine-Donnerstein, 1999) whereupon operational definitions for each category are determined. Data for this method is usually gathered through interviews with open-ended questions, followed by targeted questions about the predetermined categories. All answers are thereafter categorized in the predetermined categories and answers which do not belong to one of these categories are examined further. So, the directed content analysis method is mostly used to validate or extend conceptually a theoretical framework or theory. The last approach and applied in this study is the summative content analysis which is mostly used to explore usage instead of infer meaning of qualitative data. The summative approach starts with indentifying and quantifying certain words or contents. These indentified key words are counted in textual data in order to determine the appearance of specific words or content (Potter & Levine-Donnerstein, 1999; Kondracki & Wellman, 2002). This so called manifest summative content analysis is used in this studie. Another form of summative content analysis is called the latent content analysis, which refers to the process of interpretation of textual data quantified by the summative content analysis (Holsti, 1969). In defining the dependent variable tax transparency in this study the manifest content analysis will suffice. It is not the aim of this study to understand underlying context for tax transparency as it is just focused to what extent a MNC applies tax transparency. Tax transparency will be measured by counting the words in sentences which include information about tax transparency. Milne & Adler (1999) support the use of sentences because “using sentences for both coding and measurement seems likely, therefore, to provide complete, reliable and meaningful data for further analysis”. As mentioned, sentences including information about tax transparency are highlighted. The information provided in these sentences are categorized in six categories namely ETR drivers, tax governance, taxes paid/ contribution, uncertain tax positions, geographical split and tax havens based on research conducted by Deloitte (2014). The mention of one or more different tax initiatives is added to this list. Descriptives of these categories are included in Appendix C. These identified categories do not have a purpose on itself, but are identified in order to include all aspects of tax transparency. If a sentence contains comments about the identified categories, the words in these sentences will be counted. In order to not miss any sentences about these categories, a list of key
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words will be used (see Appendix C). The total words counted in these seven categories is used as a proxy for tax transparency.
Content analysis is an unobstructive and nonreactive way to study a aspect of interest (Babbie, 1992). But on the other hand, it is inevitably subjective and therefore the coding method needs to be reliable in order to conclude valid outcomes (Linsley & Shrives, 2006). One procedure to improve the reliability in content analysis is to have more than one person read and code the written document (Abraham & Cox, 2007). As this study is performed by just one person, this procedure is not applicable. Therefore, the writer prepared a schema with key words (see Appendix C) and submitted it for review to a fellow writer in order to receive comments to improve the quality of key words used to quantify tax transparency. The key words are derived from annual reports from four companies headquartered in Europe which reported about tax transparency. Two companies operate in the extractive industry and the other two companies are not classified as high environmentally sensitive (see Appendix B). This initial sample in Europe is selected in order to prevent a hundred percent score in advance from one or more companies in the selected sample as mentioned in section 5.1, which is focused on the United States. One selected company is Rio Tinto because it is known for its extensive tax transparency reporting. The other company selected in the extractive industry is selected because it is a founder and board member of the EITI and is therefore expected to be transparent about their tax strategy. The last two companies selected in this initial sample are not operating in high environmentally sensitive industries and that is the reason why they are included in this sample. In order to generate a diversified schema of key words these companies, operating in another industry might use different terms, words and sentences to describe tax transparency and produce therefore a more diversified schema. Also these two companies are known for their support to tax transparency. As this coding schema is prepared by one person and corrected by a second there is no need to measure inter-rater reliability. A second method to increase objectivity to this schema is to examine the output of content analysis measured one way against a different way (Beattie et al., 2004). In this study tax transparency will be quantified using words of sentences including information about tax transparency categorised in seven categories. This kind of method will be measured against the frequency of key words in textual material. The degree of consistency of these two methods will be calculated with Cronbach’s α, which shows how well a set of items capture a particular underlying construct (Abraham & Cox, 2007). The Cronbach’s α in this sample is calculated as 0,28. Normally speaking, a Cronbach’s α of 0,7 is considered as a good measure for the degree of consistency. As the calculated α in this sample is far below 0,7 it can be considered as a low degree of consistency and therefore should not be used. For this reason the Cronbach’s α is calculated again against the four corporations (see section 5.2) used to identify
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the key words resulting in an α of 0,61. As this value is significantly higher than the calculated α for the sample the identified key words can be used to measure tax transparency. Although, the α of 0,61 is below 0,7 it is much closer to this predetermined value19.
Data is collected using annual reports and scanned for a tax disclosure. If a MNC refers to an external document, this document will be used. Besides that, the company website will be used to extract information about their tax strategy. Information is only used as it comes directly from the company, news facts and documents alike will be excluded. Tables are excluded from the data collection for the dependent variable because the method used is content analysis. The main focus here is on the information provided in sentences in order to understand the context in which the key word is mentioned. A table does not provide this required information and will therefore be excluded in word counting.
5.3 Independent Variables
The independent variables in this study are consumer visibility, financial leverage, profitability and size. These variables will be measured using proxies as described below.
Consumer visibility (CV) is determined whether the company could be classified as ‘close to consumer’ (C2C) or by operating in business-to-business (B2B). This classification is obtained from the annual report or the companies’ website where it outlined its activities. A company is classified as C2C if it directly delivers to consumers, even if this is only a part of its sales activities (Haddock-Fraser & Tourelle, 2010). If a company is classified as C2C it scores a 1 and 0 otherwise.
Financial leverage (LEV) is a widely used variable in studies explaining voluntary disclosure and can be measured by several methods. Francis et al. (2005), Lan et al. (2013) and Raffournier (1995) use the ratio of total debts to assets. El-Gazzar et al. (2008) take the ratio of long-term debt to stockholders equity to calculate the financial leverage and Deumes & Knechel (2008) use the ratio book value of debt to the sum of market value of equity and book value of debt. In this study the ratio of total debts to total assets will be used as it is de most commonly used method to measure financial leverage.
Profitability (PR) is even as financial leverage a variable of interest in determining the extent of voluntary disclosure in literature. Profitability is mostly measured by the ratio of net income to total assets (ROA) (Kolsi, 2012; El-Gazzar et al., 2008; Wang et al., 2008). Deumes & Knechel (2008) take either ROA as proxy but based on book value. Raffournier (1995) uses the ratio of
23
income-on-net-worth and Lan et al. (2013) take the return on equity (ROE). Alsaeed (2006) looks in his study to three measures of firm performance namely return on equity, profit margin and liquidity. In this study the ROA will be used in line with the most researches.
Firm Size (SIZE) can be measured at different ways, by taking the number of employees, total assets, total sales and total market value. In this study, firm size will be measured by the total assets at the end of the fiscal year as is done in most studies which use firm size as an independent variable for determining the (extent) of voluntary disclosure (Alsaeed, 2006; Kolsi, 2012; Wang et al., 2008). As the values are of great divergent, these will be corrected by taking the natural logarithm (LN). The sample selected are companies operating in high environmentally sensitive industries and are therefore highly reliable on (fixed) assets as they need specialized machines to extract oil for example. For that reason, total assets will be used as a proxy to measure size.
Independent variable
Model Description Hypothesis Expected sign
Consumer visibility CV Measured by a dummy variable, 1 if the company can be classified as ‘close-to-consumer (C2C) and 0 otherwise
H1 +
Financial leverage LEV Leverage ratio, measured by the ratio of total debts to total assets at year end
H2 +/-
Profitability PR Measured by the return on assets (ROA) of net profit after tax to total assets at the end of fiscal year
H3 +/-
Size (LN) SIZE Firm size, measured by the LN of the total assets at the end of fiscal year
H4 +
Table 1 Explaining independent variables
5.4 Control Variables
This research is based on the firm characteristics which are found significant in the voluntary disclosure literature. Some of these variables are selected to test their influence on tax transparency. As these characteristics are just a part of variables which have found to be of significant influence on voluntary disclosure, it is important to control for those other variables in order to expose the relationship of the selected variables in this research. These control variables are therefore selected from the voluntary disclosure literature and discussed here after.
Ownership diffusion (OWN) is the diffusion of shares held by different kind of shareholders and is argued to be of positive influence on voluntary disclosure because of additional monitoring required by outside shareholders as managerial ownership decreases, that is ownership hold by
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executive directors (Jensen & Meckling, 1976). Managers are therefore disposed to disclose more information than is demanded by law and regulation (Donnelly & Mulcahy, 2008). For small shareholders, the annual report is the main source of information as they cannot expose the same pressure on managers as large (institutional) shareholders may be because of the costs incurred. So, managers of firms whose ownership is diffused by much (small) shareholders will experience an incentive to disclose more information to help shareholders monitoring (Raffournier, 1995). Ownership diffusion can be measured in different ways, but in this study is chosen for the percentage of ordinary shares held by other than the top twenty shareholders (McKinnon & Dalimunthe, 1993) in order to meet the requirement of small shareholders who cannot exert monitoring pressure.
Board composition (BOARDC) takes a look at distribution of executives and nonexecutives in the board which can only be applied in an one tier board. A distinction is made in board structures which are called an one tier or unitary board on the one hand and a two tier board on the other hand. In a two tier board nonexecutives sit in a supervisory board to oversee the management board which consists of executive board members to run day-to-day operations. These boards have separate chairpersons. In an one-tier/ unitary board these different boards operate in one board, with one chairperson who is also the Chief Executive Officer (CEO) (Millet-Reyes & Zhao, 2010). So, executives and nonexecutives operates next to one another in an unitary board. That is why only in an one tier/ unitary board this defined board composition can be measured. This study focuses on MNCs operating in the U.S. which is therefore the reason to include this control variable in the analysis. Corporations operating in the U.S. are characterized by the one tier/ unitary board. Prior research found a positive significant influence of board composition on voluntary disclosure and transparency (Eng & Mak, 2003; Lim, et al., 2007) (Samaha et al., 2015). If others than managers from outside the firm (nonexecutive directors) take place in the board the monitoring management will increase because of them. They are in a better position to monitor management and have incentives to do this because their own value as an outside director depends primarily on the performance of the companies in which they take place (Fama & Jensen, 1983; Harrison & Harrell, 1993). The board composition will be measured by the percentage of nonexecutive directors on the board (Donnelly & Mulcahy, 2008).
BIG 4 auditors (BIG4: Deloitte, PWC, EY and KPMG) are suggested to have a defining role in the disclosure policy of their clients (Raffournier, 1995) because they perform a higher audit quality in the accounting process in general, but a particular role in disclosure policy (Kolsi, 2012).
El-25
Gazzar et al. (2006) provided evidence in their study that audit quality has a monitoring influence on the firm disclosure policy. Large audit firms have to concern their reputation and therefore associate themselves with firms that disclose more information than is required by law and regulations (Alsaeed, 2006). BIG4 will be measured by a dummy variable, were it gets a 1 if the auditing firm is one of the BIG 4 and 0 otherwise.
6. Results
The hypotheses prepared in section 4 are measured using both an univariate and multiple regression analysis. This method measures the correlation between the independent variables CV, LEV, PR and SIZE and the dependent variable tax transparency with the control variables taking in account, using a linear regression. Each hypothesis is conducted individually using an univariate regression analysis and after that, all hypotheses are taken together for a multiple regression analysis.
H1: TAX TRANSPARENCY = c+ β1CVi + εi
H2: TAX TRANSPARENCY = β0 + β1LEVi + εi
H3: TAX TRANSPARENCY = β0 + β1PRi + εi
H4: TAX TRANSPARENCY = β0 + β1SIZEi + εi
Hall: TAX TRANSPARENCY = β0 + β1CSi + β2LEVi + β3PRi + β4SIZEi + εi
The coefficients are represented by βi and εi shows the error term.
Before the analysis is conducted, a winsorizing test is completed in order to bring outliers back to the boundaries of SD*3 – Mean + SD*3, in other words outliers are being brought back to the value of the mean minus/ plus three times the standard deviation. The reason for conducting this technique is to control the impact of outliers on the linear regression.
6.1 Descriptive Analysis
Table 2 presents the descriptive statistics for the variables used in this analysis. On average, high environmentally sensitive companies uses 308 words to explain their tax issues where most of these words are used to explain the difference of the effective tax rate of the company in relation to the applicable tax rate in the U.S.. CV is measured using a dummy variable where the company scores 1 if it delivers directly to consumers and zero otherwise. As can be seen in the table below, consumer visibility of the companies in the sample is almost equally divided, 45 out of 92 companies are classified as
close-26
2-consumers. The independent variable leverage is measured as a ratio of total debts to total assets, resulting in 23,94% leverage on average. The third variable profitability is measured using ROA where, as can be seen some companies made losses resulting in a negative minimum. The last variable, used in hypothesis 4 is size. This variable is corrected using the LN in order to bring the values closer to each other. As for example the absolute minimum value of the total assets is 2319 and 346.808 is the maximum. Of the control variable ownership diffusion 39,27% of the shares is held by other than the top twenty shareholders. The second control variable board composition results in an average of 68,33% nonexecutive board members in the board. The last variable used in this analysis is auditor, where a company scores 1 if it is audited by a Big4 auditor and 0 otherwise. As can be concluded from table 2, all companies included in the sample are audited by a Big4 auditor.
N Minimum Maximum Mean Std. Deviation
Tax transparency 92 0 1266,8 308,43 279,69 Consumer visibility 92 0 1 0,45 0,50 Leverage 92 0 55,53 23,94 11,75 Profitability 92 -11,45 25,52 7,07 5,67 Size (LN) 92 7,75 12,76 9,82 1,12 Ownership diffusion 92 4,38 63,87 39,27 10,93 Board composition 92 32,46 83,33 68,33 11,89 Auditor 92 1 1 1 0
Table 2 Descriptive statistics
In order to perform the linear regression a multicollinearity test needs to be conducted between the variables to make sure the identified variables do not influence each other. Table 3 presents these correlations.
Tax Transp.
CV LEV PR SIZE (LN) OWN BOARDC AUD
Tax Transp. 1 CV 0,097 1 LEV 0,229* -0,096 1 PR 0,049 0,188 -0,152 1 SIZE (LN) 0,075 0,223* -0,160 0,50 1 OWN 0,171 0,036 -0,112 0,175 0,221* 1 BOARDC 0,123 0,018 0,046 0,177 0,044 -0,173 1 AUD - - - - Table 3 Multicollinearity
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A value higher than 0,70 could indicate multicollinearity. As table 3 does not show any value higher than this boundary, multicollinearity is not being expected in this analysis. A second test for multicollinearity is conducted using the Variances Inflation Factors (VIF). Any value greater than 5 could indicate multicollinearity. The VIF values calculated stay beneath the value of 2, concluding that there is no question of multicollinearity in this analysis. In the case of the variable for auditor, multicollinearity cannot be calculated because all companies selected in the sample are audited by one of the Big4 auditors, thereby the variable is a constant where multicollinearity cannot be calculated with a constant value. For this reason, the control variable Auditor will be excluded from the regression analysis.
6.2 Statistical Results
As mentioned above, each hypothesis is at first analyzed individually. H0 represents a linear regression with the dependent variable tax transparency and the control variables Ownership diffusion and Board composition as Big4 is excluded from this analyses. Each independent variable corresponding with the hypotheses is added to this regression separately in order to evaluate its individual influence on tax transparency. Table 4 represents the outcomes of all these regressions.
* Significant at 10% ** Significant at 5% *** Significant at 1%
The first characteristic analyzed is consumer visibility (CV). A positive relation was expected to be found between CV and tax transparency, because consumers can exert certain pressure on the company to be transparent. This expectation was found to be true but it is not found to be significant (p = 0,402 > 0,1). Only 60% of the extent of tax transparency is influenced by consumer visibility. In the second hypothesis
Variable H0 H1 H2 H3 H4 Hall Intercept -114,11 -158,70 -300,72 -147,19 -197,53 -412,60 Ownership diffusion 5,07* 4,99* 5,74** 5,15* 4,91* 5,41* Board Composition 3,71 3,86 3,55 3,78 3,66 3,37 Consumer visibility 48,78 57,02 Leverage 5,89** 6,27** Profitability -0,73 0,27 Size 6,41 10,30 Adjusted R-squared 0,032 0,029 0,084 0,021 0,22 0,066 F-Change 2,51* 1,90 3,76** 1,66 1,67 2,07* VIF 1,03 1,03 1,04 1,08 1,09 1,14
