Empirical evidence

First, we examine the prevalence of CSR reporting in our sample. Out of the 878 firm-year observations, 92% produced CSR reporting in the form of a separate CSR report, an integrated report or substantial CSR reporting as part of the annual report. We observe a trend of more widespread adoption of CSR-related reporting in the later years. While in 2012,92% of firms in our sample reported CSR-related information, in 2017, it reached 99%. There are some country-to-country differences: CSR reporting was the most common in France (99% due to Grenelle Act requirements), followed by Germany (93%), Finland (92%), the UK (91%) and the USA (87%). GRI is the most commonly followed standard: 65% of companies in the sample stated that they used it (application method and levels varying).

Next, we further investigate the results of the tax transparency score: its components, trends and variations across time, countries and industries.

Tax transparency development over time

Most companies provide information on at least one item in our tax transparency score. Out of 878 firm-year observations, the tax transparency score was more than zero in 501 observations (57%). Out of 150 firms, 128 (85%) included at least one item of the tax transparency score as part of then CSR reporting in at least one of the years examined. However, the results demonstrate that companies are not generally willing to disclose extensive tax-related information or do not consider it relevant to their CSR reporting. Dining 2012-2017, all firms disclosed on average 1.3 items as measured on our five-point scale (median equalled 1 and standard deviation 1.5). Figure 4.1 shows the development of the mean value of tax transparency score during 2012-2017 in our sample. A clear positive trend is visible: in 2012, firms reported on average less than one item (0.91 pomts), while in 2017, the number reached 1.55 items. The trend is also explained by the spread of GRI reporting, whereby non-reporting firms in the later years choose to disclose the basic GRI requirement (tax figure) in their voluntary CSR reporting.

Components of the tax transparency score

We investigate the development of individual components of tax transparency with 878 firm-year observations (see Table 4.2). The maximum value of each score component is 1. Companies disclose information more willingly in the categories “tax figure” and “other”. The tax figure (mean value of 0.5) is readily

Tax transparency score development, 2012-2017

Figure 4.1 Tax transparency score development, 2012-2017

Table 4.2 Descriptive statistics of tax transparency score and its components (n = 878)

Variable

Mean

Median

SD

Min

Max

Tax figure (CIT)

0.5

0

0.5

0

1

Tax strategy

0.2

0

0.4

0

1

Tax footprint

0.1

0

0.3

0

1

Geographical spread

0.2

0

0.4

0

1

Other

0.4

0

0.5

0

1

Tax transparency score

1.3

1.0

1.5

1

5

available from financial statements and hence its inclusion in the CSR report or CSR section of IR is very straightforward and does not require additional effort. Furthermore, the GRI reporting standards include a tax figure under economic impacts, which makes companies applying the standard likely to report it. In the categoiy “other”, firms freely comment on then tax activities, and we observe that reporting on that categoiy is widespread with a mean value of 0.4 and a standard deviation of 0.5. Tax strategy, tax footprint and geographical spread are the items that few firms choose to disclose in their CSR reporting. Of 150 firms, only 28 fums disclosed some information on then tax footprint and 47 on geographical spread. Tax footprint information is disclosed most often by films headquartered in Finland (57% of all observations where tax footprint is disclosed), the UK (31%) and France (10%) and by one US company. German companies chose not to disclose this type of information. Regarding geographical spread, disclosure is observable across all countries, but most geographical spread disclosures come from Finland accounting for 63% of disclosures in that categoiy.

We now turn to the components the tax transparency score has developed over time (see Figure 4.2). A positive trend is observed in all components with especially higher growth in tax strategy and “other”. Smce the period of examination 2012-2017 coincides with large tax scandals and increased attention from stakeholders, these two categories can be the most practicable way for films to pursue legitimation strategies and to re-build tainted reputation. Additionally, the requirement to publish a tax strategy established by the UK Finance Act 2016 contributes to the increased reporting in this categoiy.

Cross-country differences in tax transparency

Figure 4.3 illustrates substantial differences in tax transparency reporting across countries. On average, Finnish-listed firms report 2.5 items from our 5-point transparency score, while the US fums report on average only 0.5 items. The differences in the mean value of the tax transparency score are statistically significant. In our view, the liberal capitalism hypothesis (Avi-Yonah, 2014) does not explain these differences in tax transparency reporting, as the USA and UK both belong to liberal capitalism and equity-based financing system but have completely different patterns in tax transparency. Hence cross-country differences are not explained by financing and legal systems. The results are in line with

Components of tax transparency score in 2012 and 2017

Figure 4.2 Components of tax transparency score in 2012 and 2017

Average tax transparency score by country, 2012-2017

Figure 4.3 Average tax transparency score by country, 2012-2017

Meek, Roberts and Gray’s (1995) finding that European MNEs disclose more CSR-related information compared to their US-based counterparts. MNEs based in USA may have a high threshold on what to consider proprietary tax information and prefer not to share it as part of their CSR reporting. Institutional theory and stakeholder theory can be used to explain cross-country differences where institutional settings and different levels of stakeholders' expectations can explain differences, but more research is needed to understand what the country-specific drivers of tax transparency are.

Why is tax transparency so much more pronounced amongst Finnish firms? Finland scores high on several international transparency indices - e.g. in Transparency International’s corruption index, it scored as one of the least corrupt countries in the world (tlihd out of 180 countries surveyed). Finland also scores high on economic/institutional transparency and political transparency as compiled by Williams (2015). Institutional factors appear to be influential in shaping tax transparency reporting of Finnish firms, where transparency is perceived as a virtue, a sign of honesty and is strengthened by trust in institutions. Secondly, since 2015, Finnish companies with majority state ownership (e.g. Fortum in our sample) are required to disclose tax information, including taxes paid, taxes paid on a CbC basis, tax strategy and principles, and information on tax operations in tax havens. Additionally, ten Finnish firms in our sample have the state as a minority shareholder through its holding company Solidium. Being part of Solidi- um’s portfolio raises transparency expectations, since Solidium follows a specific corporate responsibility programme as a shareholder. As Finland is a Nordic welfare state, it could be argued that the general public’s attitudes towards taxes may be more positive and taxes are more likely viewed as a contribution to funding the general welfare of society.

Tax transparency across industries

The sample consisted of firms from a wide range of industries. Figure 4.4 summarises the tax transparency score across selected industries with statistically significant differences in mean values. Telecommunications and basic materials exhibit the highest tax transparency scores of 2.2 and 2.1, respectively. Consumer goods and sendees have the lowest tax transparency score with on average only

Tax transparency score by industry in selected industries, 2012-2017

Figure 4.4 Tax transparency score by industry in selected industries, 2012-2017

one item disclosed, while extractive industries and financials disclose on average

1.5 items. The results demonstrate that industries that are subject to industry- specific disclosure requirements (EITI for basic materials and extr active industr ies and CRD IV for the financial industry in the EU) tend to have higher transparency scores, while unregulated industries disclose a bare minimum of information. The results of this analysis shall be taken with caution since it is affected by the inclusion of the US firms that demonstrate on average very low levels of voluntary tax-related disclosure.

Many MNEs choose to have their CSR reports audited by independent auditors. On average, 59% of firms in our sample had then CSR or equivalent reports assured either frilly or partially. While in 2012, this figure was 47%, it rose to 76% in 2017, indicating an increased demand in assured CSR reports as well as a developing market for CSR assurance professionals. Assurance was provided by Big-4 accounting firms for 29% of reports in 2012; in 2017, 53% of the reports were assured by Big-4 accounting firms. These results of CSR assurance are not easily comparable because some films have chosen only a few indicators to be audited. For instance, French companies have the CSR section required by Gren- elle Acts audited but they may also have another separate CSR report which might not be audited (or only partially audited).

 
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