title: Essays at the intersection of taxation and financial accounting
Creators: name: Brown, Rodney John
Publisher: name: London School of Economics and Political Science (LSE)
Year: 2018
Subjects: subject: HG Finance

description: This thesis consists of three separate chapters that explore issues at the intersection of taxation and financial accounting. The unifying theme is corporate tax avoidance and the consequences of increased transparency of tax practices on firm behaviour and financial reporting.
 Chapter 1 (co-authored with Chris Evans and Youngdeok Lim) examines the impact of changes to a full dividend imputation system on corporate tax avoidance. We exploit an exogenous shock to the Australian dividend imputation system which became effective on 1 July 2000 and allows shareholders to claim all imputation credits attached to dividends, even if it propels them into a tax refund position. This enhancement to shareholder’s after-tax positions likely provides stronger incentives for firms to minimise tax avoidance activities to generate valuable imputation credits for distribution to shareholders. We implement a difference-in-differences research design to examine the impact of the legislative change on tax avoidance for a variety of treatment and control groups after the change. Consistent with our expectations, we find evidence of an increase in cash effective tax rates (decrease in tax avoidance) for domestic dividend-paying firms relative to domestic non-dividend-paying firms. This finding is even more pronounced for firms paying fully-franked dividends, and the decreases in tax avoidance are economically significant. Our results are consistent with the notion that firms undertake less tax avoidance in the post 1 July 2000 period given the presence of stronger incentives for them to pay corporate tax.
 In Chapter 2 (solo-authored), I exploit the availability of new data to examine the impact of mandatory public country-by-country disclosures on the tax aggressiveness of European Union (EU) banks. In response to growing public and political backlash against tax avoidance, the European Parliament introduced new rules in 2013 requiring the public disclosure, on a country-by-country basis, of certain tax-related information by credit and investment firms operating in the EU. Enhanced transparency via public country-by-country-reporting (CBCR) allows greater scrutiny by stakeholders and is considered one way of increasing pressure on EU banks to pay corporate taxes that reflect their true economic presence in each country they operate in. I conduct a range of empirical tests using cash and book effective tax rates to proxy for tax avoidance and based on a hand-collected sample of 72 banks, I do not find any evidence of a reduction in tax avoidance in response to increased transparency. A similar result is found when a differences-in-differences research design is employed to test for any change in tax avoidance of EU banks relative to a control group of 39 multinational EU insurers exempt from CBCR rules. In fact, in some tests, I find that, on average, EU banks increased their tax avoidance relative to EU insurers despite increased disclosure levels. I also find that tax haven use, calculated as the proportion of turnover, profit before tax, and subsidiaries/branches disclosed in tax havens, remains largely unchanged despite increased transparency. The results suggest that mandatory public CBCR has not altered the cost-benefit equilibrium of tax avoidance sufficiently to encourage EU banks to curtail their tax avoidance practices.
 Chapter 3 (co-authored with Bjorn Jorgensen and Peter Pope) investigates the interplay between mandatory public CBCR, geographic segment reporting, and tax haven use. We examine whether the availability of country-level financial information impacts geographic segment reporting and the extent to which firms aggregate geographic segments. Based on a hand-collected sample of 70 banks operating in the EU, we document the location of their operations and the extent to which they operate in tax havens. We find that, on average, banks with tax haven operations enjoy significantly higher profit margins, turnover per employee, and profit per employee, and lower book effective tax rates, in these jurisdictions relative to non-tax havens. Using a difference-in-differences research design, we find no significant change in the number of geographic segments, country segments, or line items per geographic segment, disclosed in segment reporting notes after the introduction of CBCR relative to a control sample of 39 multinational EU insurers exempt from CBCR. Furthermore, we find a positive association between tax haven intensity and geographic segment aggregation consistent with the notion that EU banks may aggregate geographic segments to obfuscate tax haven activities. This early empirical evidence suggests that mandatory public CBCR has limited impact on geographic segment reporting.
 In sum, the three chapters of this thesis contribute to the emerging literature on the determinants and consequences of corporate tax avoidance. The findings should inform global regulators and policy makers interested in the extent of corporate tax avoidance and especially, EU policy makers currently considering the extension of public CBCR to all industries.