The tax affairs of modern multinationals

How much tax organisations have been paying has been hot news recently, with the likes of Facebook and eBay named and shamed as organisations paying precious little tax on their UK operations.

At a time of austerity when we are supposed to be 'in it together' this disclosure was met with predictable anger by many.  A new study might provide some insight into how governments can predict which companies are likely to engage in tax avoidance.

The study, conducted by the University of Toronto and the University of Oklahoma, found that non-disclosure of geographic earnings was a strong marker of tax avoidance.

Since 1998 it has not been mandatory for American multinationals to disclose how much they earn in various overseas territories.  The study found that between 1998 and 2004, firms that didn't disclose their income by territory paid effective tax rates that were 4.1% lower than companies that did.

Of course it could be coincidence, except that prior to 1998, those that didn't disclose were found to pay the same tax rates as those that did.  So it appears that managers were able to shift profits between jurisdictions to ensure they paid as little tax as possible.  To conceal this behaviour they simply didn't disclose their overseas earnings.

“If you care about tax avoidance then you want as much transparency about these activities as possible,” says Ole-Kristian Hope, a researcher on the study.

“The key takeaway is that there is clear value to greater transparency regarding firm’s foreign activities,” explains Hope. “As an outsider, this is the only way that we can learn about how [businesses] are conducting themselves, including monitoring the extent to which firms avoid taxes.”

Adi Gaskell is a management writer and blogger.