Tax-related audit disclosures can discourage multinational profit shifting

Greater transparency can influence corporate tax planning 

More detailed audit reports may do more than inform investors: they can also influence how multinational companies organise their tax affairs. Research co-authored by Jochen Pierk (Associate Professor in the section Accounting of Erasmus School of Economics) finds that companies reduce multinational income shifting when their auditors highlight uncertain tax positions as a key audit matter. 

Multinational corporations can shift income between countries to reduce their overall tax burden. However, such strategies may involve uncertainty about whether the tax treatment will be accepted by the relevant tax authorities. By explicitly highlighting these uncertainties in audit reports, auditors can draw attention to potentially risky tax positions and increase scrutiny of companies’ tax planning. The findings suggest that this additional transparency can make income-shifting strategies less attractive to multinational firms. 

Examining the impact of key audit matters 

Over the past two decades, auditing standards have increasingly required auditors to include “key audit matters” (KAMs) in expanded audit reports. These disclosures identify areas of particular importance, complexity or difficulty in auditing a company's financial statements. Pierk, together with co-researchers Christof Beuselinck (IESEG School of Management), Nathan C. Goldman (North Carolina State University), and Cinthia Valle Ruiz (IE Business School–IE University) focused specifically on KAMs concerning uncertain tax positions (UTPs). These relate to tax treatments for which the final amount of tax payable remains uncertain, potentially requiring companies to maintain tax reserves in case additional tax becomes due following an audit. 

Their study “Tax-related Key Audit Matters and Changes in Multinational Income Shifting”, that was recently published in The Accounting Review, examined multinational companies headquartered in Europe between 2012 and 2021. Its final sample comprised 207,792 affiliate-year observations, representing 8,389 companies and 45,909 affiliates across 25 European countries. By exploiting differences in the timing of the introduction of expanded audit reporting across countries, the researchers investigated whether disclosures concerning uncertain tax positions were associated with changes in corporate behaviour.  

Effects are stronger under certain conditions 

The findings indicate that multinational income shifting declines when audit reports contain KAMs relating to uncertain tax positions. The association is stronger when companies face fewer financial constraints, when tax enforcement is stronger and when disclosures identify specific risks and auditors provide explicit assurance. 

These results suggest that the effects of expanded audit reporting depend on the subject matter of the disclosures, rather than simply on the presence of additional information in an audit report. Pierk and his colleagues caution that it is not possible to observe every aspect of corporate tax planning directly. Nevertheless, their findings provide evidence that audit disclosures can have real economic consequences beyond their immediate purpose of informing investors. 

Implications for audit and tax policy 

The study highlights a potentially unintended consequence of expanded audit reporting: disclosures designed to improve transparency may also influence companies' tax-planning decisions. By making uncertain tax positions more visible to external stakeholders, such disclosures may increase scrutiny and reduce the expected benefits of certain income-shifting strategies. 

The findings could inform policy discussions about the wider effects of auditor disclosure requirements, particularly their role in promoting transparency and influencing multinational tax planning.