The relationship between tax transparency and tax avoidance

All over the world, the tax avoidance practices of large multinational firms have received much media attention over the last few years, which has become a prominent reputational risk for many firms. In addition to the possible reputational risk stemming from corporate tax avoidance, these tax practices can also have dire consequences for the economies in which these firms operate. Global tax transparency initiatives were developed in an attempt to address the issues created by global tax avoidance. There is, however, little academic evidence on whether increased tax transparency can have an effect on corporate tax avoidance. The purpose of this study is therefore to investigate the relationship between tax transparency and tax avoidance. A content analysis was firstly used to qualitatively assess the extent of tax transparency disclosures in the annual corporate reports of the top 100 firms listed on the JSE. Thereafter, a regression analysis was used to determine the relationship between tax transparency and tax avoidance. Tax transparency scores were used as a proxy to measure tax transparency while both effective tax rates and cash effective tax rates were used as a proxy to measure tax avoidance. The study finds that firms which are more transparent in the disclosure of their tax affairs also have higher effective tax rates and cash effective tax rates.