Does Accounting for Taxes on Income Provide Information about Tax Planning Performance? - Evidence from German Multinationals

The International Financial Reporting Standards (IFRS) require a company to account forcurrent and future tax consequences, due to transactions and other events recognised inprofit or loss (IAS 12). Reported tax expense (tax income) seems to be relevant for bothcompany tax management (Bolton, Chastel and Young, 2004) and shareholder investmentdecisions (Swenson, 1999, Scholes et al., 2005, 44-45). IAS 12 does not require futuretaxes to be discounted. In contrast, effective tax planning exploits timing effects andthus operates with discounted tax payments. Moreover, investment decisions are basedon discounted cash flows after taxes. This leads to the conclusion that IAS 12 incometax reporting fails to provide full disclosure of the company`s tax burden (Guenther andSansing, 2000, Halperin and Sansing, 2006, Becker, Fuest and Spengel, 2006). Why, then,should both tax management and shareholders use reported tax expenses to assess the taxburden of the company?...