Determinants of Segment-Level Tax Expense Disclosure

Abstract

This study examines the determinants of the disclosure of segment-level tax expense. Segment reporting rules require firms to report segment-level profit using a definition of earnings that is consistent with profit measures used for internal reporting. Thus, we expect firms using after-tax performance measures for internal reporting to define segment-level profit on an after-tax basis. However, given the ambiguous nature of segment reporting rules, firms with higher proprietary costs of disclosure may choose to report segment-level profit on a pre-tax basis, thus avoiding segment-level tax reporting. We find that only 13.8% of all multi-segment firms report after-tax profits at the segment-level. Using the presence of after-tax CEO incentives as a proxy for the internal use of after-tax segment performance (Phillips 2003), we find a positive association between after-tax incentive use and segment-level tax reporting in our full sample. We also find a negative association between effective tax rates and segment-tax reporting; suggesting firms engaging in tax avoidance are less likely to disclose segment-level taxes. We then split our sample of firms into those defining segments along geographic rather than non-geographic lines and find that the use of after-tax incentives increases the likelihood of reporting only for non-geographic-based operating segments, while proprietary costs of disclosure (i.e., ETRs) only decrease the likelihood of reporting for geographic-based operating segments. Overall, our results suggest discretion in ASC 280 is used to reduce disclosure quality of segment-level taxes for firms with geographic-based segments.