Are Transfer Pricing Disclosures Related to Tax Reporting Transparency? The Impact of Auditor-Provided Transfer Pricing Services

In this study I investigate whether managers’ voluntary disclosure of transfer pricing information in the 10-K is related to firms’ tax reporting transparency. Transfer pricing disclosures could be used to convey managers’ private information about risks and uncertainties underlying firms’ transfer pricing activities or alternatively be used to discount or disclaim these risks. Using several common proxies for tax reporting transparency, I find evidence that transfer pricing disclosures are generally associated with lower tax transparency, suggesting that these disclosures may be primarily opportunistic. However, when firms use their auditor for transfer pricing services, I find that these transfer pricing disclosures are associated with greater tax reporting transparency. Additionally, I find that higher quality disclosures (measured by disclosure length) are also associated with greater transparency. One implication of these findings is that the auditor could potentially improve the quality of firms’ transfer pricing disclosures, which is beneficial to financial statement users