Tax Avoidance and Companies’ Opacity: A Theoretical Approach

Abstract

The problem of companies’ opacity is related to the existence of asymmetric information, which is the extent to which the amount of information regarding the company varies from one group to another. Tax avoidance can be considered as the art of avoiding tax without violating the law, for example, by exploiting the loopholes in the legal text. The call for greater transparency from companies is seen as a way to help reduce tax avoidance. This study presents a theoretical reflection on the relation between companies’ opacity and tax avoidance practices. Financial disclosure quality and tax planning can be a source of conflict for managers. Some authors argue that the board represents a means to promote the dissemination of higher-quality disclosure, which decreases information asymmetry and resulting agency problems. The discussion of whether information disclosure policy is influenced by tax activities is under discussion. The added value of this work relies on the analysis of empirical literature about information asymmetry and tax planning activities, providing a more extensive overview of this relation, that can be used to better understand compliance behavior and reduce tax fraud.