The Relation between Corporate Tax Burden and ESG Tax Disclosure: Focusing on the Disclosure of Sustainability Reports

We examine the relation between a company’s tax burden and its tax-related activities disclosed in sustainability reports. International ESG disclosure guidelines, such as GRI and PRI, recommend that companies disclose their tax strategy, governance and risks. Many companies include this tax-related information in their sustainability reports. We analyze using data from 3,379 firm-year observations using KIS-VALUE, TS-2000, the Korea Exchange Information database, and corporate sustainability reports. The empirical analysis reveals a significant negative relationship between a firm's effective tax rate and the extent of tax-related disclosures in sustainability reports. This suggests that companies with lower effective tax rates(i.e., the higher level of tax avoidance), the more tax-related activities are disclosed in the sustainability report. This study is significant because it is the first to examine tax information and tax avoidance in the context of ESG information. The results indicate that companies’ tax-related disclosures are correlated with their level of tax avoidance, suggesting that these non-financial disclosures are strategically used to mitigate negative external stakeholder perceptions of aggressive tax planning. In addition, the study highlights that tax activities disclosed in ESG reports may not accurately reflect companies’ actual tax burdens, suggesting a potential inconsistency. The findings have important policy implications, highlighting the need for legislation and detailed guidelines to ensure that tax disclosures in ESG reports are aligned with financial metrics such as a company’s tax burden. This alignment is essential to improve the transparency and reliability of ESG reporting and to provide stakeholders with a more accurate picture of a company’s tax practices.