The Impact of Financial Reporting Transparency and Internal Control Quality on Corporate Tax Avoidance: Evidence from Firms Listed on the Tehran Stock Exchange

Abstract

Purpose: This study examines the influence of financial reporting transparency and the quality of internal controls on corporate tax avoidance within the context of the Tehran Stock Exchange (TSE). Tax avoidance is a significant strategic decision for firms, influenced by both the external information environment and internal governance structures.

Design/Methodology/Approach: The research utilizes a quantitative approach, analyzing a balanced panel of 130 non-financial firms listed on the TSE over a six-year period from 2018 to 2023. Corporate tax avoidance is measured using the Effective Tax Rate (ETR), where a lower ETR signifies higher avoidance. Financial reporting transparency is operationalized through disclosure quality scores, and internal control quality is assessed based on the presence of reported material weaknesses. The study employs Ordinary Least Squares (OLS) regression to test the research hypotheses, controlling for firm size, leverage, and profitability.

Findings: The empirical results indicate a significant positive relationship between financial reporting transparency and the effective tax rate, suggesting that more transparent firms engage in less aggressive tax avoidance. Furthermore, higher internal control quality is found to significantly reduce the level of tax avoidance. These results support the view that robust internal and external monitoring mechanisms act as constraints on aggressive tax planning strategies.

Practical Implications: The findings provide critical insights for the Iranian National Tax Administration (INTA) and the Securities and Exchange Organization (SEO). They suggest that improving reporting standards and strengthening internal control requirements can lead to higher tax compliance and more sustainable corporate financial behavior.