This study examines the interplay between tax and internal reporting incentives among affiliates of multinational corporations (MNCs). MNCs face limited information flows that may prevent affiliates' performance metrics to be responsive immediately to changes in the firm's tax planning. Using granular data of affiliates belonging to MNCs from 21 European countries, our study provides new empirical evidence of affiliate internal reporting responses induced by changing tax plans. When high‐tax‐rate countries tighten income shifting rules, we first document that income shifting is reduced and low‐tax‐rate affiliates have less income. Second, we predict and document that managers of these low‐tax‐rate affiliates offset this decrease in profits by managing upwards a key performance metric: affiliate earnings. Our results are consistent with firms not quickly adjusting the affiliate managers' incentives in the face of changing tax planning strategies, and affiliates managing reported earnings to offset the effect of changes in the tax planning of the firm. Cross‐sectional analyses provide further evidence consistent with the theory underlying the main tests. The results support the policy of tightening income shifting rules when the objective is to reduce income shifting, and firms' central management would benefit from considering the implications of changing tax plans on the assessment of local managers.

Key audit matters (KAMs) increase the salience of uncertainty surrounding the underlying accounts. We examine KAMs related to uncertain tax positions (UTPs), which highlight potential concerns to external stakeholders about uncertain tax planning activities such as multinational income shifting. Increased scrutiny may reduce the expected benefits of these strategies and discourage firms from pursuing them. Using KAM disclosures in the expanded audit reports, we find that group-level KAM disclosures are associated with a decline in multinational income shifting when the KAMs relate to UTPs. This relation is stronger when firms are financially unconstrained, when the institutional environment features strong tax enforcement, and when KAMs highlight specific risk statements and auditors provide explicit assurance. Overall, our findings reveal a novel and potentially unintended real effect of expanded audit reports: the salience of tax-related KAM disclosures influences multinational tax planning, highlighting broader consequences of this regulatory intervention. Data Availability: Data are available from the public sources cited in the text.