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Brief overview of Country-by-Country Reporting (CbCR)

In 2015, to address the lack of data and transparency on corporate taxation and firm tax avoidance strategies, the Organization for Economic Co-operation and Development (OECD) released the Base Erosion and Profit Shifting (BEPS) Action 13 Report which established the annual Country-by-Country Reporting (CbCR) guidelines for multinational enterprises (MNEs). These guidelines stipulate that MNEs with EUR 750 million “will provide annually and for each tax jurisdiction in which they do business the amount of revenue, profit before income tax and income tax paid and accrued. It also requires MNEs to report their number of employees, stated capital, retained earnings and tangible assets in each tax jurisdiction. Finally, it requires MNEs to identify each entity within the group doing business in a particular tax jurisdiction and to provide an indication of the business activities each entity engages in.”[1] While information reported by MNEs remains private and is reported only to the tax authority, through a bilateral agreement countries automatically share reported MNE information with relevant foreign tax authorities[2][3]. Currently, 58 jurisdictions, including the United States and the European Union, require or permit CbCR and over 80 jurisdictions have introduced legislation mandating a CbCR obligation[4].
In 2016, the Internal Revenue Service (IRS) and the U.S. Department of the Treasury released final CbCR guidelines for MNEs with U.S. ultimate parent entities (UPE). “Parent entities of U.S. multinational enterprise (MNE) groups with $850 million or more of revenue in a previous annual reporting period” are required to report country-by-country activities for tax years beginning on or after June 30, 2016[5]. The IRS releases aggregate information from these confidential reports within the Statistics of Income Tax Stats[6].
In 2013, before the adoption of CbCR for MNEs by OECD, the European Union (EU) Capital Requirements Directive IV (CRD IV) mandated public CbCR of activities conducted by EU banks. This requirement has provided researchers access to previously unavailable data.

Empirical Academic Studies

As firms and countries adjust to the new reporting requirements, data has started to become available, allowing academic researchers to investigate the effects of these requirements. A large portion of the research has focused on the effects public CbCR guidelines on EU banks since the mandate went into effect a few years before the OCED guidelines. Below, we outline some of the major themes and findings of these preliminary studies. Click on the citation to be taken directly to the research article.

Tax Avoidance

One of the main goals of CbCR is to accurately collect and measure MNEs’ tax avoidance activities, such as shifting income to low-tax locations, which then allows the tax authority to better police this behavior. Current preliminary literature suggests that CbCR may have an impact on firm’s tax avoidance strategies and firms engage in less tax avoidance behavior after subject to private CbCR mandates. Joshi (2019) found after the implementation of the new disclosure guidelines, firms effected by the private CbCR had higher effective tax rates than those not subject to the disclosure. Similarly, De Simone and Olbert (2019) find an effect of CbCR on tax haven subsidiary closures. The authors found that firms just above the 750 million euro threshold closed on average .6 to 3.1 tax haven subsidiaries globally compared to other firms. While the available data allow researchers to see the closing of subsidiaries (or, at least, see subsidiaries exist in the data in year t but not in t+1), but seeing precise economic consequences of these closures is difficult, especially as these outcomes may play out over a number of years.
De Simone and Olbert (2019) also explore the effect of CbCR regulations on real economic activity. While firms decrease the number of tax haven subsidiaries as a result of CbCR, firms compensate for these closures “by reallocating real economic activities to relatively low-tax non-haven European countries”. The authors find that effected firms reduced employment growth at the consolidated level while at the unconsolidated level increasing revenues and employment growth in low tax areas, indicating potentially unintended consequences to CbCR as real economic activity and tax payments shift to low tax jurisdictions.

Public CbCR

Specifically focusing on the public CbCR mandate for EU banks, Overesch, and Wolff (2019) find that CbCR regulations decreases tax avoidance behavior for EU banks. EU headquartered multinational banks’ effective tax levels increased after the implementation of public CbCR. Compared to EU banks without tax haven exposure, the effective tax rate for EU banks with activities in tax havens increased by 3.7 percentage points. Joshi, Outslay, and Persson (2018), however, find no significant difference in effective tax rates of EU banks subjected to CbCR mandate when compared to US multinational banks over the same time period. These conflicting results reflect the use of different datasets and different methods, and as the papers are refined by the publication process, hopefully will converge to a consistent answer.
Brown, Jorgensen, and Pope (2019), investigating the impact of public CbCR guidelines on geographic segment reporting by EU banks, note that while public CBCR disclosure “has little impact on geographic segment reporting”, there seems to be a positive relationship between strategically aggregate geographic segments and EU banks operating in tax havens. This work indicates that EU banks may aggregate geographic segments in reporting in order to obscure tax haven activity.
While it is early to see what firm behavior actually results from these reporting regimes, Dutt, Ludwig, Nicolay, Vay, and Voget (2018) examine what impact these reporting regimes might have for the expected future cash flows of firms by looking at stock market reactions to these reporting requirements. Dutt, Ludwig, Nicolay, Vay, and Voget (2018) did not find a significant public market reaction in response to CbCR requirements for EU banks. The authors suggest that unlike other regulatory changes, market reaction to new tax transparency requirements are “likely to depend on the motivation of the rule and on the way the information is presented”. The authors, however, caution that this market reaction is not generalizable to other industries outside of banking and “consideration must be given to the context and the exact design of the rule.” The lack of market response is consistent with the finding of Joshi, Outslay, and Persson (2018), who find no change in tax avoidance bahvior as a result of public CbCR.
As new work is released, this resource will continue to grow. Further, many of these papers are in working paper form (pre-publications drafts released to receive feedback), and as the papers are updated, this resource will be updated.
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[1] http://www.oecd.org/ctp/beps-reports-2015-executive-summaries.pdf
[2] https://read.oecd-ilibrary.org/taxation/transfer-pricing-documentation-and-country-by-country-reporting-action-13-2015-final-report_9789264241480-en#page21
[3] https://www.irs.gov/businesses/international-businesses/us-multinational-enterprises
[4] http://www.oecd.org/tax/beps/beps-actions/action13/
[5] https://www.bdo.com/insights/tax/transfer-pricing/cbc-reporting-in-the-united-states
[6] https://www.irs.gov/statistics/soi-tax-stats-country-by-country-report