County by County Translational Research

Does Private Country-by-Country Reporting Deter Tax Avoidance and Income Shifting?

Wednesday May 1, 2019

Abstract

This paper evaluates the economic consequences of a recent global tax transparency initiative. To combat tax avoidance by multinational corporations, many jurisdictions have introduced regulations aimed at enhancing tax disclosure requirements. In particular, the Organization for Economic Cooperation and Development introduced country-by-country reporting that requires firms to provide a detailed geographic breakdown of their activity and results to tax authorities in all jurisdictions in which the firm operates. Treating the introduction of country-by-country reporting in the European Union as an exogenous shock to private disclosure requirements, this study examines the resulting effect on corporate tax outcomes. Exploiting the €750M threshold and employing a regression discontinuity and difference in difference design, I document a decline in income shifting and tax avoidance in the affected firms. The results translate into an increase in the effective tax rate of 2%-4% in firms to the right of the €750M threshold, suggesting that private geographic disclosures can have a significant impact on corporate tax behavior. The findings of this study have important policy implications for the global implementation of private country-by-country reporting and add to the ongoing debate on public versus private disclosure of tax information.

Preetika Joshi (May 2019)