Financial Transparency to the Rescue: Effects of Country-by-Country Reporting in the EU Banking Sector on Tax Avoidance
We analyze the effect of mandatory financial transparency on corporate tax avoidance. Capital Requirements Directive IV by the European Commission forced multinational banks to publish key financial and tax data in the form of Country-by-Country Reporting for the first time in history. We use this event as an exogenous shock to the disclosure duties of European banks and examine tax expenses around the reform. We find that multinational banks increased their tax expense relative to other banks unaffected by the Country-by-Country Reporting mandate. Moreover, we find a stronger response of those banks that were particularly exposed to the new transparency due to significant activities in tax havens. In additional tests we compare our sample of multinational banks to several different control groups from the financial sector and other industries. Our results suggest that Country-by-Country Reporting can serve as an additional instrument for policy makers to curb corporate tax avoidance.
Overesch, Michael and Wolff, Hubertus (February 2019)