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What do we know about the effects of country-by-country reporting?

Sophisticated multinational corporations are becoming ever more adept at tax planning, prompting fears that skillful manipulation of tax laws is eroding the tax base in many countries. The Organisation for Economic Co-operation and Development (OECD) is particularly concerned about this development, and has undertaken a number of initiatives to address this perceived threat to the tax base. Its Base Erosion and Profit Shifting (BEPS) project, for example, requires multinational firms above a certain size threshold to disclose their country-by-country numbers on several metrics to members’ tax authorities (e.g., the number of their employees in each country).

This country-by-country reporting currently is required on a private level in many OECD member countries, including the IRS in the United States. In the European Union, some multinational banks are also required to file public reports – and many support an extension to public reporting for large multinationals as well.

In this page, we summarize what the research has found thus far on the effectiveness of both public and private country-by-country reporting. Be sure to check back often, as more and more research is added to this growing area of exploration.

Summary of CbCR Papers

How Do Investors Value the Publication of Tax Information? Evidence From the European Public Country-By-Country Reporting

10/27/2021 Muller, Raphael Spengel, Christoph Weck, Stefan

We examine the capital market reaction to the announcement of the European Union (EU) to introduce a public tax country-by-country reporting (CbCR) regime. By employing an event study methodology, we find a significant cumulative average abnormal return (CAAR) of -0.699%, which translates into a monetary value drop of approximately EUR 65 billion. We conclude that investors evaluate reputational risks arising from public scrutiny and competitive disadvantages to outweigh potential benefits of an extended information environment or more sustainable corporate tax strategies. In cross-sectional tests, we find that the average investor reaction is more pronounced for firms with low effective book tax rates, indicating that reputational concerns play a significant role in the marginal investor's investment behavior. Furthermore, our cross-sectional results indicate that the market reaction is stronger for firms operating in industries with high growth in market participants, providing an initial indication for the role of the competitive environment as an additional channel. Our inferences are of particular importance in light of the current ongoing debates on similar disclosure rules (particularly in the United States; cf. "Disclosure of Tax Havens and Offshoring Act") as well as for sustainability standard setters.

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Corporate Profit Shifting and the Role of Tax Havens: Evidence from German Country by Country Reporting Data

01/26/2021 Fuest, Clemens and Hugger, Felix and Neumeier, Florian

This paper is the first to use information from individual country-by-country (CbC) re-ports to assess the extent of profit shifting by multinational enterprises. Unlike other data often used to evaluate the extent of profit shifting and tax avoidance, CbC reports pro-vide a complete coverage of the global distribution of profits and indicators of economic activity for multinationals exceeding a certain revenue threshold. We show that 82% of the German multinationals subject to CbC reporting have tax haven subsidiaries and that these subsidiaries are notably more profitable than those in non-havens. However, only 9% of the global profits of German multinationals are reported in tax havens. Results from regression analysis suggest that approximately 40% of the profits reported in tax havens are a result of tax-induced profit shifting. The associated annual tax base loss for Germany amounts to EUR 5.4 billion. Adding estimates of profit shifting by multinationals not covered by the CbC data yields an overall estimate for profits shifted out of Germany to tax havens of EUR 19.1 billion per year, corresponding to 4.3% of the profits reported by these firms in Germany. This implies a tax revenue loss due to corporate profit shifting to tax havens of EUR 5.7 billion per year.

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Do investors care about tax disclosure?

04/05/2020 Flagmeier, Vanessa and Gawehn, Vanessa

We assess the investor reaction to a potential introduction of public country-by-country reporting (CbCR) into the European Capital Requirements Directive IV. Estimating cumulative abnormal returns with the help of a multivariate regression model, we find weak significant evidence around our event date (February 20th, 2013) that investors perceive the introduction of CbCR as beneficial. In additional tests, we assess investor perceptions relative to different control groups (domestic institutions and non-EU institutions) and in the cross-section (splitting across size, systemically relevant, pre-event level of GAAP ETR and pre-event level of geographic disclosure). The only significant outcome is a negative reaction for large international EU institutions.

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Real Effects of Public Country-by-Country Reporting and the Firm Structure of European Banks

10/01/2019 Eberhartinger, Eva and Speitmann, Raffael and Sureth-Sloane, Caren (October 2019)

European regulation mandates public country-by-country reporting for banks and is expected to increase reputational costs in case of tax haven activities. We test whether the availability of additional public information on the locations of banks' subsidiaries reduces their tax haven presence. In a preliminary difference-in-difference analysis we find that indeed, tax haven presence in “Dot-Havens” has declined significantly after the introduction of mandatory public country-by-country reporting for European banks, as compared to the insurance industry which is not subject to this regulation.

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Real Effects of Private Country-by-Country Disclosure

09/01/2019 De Simone, Lisa and Olbert, Marcel

We investigate the effects of mandatory private Country-by-Country (CbC) disclosure to tax authorities on economic activity. Using rich data on the operations of multinational firms, we exploit the threshold-based application of this 2016 disclosure rule in a regression discontinuity design. We find evidence that firms affected by the disclosure mandate reduce ownership in tax haven subsidiaries relative to unaffected firms and thereby increase transparency in their previously opaque organizational structure. We also document that affected firms invest less in aggregate employment on average relative to unaffected firms but do not appear to alter consolidated tax payments. However, affected firms increasingly allocate revenue, employment, total assets, and, correspondingly, tax payments to subsidiaries in European low-tax countries. Collectively, our findings suggest that mandatory CbC disclosure curbs the most aggressive tax planning achieved through tax haven operations but has likely unintended adverse effects on other real economic activities.

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

05/01/2019 Preetika Joshi

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.

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Increasing Tax Transparency: Investor Reactions to the Country-by-Country Reporting Requirement for EU Financial Institutions

04/20/2019 Dutt, Verena Katharina and Ludwig, Christopher and Nicolay, Katharina and Vay, Heiko and Voget, Johannes

We employ an event study methodology to investigate the stock price reaction around the day of the political decision to include a country-by-country reporting obligation for EU financial institutions.

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The Interplay between Mandatory Country-by-country Reporting, Geographic Segment Reporting, and Tax Havens: Evidence from the European Union

03/01/2019 Rodney J. Brown, Bjorn N. Jorgensen, Peter F. Pope

We investigate whether mandatory public country-by-country reporting (CBCR) by European Union (EU) banks affects geographic segment reporting. We find no significant change in the reported number of geographic segments, country segments, or line items per geographic segment disclosed in segment reporting notes after the introduction of CBCR. Consistent with the notion that EU banks may aggregate geographic segments to obfuscate tax haven activities, we find a positive association between tax haven intensity and geographic segment aggregation.

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Financial Transparency to the Rescue: Effects of Country-by-Country Reporting in the EU Banking Sector on Tax Avoidance

11/27/2017 Overesch, Michael and Wolff, Hubertus

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.

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