Banks’ tax disclosure, financial secrecy, and tax haven heterogeneity

Abstract

This study investigates the effect of mandatory public Country-by-Country Reporting (CbCR) for European banks on their presence in tax and regulatory havens. We find that the number of subsidiaries of European banks in tax havens declines significantly after the introduction of mandatory public CbCR in contrast to insurance firms that need not disclose. We document that this decline is mainly driven by a reduction of subsidiaries in small countries with little economic substance (“dot havens”) and in tax havens that are regulatory havens at the same time, i.e., with high financial secrecy. Further, we find that high exposure to reputational risk is a major amplifier of reorganizational activities. Our results explain prior mixed evidence and document that CbCR effectively curbs tax haven presence only under specific circumstances, i.e., in countries offering both tax shelter and financial secrecy, and more strongly for banks with high reputational risk. These findings suggest that increased tax disclosure on banks does not effectively attenuate tax haven presence per se, but only for a subset of havens and banks. Policymakers need to be aware of these limitations, especially in light of the current decision of extending public CbCR to all large multinationals.

Keywords: financial secrecy, real effects, reputational risk, tax haven, tax disclosure

JEL Classification: F23, G18, G21, G22, H20, H25, H32, M48