Financial Transparency to the Rescue: Effects of Country-by-Country Reporting in the EU Banking Sector on Tax Avoidance
40 Pages Posted: 27 Nov 2017 Last revised: 3 Oct 2018
Date Written: July 1, 2018
We analyze the effect of enforced financial transparency on corporate tax avoidance. Since 2014 an EU directive obliged multinational banks to publish key financial and tax data in the form of Country-by-Country Reporting. We use this as an exogenous shock to disclosure duties and analyze the development of tax expenses of European multinational banks around the reform. We find that European multinational banks increased their tax expenses relative to unaffected other banks after Country-by-Country Reporting became mandatory. Moreover, we find a pronounced response of those banks that were particularly exposed to the new transparency due to significant activities in tax havens. Additional comparisons using several control groups from the financial sector and other industries confirm our main finding. Our results suggest that Country-by-Country-Reporting can be an additional instrument for policy makers to curb corporate tax avoidance.
Keywords: Tax Transparency, Country-by-Country-Reporting, Banks, Tax Avoidance, Profit-Shifting
JEL Classification: F23, G18, G21, H26
Suggested Citation: Suggested Citation