Real Effects of Private Country-by-Country Disclosure
56 Pages Posted: 14 Jun 2019 Last revised: 26 Jun 2020
Date Written: June 26, 2020
We investigate the effects of mandatory private Country-by-Country (CbC) disclosure to European tax authorities on economic activity. Using rich data on the organizational structures and economic activities of multinational firms, we exploit the threshold-based application of this 2016 disclosure rule in a regression discontinuity design. We find evidence consistent with firms affected by the disclosure mandate reducing their organizational complexity relative to unaffected firms. This reduced organizational complexity is achieved through a decline in the number of subsidiaries, particularly at deep hierarchical levels and including those located in tax havens. Tests using consolidated firm-level and unconsolidated subsidiary-level financial data support the conclusion that firms take measures to substantiate their tax avoidance activities in Europe, particularly by increasing the number of employees in countries with preferential tax regimes. Collectively, our results are consistent with mandatory private CbC disclosure causing firms to support rather than abandon tax strategies, leading to changes in organizational structure and the allocation of real economic activities.
Keywords: Real Effects, Disclosure Regulation, Private Disclosure, Mandatory Disclosure, Country-by-Country Reporting, Tax Transparency, Tax Avoidance, Tax Havens, Organizational Complexity
JEL Classification: H20, H25, H26, H32, K22, L51, M41, M48, O47
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