Can European Banks’ Country-by-Country Reports Reveal Profit Shifting? An Analysis of the Information Content of EU Banks’ Disclosures

76 Pages Posted: 22 Oct 2019 Last revised: 30 Apr 2021

See all articles by Verena K. Dutt

Verena K. Dutt

Centre for European Economic Research (ZEW)

Katharina Nicolay

ZEW – Leibniz Centre for European Economic Research

Heiko Vay

University of Mannheim

Johannes Voget

University of Mannheim - Accounting and Taxation

Date Written: 2019

Abstract

We create a novel database of hand-collected information from the country-by-country reports (CbCRs) of more than 100 multinational bank groups headquartered in the EU for 2014-2016. We compare this new dataset with information from Orbis and Bank Focus to assess in how far the new disclosure obligation increased transparency on banks’ tax avoidance behavior. Our descriptive analysis shows that CbCRs uncover a large fraction of worldwide profits and real activities in terms of employees of EU bank groups, especially in tax havens. We also document a striking disconnect between reported profits and real activity, noting considerable heterogeneity between different tax havens and bank groups from different headquarter countries. Regression analysis based on CbCR data and Bank Focus data leads us to expect a tax semi-elasticity of banks’ reported profits of about -4.6. In this regard, CbCRs are indicative of a more pronounced tax sensitivity than conventional databases suggest. However, the lack of important economic variables (total assets and staff cost) impedes an exact estimation of banks’ profit shifting based on CbCR data alone and with standard methods. These insights are especially relevant in the context of the ongoing political discussions whether to introduce a public CbCR for all large multinational firms in the EU.

Keywords: Tax Avoidance; Profit Shifting; Country-by-Country Reporting; Public Disclosure; Tax Transparency; Financial Institutions; Database

JEL Classification: H25, H26, G21, G28

Suggested Citation

Dutt, Verena Katharina and Nicolay, Katharina and Vay, Heiko and Voget, Johannes, Can European Banks’ Country-by-Country Reports Reveal Profit Shifting? An Analysis of the Information Content of EU Banks’ Disclosures (2019). ZEW - Centre for European Economic Research Discussion Paper No. 19-042, 10/2019, TRR 266 Accounting for Transparency Working Paper Series No. 19, Available at SSRN: https://ssrn.com/abstract=3472876 or http://dx.doi.org/10.2139/ssrn.3472876

Verena Katharina Dutt (Contact Author)

Centre for European Economic Research (ZEW) ( email )

L7, 1
Mannheim, 68161
Germany

Katharina Nicolay

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Heiko Vay

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

Johannes Voget

University of Mannheim - Accounting and Taxation ( email )

Mannheim, 68131
Germany

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