Do Third-Party Cross-Border Tax Transparency Requirements Impact Firm Behavior?

Abstract

Governments and regulators have increased corporate taxpayer transparency requirements in an attempt to reduce abusive tax behavior. Historically, these transparency rules have fallen on taxpayers, requiring them to self-report tax information. We exploit the requirement for third-party advisors to report on a broad set of cross-border tax arrangements under EU Directive 2018/922 (commonly known as DAC6) to investigate the impact of external (to the firm) reporting requirements on tax behavior. Using a difference-in-differences research design, we provide evidence that robust transparency requirements, with third-party reporting and information exchange across jurisdictions, can help constrain tax avoidance through income shifting behavior. We further find that the decline in income shifting activities is concentrated among affiliates in countries with higher penalties for misreporting and in countries where legal professional privilege does not extend to non-lawyer tax advisors. We also examine whether affected firms respond by modifying their use of an intermediary for tax planning services and document that they are less likely to engage their auditor to provide tax-related services following DAC6.

Keywords: Cross-border tax avoidance; DAC6; Mandatory disclosure regime; Auditor provided tax services.

JEL Classification: H25, H26, L51, M41, M48