Incentive Effects of Tax Transparency: Does Country-by-Country Reporting Call for Arbitration?

39 Pages Posted: 27 Jul 2022 Last revised: 16 Jan 2024

See all articles by Jan Thomas Martini

Jan Thomas Martini

Bielefeld University - Department of Business Administration and Economics

Rainer Niemann

University of Graz, Center for Accounting Research; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Dirk Simons

University of Mannheim - Accounting and Taxation

Dennis Voeller

TBS Business School

Date Written: January 15, 2024

Abstract

The OECD proposes mandatory fiscal arbitration as a means of dispute resolution between tax authorities to avoid double taxation of multinational enterprises’ profits. We investigate the effects of mandatory fiscal arbitration on tax-audit qualities in a two-country setting with country-by-country reporting (CbCR) and a tax rate differential. Our analytical model shows that tax-audit quality in the high-tax country increases under CbCR, because finer information raises tax-audit effectiveness.
In contrast, the low-tax country refrains from auditing as it benefits from profit shifting. While arbitration resolves double taxation, its effects on tax-audit quality depend on the procedure in place. An approach based on exogenous negotiation powers lowers audit quality, a final-offer arbitration preserves audit quality, and an independent-opinion arbitration with minimum-quality requirement offers the strongest audit incentives: even the low-tax country engages in auditing. Our findings contribute to the policy debate about interdependencies between firm-level tax policies, national fiscal enforcement, and international fiscal cooperation.

Keywords: BEPS, country-by-country reporting, double taxation, fiscal arbitration, profit shifting, tax avoidance, tax base allocation

JEL Classification: C70, H25, H26, H32, M48

Suggested Citation

Martini, Jan Thomas and Niemann, Rainer and Simons, Dirk and Voeller, Dennis, Incentive Effects of Tax Transparency: Does Country-by-Country Reporting Call for Arbitration? (January 15, 2024). TRR 266 Accounting for Transparency Working Paper Series No. 93, Available at SSRN: https://ssrn.com/abstract=4173172 or http://dx.doi.org/10.2139/ssrn.4173172

Jan Thomas Martini (Contact Author)

Bielefeld University - Department of Business Administration and Economics ( email )

P.O. Box 100131
D-33501 Bielefeld, NRW 33501
Germany

HOME PAGE: http://www.wiwi.uni-bielefeld.de/lehrbereiche/bwl/ctrl/martini

Rainer Niemann

University of Graz, Center for Accounting Research ( email )

Universitätsstr. 15 / G2
Graz, 8010
Austria
+43-316-380-6444 (Phone)
+43-316-380-9595 (Fax)

HOME PAGE: http://www.uni-graz.at/steuer

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

Dirk Simons

University of Mannheim - Accounting and Taxation ( email )

Mannheim, 68131
Germany

Dennis Voeller

TBS Business School ( email )

1 Place Alphonse Jourdain
Toulouse, 31068
France

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