Could Country-by-Country Reporting Increase Profit Shifting?

Publication: Working/Discussion PaperWU Working Paper

Abstract

Since 2016, Country-by-Country reporting has provided tax authorities with detailed information about multinationals’ worldwide activities. It has been hailed as a game-changer for corporate taxation, enabling tax authorities to target multinational firms with high profits in tax havens. We model Country-by-Country reporting as increasing both tax planning and audit costs for profit-shifting multinationals, where the latter costs depend on the share of profits held in tax havens. Then, Country-by-Country reporting makes shifting profits from a high-tax country to a tax haven relatively more attractive than shifting from a low-tax country to a tax haven—a substitution effect. Thus, while the total amount of profits shifted to the tax haven decreases, profit shifting from high-tax affiliates may increase relative to the situation without Country-by-Country reporting. We confirm these changes in profit-shifting patterns using a staggered difference-in-differences design. The opposing effects for low-tax and high-tax countries also help explaining the mixed findings of previous empirical studies on Country-by-Country reporting.
Original languageEnglish
Place of PublicationMunich
PublisherCESifo
Number of pages49
Publication statusPublished - 14 Nov 2024

Publication series

SeriesCESifo Working Paper Series
Number11464
ISSN1617-9595
SeriesWU International Taxation Research Paper Series
Number2024-13

Keywords

  • country-by-country reporting
  • profit shifting
  • anti-tax-avoidance rules

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