Real effects of private country-by-country disclosure

Real effects of private country-by-country disclosure

By Lisa De Simone, Marcel Olbert
October 2019Working Paper No. 3833

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We investigate the effects of mandatory private Country-by-Country (CbC) disclosure to European tax authorities on economic activity. Using rich data on the operations 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 ownership in tax haven subsidiaries relative to unaffected firms and thereby increasing transparency in their previously opaque organizational structure. We also observe that affected firms increasingly allocate revenue, employment, total assets, and, correspondingly, tax payments to subsidiaries in low-tax European countries. Additional tests at the consolidated firm-level and at the subsidiary-level support the conclusion that firms shift real activities away from operations outside Europe – including from tax havens – to Europe, particularly to non-haven European countries with low corporate income tax rates. Collectively, our findings suggest that mandatory CbC disclosure curbs the most aggressive tax planning achieved through tax haven operations but also affects the allocation of multinationals’ real economic activities.