Country-By-Country Reporting Makes Both Tax Havens and High-Tax Countries Less Attractive

Country-by-Country Reporting (CbCR) appears to effectively curb aggressive tax avoidance of multinational corporations and leads to a significant decrease in tax haven operations. The main beneficiaries of this development, however, are European low-tax countries, to which Germany does not belong. It is mainly these low-tax countries that attract real investment from multinationals following the CbCR mandate. These are the findings of empirical studies by the ZEW – Leibniz Centre for European Economic Research, the University of Mannheim and Stanford University.

Ever since the OECD tackled the task of avoiding aggressive tax planning by multinational companies as part of the Base Erosion and Profit Shifting (BEPS) Action Plan, enhanced tax transparency has been a recurrent focus of political attention. With the introduction of the EU Directive 2016/881, the European Commission has finally adopted the OECD proposals for more transparency. It has made Country-by-Country Reporting mandatory for multinational companies with a consolidated turnover of at least 750 million euros per year, and which have either their headquarters or at least a subsidiary in the EU. Since 2016, CbCR has required affected companies to report to the competent national tax authorities on their overall activities (including subsidiaries, employees, profits, tax payments) on a country-by-country basis in a separate report. The aim of this increased tax transparency is above all to curb aggressive tax planning and to enable international tax authorities to better monitor transfer pricing strategies.

As researchers from ZEW, the University of Mannheim and Stanford University show, the companies concerned have reacted to the mandatory CbCR on several levels. In their empirical analyses, the researchers compared the presence in tax havens and economic activity in EU Member States of companies above and below the 750 million euro threshold. The results show that companies affected by CbCR have significantly reduced their presence in tax havens. At the same time, the number of employees in the affected companies has grown significantly less than in the non-affected companies in the two years since the introduction of CbCR. In addition, the results suggest that affected companies are increasingly shifting their real investments to European low-tax countries. This is reflected in the lower income tax rates to which the companies concerned are exposed on average on the basis of their subsidiaries’ investments and employee numbers. As a result, since 2016 tax payments appear to be increasingly due in countries where the tax rate in Europe is below the median.

“The empirical findings show for the first time the effectiveness of mandatory Country-by-Country Reporting. This has important implications for tax policy,” says Prof. Dr. Christoph Spengel, tax expert at ZEW and professor at the University of Mannheim. The greater tax transparency reduces aggressive forms of tax planning by means of tax havens. By relocating real investments, however, companies also seem to react in ways not anticipated by the legislator. It is expected that CbCR could lead to higher tax competition for corporate investment within Europe. In addition, lower growth rates indicate that multinationals perceive higher tax uncertainty. To counteract the unintended developments, legislators and tax authorities would have to send a strong signal to multinational companies that greater tax transparency will not result in more aggressive tax audits.