Taxation of Multinationals - Country-by-Country Reporting not Suitable to Combat Aggressive Tax Planning

Multinationals are frequently criticised for using tax havens and loopholes in international tax law to lower their tax burdens. Introducing a country-by-country reporting is discussed as one possible countermeasure against this problem. It requires multinationals to disclose certain key figures such as revenues, earnings, expenses, profits, and tax payments for each country they operate in. However, aggressive tax planning of multinational corporations would hardly be affected by a country-by-country reporting. This is the finding of a current study conducted by the Centre for European Economic Research (ZEW) in Mannheim. In particular, introducing such a reporting would involve high costs without necessarily generating any benefit.

Unlike tax evasion, aggressive tax planning does not violate existing law, but rather takes advantage of favourable tax regimes and structural shortcomings in international tax law. Yet, the fact that multinationals seize these opportunities is broadly perceived as unjust. Therefore, the EU and the OECD aim at designing policy measures such as country-by-country reporting to prevent aggressive tax planning.

If this measure were introduced, the documentation of the required data would come along with high costs as internal reporting standards would need to be developed. Moreover, additional costs would arise with regard to auditing and explaining the disclosed information. Additionally, indirect costs would occur with respect to the disclosure of sensitive information possibly implying a competitive disadvantage, the violation of the principle of tax secrecy as well as the danger of inappropriate accusations due to a lack of expertise.

Proponents of a country-by-country reporting claim that customers could put pressure on multinationals if they are aware about their aggressive tax planning efforts and may thus force them to adhere to fairer tax planning. Moreover, it is claimed that financial authorities would get a better overview over tax payments and internal transactions within multinationals. However, none of this solves the fundamental problem that it is virtually impossible to identify the sources of profits of multinational corporations. Therefore, it remains unclear how profits and tax payments should be distributed fairly among the countries these multinationals operate in.

Furthermore, the benefit for tax administrations is likely to be limited because these already are familiar with most of the tax loopholes and tax planning models.

For further information please contact

Maria Theresia Evers, phone +49 (0)621/1235-172,e-mail maria.evers@zew.de

Prof. Dr. Christoph Spengel, phone +49 (0)621/181-1704,e-mail spengel@uni-mannheim.de