We employ an event study methodology to investigate the stock price reaction around the day of the political decision to include a country-by-country reporting obligation for EU financial institutions. We do not find significant abnormal returns for the banks affected. Sample splits according to the effective tax rate and the degree of B2C orientation do not reveal a more pronounced negative investor response for banks engaging more strongly in tax avoidance or being potentially more concerned about reputational risks, respectively. We conclude that the implementation of a CbCR requirement for EU financial institutions did not trigger a noticeable investor response. Contrary prior findings regarding other public tax disclosure obligations might be driven by the distinct motivation of the rules and the way the information is presented. We contend that capital market reactions to an upcoming increase in tax transparency are not generalizable to other industries and settings, but that consideration must be given to the context and the exact design of the rule.

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. The issue of base erosion and profit shifting has been on the international policy agenda for several years now. The aim of this paper is to examine how firms adjust their profit shifting mechanisms in a changing institutional environment. In particular, we test whether firms substitute one profit shifting strategy for another if respective costs change. To this end, we exploit changes in the strictness of transfer pricing regulations and thin capitalization rules over time in a panel of European multinational firms and study a quasi-experimental reform setting in France. We confirm existing evidence that tightening transfer pricing regulations reduces the tax sensitivity of earnings before interest and taxes (EBIT) substantially. Our results show, however, that this reduction includes both a reduction in profit shifting activity via the transfer pricing channel and a substitution with debt shifting. Moreover, firms using debt shifting to begin with rely more heavily on tax optimization of transfer prices when thin capitalization rules are strengthened. If transfer pricing regulations are also strict, the conditional reform effects show that the substitutive response is more pronounced for a subsample of firms with a high share of intangible property (IP). The difference-in-difference approach for the French tax reform illustrates an increase in profit shifting based on transfer prices for treated firms facing new restrictions on debt shifting. Again, the effect is stronger for IP intensive firms.

We create a novel database of hand-collected information from the country-by-country reports (CbCRs) of more than 100 multinational bank groups headquartered in the EU for 2014-2016. We compare this new dataset with information from Orbis and Bank Focus to assess in how far the new disclosure obligation increased transparency on banks' tax avoidance behavior. Our descriptive analysis shows that CbCRs uncover a large fraction of worldwide profits and real activities in terms of employees of EU bank groups, especially in tax havens. We also document a striking disconnect between reported profits and real activity, noting considerable heterogeneity between different tax havens and bank groups from different headquarter countries. Regression analysis based on CbCR data and Bank Focus data leads us to expect a tax semi-elasticity of banks' reported profits of about-4.6. In this regard, CbCRs are indicative of a more pronounced tax sensitivity than conventional databases suggest. However, the lack of important economic variables (total assets and staff cost) impedes an exact estimation of banks' profit shifting based on CbCR data alone and with standard methods. These insights are especially relevant in the context of the ongoing political discussions whether to introduce a public CbCR for all large multinational firms in the EU.

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. Abstract:We employ an event study methodology to investigate the stock price reaction around the day of the political decision to include a country-by-country reporting obligation for EU financial institutions. We do not find significant abnormal returns for the banks affected. Sample splits according to the effective tax rate and the degree of B2C orientation do not reveal a more pronounced negative investor response for banks engaging more strongly in tax avoidance or being potentially more concerned about reputational risks, respectively. We conclude that the implementation of a CbCR requirement for EU financial institutions did not trigger a noticeable investor response. Contrary prior findings regarding other public tax disclosure obligations might be driven by the distinct motivation of the rules and the way the information is presented. We contend that capital market reactions to an upcoming increase in tax transparency are not generalizable to other industries and settings, but that consideration must be given to the context and the exact design of the rule.JEL Classification: H25, H26, G21, G28

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. http://ftp.zew.de/pub/zew-docs/dp/dp17003.pdf Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar. Terms of use: Documents inDis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. The Implications of Book-Tax Differences: A Meta-AnalysisMaria Theresia Evers*, Ina Meier**, Katharina Nicolay*** November 2016 AbstractOver the last decade, a large body of tax accounting literature on the association between book-tax conformity (BTC)/book-tax differences (BTD) and firms' opportunistic reporting behavior has emerged. Yet, existing empirical evidence on the questions whether increased book-tax conformity actually reduces Earnings Management (EM) and/or Tax Sheltering (TS) and whether book-tax differences are really indicative of such opportunistic reporting behavior is not yet clear. We therefore conduct a meta-analysis aimed at identifying the sources of heterogeneity in primary studies and at providing a consensus estimate with respect to the sign and the statistical significance level for the examined association. Our qualitative literature review reveals that major sources of heterogeneity in the study design include differences in the proxies for EM and TS and in the measures used to determine BTD and BTC. Our meta-regression results show that BTD are indeed indicative of opportunistic reporting behavior, and even more so of EM. These results are, however, weaker for studies that determine BTD only roughly as the difference between book and estimated taxable income instead of using more specific BTD proxies. Moreover, examining actual BTD computed from tax returns instead of only approximating these from financial statements strongly increases the effects. Hence, efforts taken to accurately determine BTD seem to be worth wile when it comes to the explanatory power for opportunistic reporting. Furthermore, our results suggest a negative association between book-tax conformity and EM/TS, which we interpret as an indicator for higher conformity indeed being effective in reducing aggressive reporting.JEL Classificat...

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Our study investigates firms' internal digitalization as a crucial foundation for timely, datadriven decision making. We evaluate the association between digital infrastructure and improved decision making in tax planning decisions to analyze if the benefits of digitalization expand beyond firms' core business functions. The novel use of a survey that identifies European firms' digital infrastructure over the period from 2005 to 2016 allows us to create an index of IT sophistication. Using this index, we extend prior approaches and observe the effectiveness of tax planning decisions in terms of a firm's ability to exploit income shifting incentives. Our empirical analysis confirms the prediction that digitalized firms respond more efficiently to income shifting incentives. Further, we provide evidence that firms with sophisticated IT are more reactive to shocks in the income shifting incentive than non-digital firms. Our results suggest that internal digitalization allows firms to efficiently monitor and manage internal processes and to strategically price internal transactions. With this work, we are the first to document the association of digitalization and the performance of firms' support functions.

 As part of its action plan against base erosion and profit shifting (BEPS), the OECD (2015) has proposed six indicators to measure profit shifting activity. These indicators add to past and ongoing efforts in academic tax research to empirically identify the scale and tax sensitivity of international profit shifting. In this paper, we discuss whether the proposed OECD indicators indeed represent methodological advances and critically assess their informative value. While a certain need for "easy-access" indicators to measure the relevance of the base erosion problem seems justified, our discussion reveals that the indicators come up with certain shortcomings, many of them acknowledged by the OECD (2015) itself, that prevent them from reliably tracing profit shifting activity in available international data. With one notable exception, the OECD's indicators lack consistent counterfactuals and comparison groups which are essential benchmarks for the observed data. Even the most promising approaches require representative and timely data that covers firms' global activity, including tax haven operations. With better access to such highquality micro-level data, it will be more promising to empirically isolate the effects of profit shifting from relocations of real economic activity and value creation.