Transparency in Financial Reporting: Is Country-by-Country Reporting Suitable to Combat International Profit Shifting?

Abstract

Aggressive tax planning efforts of highly profitable multinational companies (Base Erosion and Profit Shifting (BEPS)) have recently become the subject of intense public debate. As a response, several international initiatives and parties have called for more transparency in financial reporting, especially by means of a country-specific reporting of certain tax information (Country-by-Country Reporting (CbCR)). In our paper, we demonstrate that neither consolidated nor individual financial accounts seem to be an appropriate platform to provide such country-specific information and, therefore, that CbCR cannot be based on extended financial accounting standards. Moreover, we argue that even separate CbCR templates do not prevent multinationals from profit shifting, since their common tax minimization strategies are mainly based on the legal exploitation of gaps and loopholes in national and international tax law. In that regard, we show that expected costs for CbCR would exceed expected benefits and therefore contend that CbCR cannot be regarded as a convincing measure to combat international profit shifting. Instead, we argue that tax legislators should limit profit shifting by enforcing national and international tax rules and by closing gaps in tax law. In particular, we call for more tightened and standardized transfer pricing regulations to be adopted at an international level.

BEPS 13 No’lu Eylem Planı Kapsamında Transfer Fiyatlandırması Belgelendirme Yükümlülüğü ve Ülke Bazlı Raporlama: Türkiye Uygulamasına İlişkin Bir Değerlendirme

“…Transfer pricing affects countries' tax revenues, and one of the measures brought to the forefront by the OECD with an emphasis on international cooperation in terms of this method is the transfer pricing documentation obligations (Rozas et al, 2019: 37). Empirical evidence indicates that intra-group financing and transfer pricing are the most prominent channels for MNEs to engage in profit shifting (Evers et al, 2014;Heckemeyer and Overesh, 2017). The most essential prerequisite for countries to act effectively and in cooperation to prevent tax losses arising from these actions is to have the necessary and sufficient information.…”

Leveling the Playing Field? A Qualitative and Quantitative Examination of the EU Directive on Public Country-by-Country Reporting

“…The materialization of proprietary costs, on the contrary, is less researched. Various studies indicate that a public CbC disclosure of financial information may harm the competitive position of affected firms (Evers et al 2014;Cockfield and MacArthur 2015;Forstater 2017;Dutt et al 2020), in particular if it applies to individual firms of specific size or regions. Recent studies suggest that proprietary costs are responsible for reduced voluntary corporate disclosure in competitive markets (Ellis et al 2012;Huang et al 2017) and for growing firms (Prencipe 2004).…”

“…Conceptually, various authors point out that public CbCR might violate the tax secrecy in certain member states (Evers et al 2014;Dutt et al 2020;Müller and Müller 2022). Further researchers have normatively assessed the national implementation of the public CbCR Directive in individual member states.…”

Country-by-country reporting and corporate tax avoidance: evidence from China

“…Furthermore, discussions continue on whether to publish CbCR, and private disclosure may be leaked to the public (e.g., the Swiss Leaks). Expectations of future public CbCR and concerns about leakage risks may change the tax avoidance behaviour of rational managers (Evers et al, 2014).…”