During the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project, many participants believed the increased transparency from country-by-country reporting (CbCR) by the largest MNEs to tax authorities would have the largest effect of all of the BEPS Actions. Some initial studies with data since implementation of CbCR initiatives report positive effects of increased tax transparency on reducing profit shifting. I look forward to additional studies examining different types of transparency initiatives.
Michael Overesh and Hubertus Wolff of the University of Cologne recently examined the effects of the EU’s financial regulatory CbCR reporting by EU multinational banks. <Link> Unlike the BEPS CbCR, the EU financial reporting was in public financial statements. The analysis compared the tax expense of multinational banks before and after the CbCR and to other banks and corporations unaffected by the requirement. They found the largest effect among multinational banks with activities in tax havens. Those banks increased their effective tax rates by 3.7 percentage points relative to other banks after the CbCR disclosure.
The study didn’t analyze the specific reasons for the increase in the effective tax rate, but did show that profitability in some tax havens was substantially reduced. The study did not distinguish between the effect of better informed tax administrations versus the effect from public disclosure of increased reputational costs of corporate tax planning.
Lisa De Simone and Marcel Olbert report strong empirical evidence that multinational corporations above the €750 million global revenue threshold closed down tax haven subsidiaries as a result of the BEPS Action 13 CbCR requirement. <Link> Not surprisingly, they found shifting of some real economic activity to European low tax “non-haven” countries, such as Ireland and Luxembourg. Other studies label Ireland and Luxembourg “tax havens”, so some of the shifting was toward “tax havens” with at least some economic substance.
Preetika Joshi, Ed Outslay, and Anh Persson also analysed the EU financial reporting tax disclosure on bank MNEs and found substantial reductions in profit shifting by their financial affiliates. <Link> They also found increased income shifting by the banks’ industrial affiliates, not subject to the disclosure, thus mitigating the overall effect on the banking MNEs’ tax liability. The BEPS CbCR does not have this glaring loophole of the EU financial reporting disclosure.
Overesh and Wolff note that financial transparency is “an additional instrument for policy makers to curb corporate tax avoidance.” In fact, recent OECD research found that disclosure and exchanges of information on off-shore financial holdings by high-wealth individuals between tax administrations reduced by roughly one-third the amount of bank deposits held in international financial centers. <Link> The Global Forum on Transparency and Exchange of Information for Tax Purposes has implemented Automatic Exchange of Information between more than 90 jurisdictions using the OECD’s Common Reporting Standard to exchange information on 47 million off-shore accounts, totaling €4.9 trillion. <Link>
In addition to the BEPS Action 13 CbCR requirement, the BEPS Project included another mandatory transparency measure, Action 5, requiring countries to report tax rulings to other countries that relate to preferential regimes, cross border unilateral transfer pricing rulings, and others that might give rise to BEPS concerns. This has resulted in a number of preferential tax regimes being closed or modified, and provided tax administrations with an additional perspective on MNEs’ tax positions in other countries. Although not a mandatory requirement, BEPS Action 12 provided a framework for countries to obtain early information on potentially aggressive or abusive transactions, arrangements, or structures. Since then, a number of additional countries have adopted mandatory disclosure rules on promoters and/or taxpayers of potential questionable tax practices.
Greater tax and financial transparency for multinational corporations and high-wealth individuals combined with multilateral tax cooperation is making a difference in reducing global tax avoidance and tax evasion. Tax administrations need additional tools and resources to ensure effective enforcement of the tax laws with the additional information. Efforts to enhance the use of the CbCR data are underway by the Platform for Collaboration on Tax and the Federation of Tax Administrators, including a handbook on Effective Tax Risk Assessment of CbCRs. <Link> Taxpayer responsiveness to tax rate differentials across countries will be reduced by these transparency and exchange of information initiatives.