Examinations of the Relations Between Tax-Motivated Income Shifting and Private and Public Country-by-Country Reporting

Abstract

Multinational corporations’ (MNCs’) tax-motivated income shifting concerns governments and policymakers worldwide. In this thesis, I examine how disclosure can address this concern by studying the relation between mandatory private country-by-country reporting (CbCR) disclosure, voluntary public CbCR disclosure, and MNCs’ tax-motivated income shifting. Extant research has failed to find robust evidence that mandatory private CbCR disclosure to the tax authorities has significantly decreased MNCs’ tax-motivated income shifting. These results have been widely cited and interpreted as evidence that MNCs’ income shifting did not decrease in the post-CbCR implementation period. I revisit this question by replicating the results of prior research, lengthening the sample period, and expanding the sample beyond the European Union. Using affiliate-level income shifting models, I find robust evidence that MNCs shift significantly less income in the post-CbCR implementation period. On average, MNCs have decreased their income shifting by half since the implementation of CbCR, and these decreases are monotonic across MNC size and not concentrated amongst MNCs subject to mandatory private CbCR. Altogether, I show that the objective of CbCR in reducing income shifting was achieved around the time CbCR was implemented; however, I provide compelling evidence that the CbCR consolidated revenue threshold did not matter, making it unlikely that it was the CbCR disclosure to the tax authorities that resulted in the decrease in income shifting. Consistent with the overarching focus of the Organisation for Economic Cooperation and Development’s Base Erosion and Profit Shifting (BEPS) framework, I find that MNCs headquartered in countries with strong regulatory environments, an interest deduction limitation consistent with BEPS Action 4, and no preferential tax regimes named in BEPS Action 5, exhibit greater decreases in income shifting relative to MNCs headquartered in countries with weak regulatory environments and not compliant with Action 4 or Action 5. These findings have important implications for governments and policymakers worldwide as they work to curb MNCs’ income shifting and implement BEPS action items. Then, I consider MNCs that voluntarily disclose CbCR publicly to determine whether this disclosure is a credible signal of their tax behavior. I use a unique hand-collected dataset of MNCs that disclose CbCR in their sustainability reporting, consistent with the Global Reporting Initiative’s sustainability-tax reporting standard. After explicitly modelling the endogenous disclosure decision and controlling for the post-CbCR implementation period, I find that MNCs that voluntarily disclose CbCR publicly significantly decrease tax-motivated income shifting in conjunction with disclosure, relative to the pre-disclosure period. The propensity for reduced income shifting is greater amongst MNCs that provide detailed CbCR disclosure, which is consistent with the costliness of such a detailed disclosure. Overall, I find that sustainability reporting is a mechanism within which MNCs differentiate themselves, consistent with a separating equilibrium, by demonstrating that the voluntary disclosure of complex tax information that is not easily verifiable can be a credible signal of the underlying tax behavior. This evidence has important implications for stakeholders interested in utilizing voluntary tax disclosures.