Real Effects of Private Country-by-Country Disclosure

Olbert, Marcel; Simone, Lisa De

doi:10.2308/tar-2020-0714

Cited by 71 publications

(17 citation statements)

References 66 publications

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“…3 3 I limit my discussion of organizational complexity to ownership structures (i.e., “webs”) of foreign affiliates and view the inclusion of an additional holding company as increasing structural organizational complexity. This definition is consistent with the measure of organizational complexity from De Simone and Olbert (2021). The inclusion of a holding company may reduce other aspects of organizational complexity; for example, holding companies can better delineate duties among subsidiaries. …”

supporting

confidence: 79%

Foreign Holding Companies and the US Taxation of Foreign Earnings: Evidence from the Tax Increase Prevention and Reconciliation Act of 2005*

Murphy¹

2023

Contemporary Accting Res

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I analyze US multinationals' (MNCs) use of foreign holding companies in their organizational structures and the impact of holding companies on internal capital markets. The look‐thru rule in the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) reduces the after‐tax cost of foreign intercompany financing transactions. I use TIPRA as a natural experimental setting to test whether a shift in US tax policy that reduces the cost of moving foreign capital increased firms' reliance on foreign holding company subsidiaries. I find that MNCs responded to TIPRA by creating more foreign holding companies. Furthermore, consistent with the policy objectives of TIPRA, I document that MNCs that rely on holding companies gained tax efficiencies in their post‐TIPRA foreign internal capital markets, reducing domestic taxation on foreign earnings and easing financial constraints. Overall, my results expand our understanding of foreign organizational structure decisions and their internal financing benefits. I contribute to the tax literature by documenting a response to TIPRA that sheds light on the growing complexity of foreign subsidiary ownership structures.

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supporting

confidence: 79%

Foreign Holding Companies and the US Taxation of Foreign Earnings: Evidence from the Tax Increase Prevention and Reconciliation Act of 2005*

Murphy¹

2023

Contemporary Accting Res

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“…The decline in tax avoidance that I document over the same time period can be attributed to a change in other types of tax planning. For example, De Simone and Olbert [2019] find a reduction in ownership of tax haven subsidiaries by EU MNCs subject to CbCr. Consistent with the notion that it can take firms 12 to 18 months to adjust tax planning strategies (Khan et al.…”

Section: Affiliate‐level Response To Country‐by‐country Reportingmentioning

confidence: 99%

“…De Simone and Olbert [2019] and Joshi [2019] examine the effects of CbCr on economic activity, finding a significant change in investment and employment levels in low‐tax countries after its introduction. My paper differs from these in several ways.…”

Section: Introductionmentioning

confidence: 99%

“…First, I examine whether CbCr meets its objective—a reduction in tax avoidance—by discouraging firms from shifting income to low‐tax jurisdictions. Unlike De Simone and Olbert [2019] and Joshi [2019], I also examine the channel through which these disclosures change tax behavior (i.e., enforcement risk, detection risk, and risk of public exposure).…”

Section: Introductionmentioning

confidence: 99%

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Does Private Country‐by‐Country Reporting Deter Tax Avoidance and Income Shifting? Evidence from BEPS Action Item 13

Joshi

2020

J of Accounting Research

112

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To combat tax avoidance by multinational corporations, the Organisation for Economic Co-operation and Development introduced country-by-country reporting (CbCr), requiring firms to provide tax authorities with a geographic breakdown of their profitability and activities. Treating the introduction of CbCr in the European Union as a shock to private disclosure requirements, this study examines the effect on corporate tax outcomes. Exploiting the Accepted by Douglas J. Skinner. I appreciate the insightful comments and constructive suggestions of two anonymous referees. This paper is based on my dissertation and I received invaluable guidance from my dissertation committee members: P. JOSHI €750 million revenue threshold for disclosure and employing regressiondiscontinuity and difference-in-differences designs, I document a 1-2 percentage point increase in consolidated GAAP effective tax rates among affected firms. I also find evidence consistent with a decline in tax-motivated income shifting, starting in 2018. These results suggest that, although private geographic disclosures can deter corporate tax avoidance, so far, the regulations have had a limited effect on tax-motivated income shifting. My findings have policy implications for the global implementation of private CbCr and extend the debate on public versus private disclosure of tax information.

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“…However, other methods of income shifting are more quickly altered, including changing affiliate capital structure and updating the economic analyses to support transactions pricing, particularly when the changes provide greater profits to the high‐tax‐rate country. Evidence also suggests income shifting patterns can respond quickly to changing circumstances (De Simone et al 2017; De Simone and Olbert 2021). Although we acknowledge the long‐run benefit of investment‐related income shifting, avoiding new regulatory intervention can prompt a quick response by the firm 12…”

Section: Background Prior Literature and Hypothesis Developmentmentioning

confidence: 99%

The Effect of Changes in Income Shifting on Affiliate Managers' Internal Reporting Decisions*†

Klassen

Ruiz

2022

Contemporary Accting Res

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This study examines the interplay between tax and internal reporting incentives among affiliates of multinational corporations (MNCs). MNCs face limited information flows that may prevent affiliates' performance metrics to be responsive immediately to changes in the firm's tax planning. Using granular data of affiliates belonging to MNCs from 21 European countries, our study provides new empirical evidence of affiliate internal reporting responses induced by changing tax plans. When high-tax-rate countries tighten income shifting rules, we first document that income shifting is reduced and low-tax-rate affiliates have less income. Second, we predict and document that managers of these low-tax-rate affiliates offset this decrease in profits by managing upwards a key performance metric: affiliate earnings. Our results are consistent with firms not quickly adjusting the affiliate managers' incentives in the face of changing tax planning strategies, and affiliates managing reported earnings to offset the effect of changes in the tax planning of the firm. Cross-sectional analyses provide further evidence consistent with the theory underlying the main tests. The results support the policy of tightening income shifting rules when the objective is to reduce income shifting, and firms' central management would benefit from considering the implications of changing tax plans on the assessment of local managers.

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Real Effects of Private Country-by-Country Disclosure

Cited by 71 publications

References 66 publications

Foreign Holding Companies and the US Taxation of Foreign Earnings: Evidence from the Tax Increase Prevention and Reconciliation Act of 2005*

Foreign Holding Companies and the US Taxation of Foreign Earnings: Evidence from the Tax Increase Prevention and Reconciliation Act of 2005*

Does Private Country‐by‐Country Reporting Deter Tax Avoidance and Income Shifting? Evidence from BEPS Action Item 13

The Effect of Changes in Income Shifting on Affiliate Managers' Internal Reporting Decisions*†

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