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Can European banks' country-by-country reports reveal profit shifting? An analysis of the information content of EU banks' disclosures

Verena Dutt, Katharina Nicolay, Heiko Vay and Johannes Voget

No 19-042, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

Abstract: 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.

Keywords: Tax Avoidance; Profit Shifting; Country-by-Country Reporting; Public Disclosure; Tax Transparency; Financial Institutions; Database (search for similar items in EconPapers)
JEL-codes: G21 G28 H25 H26 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-acc and nep-pbe
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