Over the years, companies have not been required to disclose information about their activities, profits, and the taxes that they pay in all the countries where they operate, which has allowed them to hide their presence in many low-tax jurisdictions. For this reason, country-by-country reporting (CbCR) has emerged as one of the measures to increase organizational transparency. With a sample of the 36 largest European banks, based in 11 EU countries, in more than 90 jurisdictions around the world, this study aims to analyze the relationship between European banks' presence in tax havens, effective tax rates, performance, and productivity. Based on 3587 observations, the results reveal a tendency for European banks to move their profits to tax havens, which allows them to pay less tax or none. In addition, the results show that banks with lower effective tax rates have better performance; however, they did not prove a significant relationship with productivity. This study highlights the importance of the CbCR in the fight against tax evasion and profit shifting.
TopIntroduction
The trend for institutions to be subject to constant scrutiny is increasingly gaining momentum, giving rise to a global debate around transparency and how multinational organizations should be taxed. Transparency not only requires the managers and owners’ involvement, but also raises questions regarding the organization’s behavior towards stakeholders, including society (Hebb, 2006). Tax evasion has a significant social impact, and it is therefore important that institutions disclose information about the taxes paid in the countries where they operate.
Several academics and researchers argue that multinational organizations shift a substantial portion of their profits to low-tax countries, namely with tax havens and tax-privileged regimes, to avoid paying their fair share of tax in the highertax countries where they produce and sell most of their products (Fuest et al., 2022). Given the necessity to prevent such abuses and improve transparency among organizations, Murphy (2019) debated and proposed the CbCR as an accounting information reporting standard. His proposal generated numerous debates among various international stakeholders (Murphy, 2019).
The CbCR is included in Action 13 of the Organization for Economic Cooperation and Development (OECD) BEPS (Base Erosion and Profit Shifting) and requires certain multinational organizations to report their aggregate income and economic activities by country (Hanlon, 2018). The first period for which the report was completed was for fiscal years beginning January 1, 2016 (Hanlon, 2018). With the CbCR introduction, the individuals, citizens, politicians, investors, and researchers can access information about the activity of certain institutions and the actual taxes paid in the countries where they operate (among other information).
The literature reveals that there is an understanding lack of the technical and structural deficiencies in accounting for the response, in a cross-border context, to this regulation (Murphy, Janský & Shah, 2019). According to these authors, the CbCR is destined to fail in achieving its regulatory objectives unless a reform to the regulations is undertaken. The corporate transparency required under this initiative is contingent on institutional powers.
Thus, based on institutional theory, this study focuses on the regulation contribution to corporate transparency at the national and international levels. Nevertheless, and according to the internalization theory of multinational firms, emerging market firms internalize the benefits of investing in tax havens and reduce their transaction costs, thus achieving unperceived regulatory or institutional arbitrage (e.g., Boisot and Meyer 2015; Buckley et al. 2015; Deng, Yan and Sun, 2020). Indeed, there is much to be done to overcome these remaining gaps.
The relevance of CbCR to ongoing debates in the social sciences goes beyond the literature on policy effectiveness and financial reporting (Hugger, 2019). This topicality broader issue is information governance underpinned by the globalization phenomenon (Wójcik, 2015).
The literature review has identified gaps in the literature, namely the scarcity of studies focused on the relevance and effects of information reporting within the CbCR scope. Thus, the aim of this study is to highlight the CbCR value for organizational transparency and to combat tax evasion and fraud, and to analyze the impact of tax havens on the taxation and performance of the largest European banks.