Private Country-by-Country Reporting and the Misalignment between Profits and Economic Activity

Believing that opacity in tax reporting enables international tax avoidance, the OECDintroduced private country-by-country reporting (CbCR) whereby firms report the geographicbreakdown of key financial metrics to tax authorities. The European Union implementedmandatory CbCR in 2016 for firms with consolidated revenues over =C750 million.We exploit this threshold and use a non-parametric regression discontinuity designto examine the effect of CbCR on the location of firms profits and real activity. We findconsistent evidence that firms reduced the misalignment between profit and activity inresponse to CbCR. We show that affiliates in non-haven countries with high activity andlow profits (outbound profit shifters) prior to CbCR reduce their misalignment by decreasingfixed assets. Our findings have important policy implications for assessing theeffectiveness of CbCR.