The aggressive tax planning efforts of multinational companies such as Google, Apple or Amazon that are aimed at effectively reducing corporate tax burdens have been the subject of public discussion for several years now. In order to combat such aggressive strategies and increase transparency in financial reporting, the Organisation for Economic Co-operation and Development (OECD) and the European Commission have proposed something called Country-by-Country-Reporting (CbCR). Through CbCR, policy-makers intend to oblige multinational companies to disclose certain country-specific tax-related information. However, a recent study carried out by the Centre for European Economic Research (ZEW) in Mannheim shows that a CbCR is not an effective means for combatting aggressive tax planning.
Multinationals frequently exploit legal loopholes in national and international tax law to shift their profits to foreign subsidiaries in low-tax jurisdictions in order to keep their tax burden as low as possible. As a countermeasure to this problem, the OECD and the EU Commission have put forward several proposals for a CbCR with the aim of increasing transparency in financial reporting. Under a CbCR, multinational firms in all industry sectors would be obliged to disclose certain country-specific tax-related information.
The ZEW study shows, however, that neither consolidated nor individual financial statements, nor any other existing data can serve as a suitable means for establishing a common basis for CbCR. "As a first step, it would be necessary to define standardised rules regarding the determination of corporate income and the valuation of assets, which could then serve as a legal framework for all countries," says Professor Christoph Spengel, ZEW Research Associate and co-author of the study. "In this respect, the proposal for a Common Consolidated Corporate Tax Base (CCCTB) put forward by the European Commission constitutes a first step in the right direction."
The costs of implementing a CbCR would to a certain degree exceed the expected benefits
The study further indicates that the expected costs of implementing a CbCR would – at least to a certain degree – exceed the expected benefits. "Introducing CbCR would not only entail direct costs arising from processing and standardising company data, but also indirect costs that stem from disclosing sensitive corporate information to the public," explains Christoph Spengel. A more efficient approach to reducing profit shifting activities would be to encourage the respective legislators to close existing loopholes in national tax law and to ensure the enforcement of established law. According to the authors of the study, a more stringent and standardised set of transfer pricing rules and the introduction of thin-capitalization rules would be more effective in curbing aggressive tax planning. "But countries need to cooperate with one another in order to ensure that their tightened tax laws are consistent in multijurisdictional settings in order to avoid double taxation," says Christoph Spengel.
Centre for European Economic Research (ZEW)
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