Incentive Effects of Tax Transparency: Does Country-by-Country Reporting Call for Arbitration?
39 Pages Posted: 27 Jul 2022 Last revised: 16 Jan 2024
Date Written: January 15, 2024
Abstract
The OECD proposes mandatory fiscal arbitration as a means of dispute resolution between tax authorities to avoid double taxation of multinational enterprises’ profits. We investigate the effects of mandatory fiscal arbitration on tax-audit qualities in a two-country setting with country-by-country reporting (CbCR) and a tax rate differential. Our analytical model shows that tax-audit quality in the high-tax country increases under CbCR, because finer information raises tax-audit effectiveness.
In contrast, the low-tax country refrains from auditing as it benefits from profit shifting. While arbitration resolves double taxation, its effects on tax-audit quality depend on the procedure in place. An approach based on exogenous negotiation powers lowers audit quality, a final-offer arbitration preserves audit quality, and an independent-opinion arbitration with minimum-quality requirement offers the strongest audit incentives: even the low-tax country engages in auditing. Our findings contribute to the policy debate about interdependencies between firm-level tax policies, national fiscal enforcement, and international fiscal cooperation.
Keywords: BEPS, country-by-country reporting, double taxation, fiscal arbitration, profit shifting, tax avoidance, tax base allocation
JEL Classification: C70, H25, H26, H32, M48
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