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on Accounting and Auditing |
| By: | Giulia Aliprandi (EU Tax Observatory); Kane Borders (EU Tax Observatory) |
| Abstract: | Multinational enterprises have risen to become dominant forces in the global economy, accompanied by a troubling trend of aggressive tax avoidance. In 2022 alone, an estimated $1 trillion in profits was shifted to tax havens by multinationals, amounting to 35% of all profits booked outside their headquarters countries (Alstadsæter et al., 2023). Despite tax avoidance being a major public concern, the specific practices employed by individual companies have remained largely opaque to the public due to a lack of transparency and public disclosure obligations. Comprehensive transparency measures promote informed policymaking, accountability, public trust, and sustainable development globally. This report examines the current landscape of corporate tax transparency and evaluates how emerging transparency measures could shape future developments in this critical area. We focus on corporate tax transparency measures via Country-by-Country Reporting (CbCR), where multinationals disclose detailed financial and tax-related information for each country of operation. We collected the publicly available CbCR reports and compiled them into a single database: the Public CbCR Database. This new data source highlights that large multinationals, particularly from Western Europe, are leading the way as primary publishers of such reports. Overall, the large multinationals publishing public CbCR account for less than 2% of large companies, and less than 5% of global revenues and global profits. Despite the small numbers, our research reveals an upward trend in voluntary CbCR disclosures, signalling increasing tax transparency practices. However, significant gaps remain, as U.S. multinationals and firms from major economies like China and Russia have only a few CbCR disclosures available. The European Union (EU) made an important step in furthering corporate tax transparency by adopting a mandatory CbCR directive that started applying this year in many EU countries. Our simulations reveal the impact this directive will have. Nearly one-third of large U.S. MNEs will be compelled to publish more disaggregated financial information than ever before publicly available. The increased disclosure from these U.S. corporate giants, who have historically been opaque, could be a breakthrough in tax transparency. However, the directive has serious limitations, as the requirements for geographical disaggregations are largely insufficient to truly evaluate the activity of multinationals. Broader adoption and enhancement of corporate tax transparency initiatives are crucial, we suggest several ways to improve the directive going forward. |
| Keywords: | Tax transparency, country-by-country reporting, profit shifting |
| JEL: | H26 F23 M48 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:dbp:report:005 |
| By: | Jules Ducept (EU Tax Observatory, EPEE-CEPS UniversitéParis-Saclay); Sarah Godar (EU Tax Observatory, DIW Berlin) |
| Abstract: | This paper documents the rise of corporate tax-base narrowing measures in the EU using a novel dataset covering both tax rate and tax base reforms implemented between 2014 and 2022. Our findings indicate a shift away from the ’cut rate – broaden base’ approach, as governments increasingly align corporate taxation with industrial policy objectives. We show that EU tax competition exerts downward pressure on high-tax countries, while the likelihood of tax cuts also varies with the political orientation of governments. Using financial accounts from more than 40, 000 affiliates, we find that the average effective tax rate of multinational enterprises in the EU has declined more rapidly than the statutory rate and estimate that tax base reforms account for 24% of this decline. The estimated revenue cost of all reforms combined amounts to 3.5% of total corporate tax revenue collected from the sample firms. These revenue losses should be carefully weighed against the anticipated benefits of tax reforms. |
| Keywords: | Effective Tax Rates, Multinationals, Tax Competition, Corporate Income Tax, Tax Reform, Political Orientation, European Union |
| JEL: | F23 H25 H26 P11 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:dbp:wpaper:030 |
| By: | Yohei KOBAYASHI; Yasuo BAMBA; Motohiro SATO |
| Abstract: | Many countries have reduced their statutory tax rates (STRs) on corporate income while broadening their tax bases. Japan presents an intriguing case study in this context. It has reduced its STR while expanding its pro forma standard tax primarily based on companies' value-added. This study analyzes the impact of Japan's corporate tax reforms since the mid-2010s on firm dynamics using forward-looking effective tax rates (ETRs) that incorporate pro forma standard taxation. Our observations indicate that these corporate tax reforms lowered the ETR and narrowed the disparities between companies. Although the reduction in ETRs stimulated increased investment and employment, the positive impacts were partially offset for large firms owing to the expansion of pro forma standard taxation, which effectively increased the labor costs. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:eti:dpaper:25062 |
| By: | Anna Maria C. Menichini (Università di Salerno and CSEF); Peter Simmons (University of York) |
| Abstract: | We propose a rationale for the joint financing of two independent projects based on the reduction in audit costs resulting from endogenous sequential verification. This cost reduction occurs not only when joint financing offers coinsurance benefits, but, remarkably, also in the presence of contagion losses -where the failure of one project negatively impacts the other. This is because the benefits from endogenous verification - namely, the cost saving from audits optimally decreasing in the reported outcome - may offset the additional cost arising from contagion, specifically, the potential need to audit a successful project due to the failure of the other. We provide a detailed characterisation of the optimal contract, showing that under certain conditions it may take the form of standard debt. Furthermore, we conduct a comparative static analysis relating the optimality of joint financing to the quality of accounting information. Importantly, we find that with fully transparent accounting information, joint financing always dominates single financing even under contagion. The results remain robust across scenarios involving simultaneous audits and multiple projects. |
| Keywords: | financial contracts, auditing, joint financing, project finance, conglomerates. |
| JEL: | D82 D86 G32 G34 |
| Date: | 2024–12–01 |
| URL: | https://d.repec.org/n?u=RePEc:sef:csefwp:742 |
| By: | Nina Boyarchenko; Kinda Hachem; Anya V. Kleymenova |
| Abstract: | A large literature at the intersection of economics and finance offers prescriptions for regulating banks to increase financial stability. This literature abstracts from the discretion that accounting standards give banks over financial reporting, creating a gap between the information assumed to be available to regulators in models of optimal regulation and the information available to regulators in reality. We bridge insights from the economics, finance, and accounting literatures to synthesize knowledge about the design and implementation of bank regulation and identify areas where more work is needed. We present a simple framework for organizing the relevant ideas, namely the externalities that motivate bank regulation, the rationales for allowing accounting discretion, and the use of discretion to circumvent regulation. Our takeaway from reviewing work in these areas is that academic studies of bank regulation and accounting discretion require a more unified approach to design optimal policy for the real world. |
| Keywords: | bank regulation; accounting discretion; regulatory arbitrage; financial stability; optimal policy |
| JEL: | D62 E44 G21 G28 M41 |
| Date: | 2025–06–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:101174 |
| By: | Lysle Boller; Clare M. Doyle; Juan Carlos Suárez Serrato |
| Abstract: | We use administrative corporate tax data from the IRS to study a particular form of tax avoidance for US multinational corporations (MNCs). This strategy relies on cost sharing agreements (CSAs), which govern joint R&D efforts conducted with foreign affiliates and allow US MNCs to shift profits by moving intellectual property abroad. We analyze an unexpected 2005 Tax Court ruling that additionally allowed MNCs with CSAs to engage in cost shifting: by excluding employee stock option compensation costs from CSAs, the ruling allowed MNCs to allocate these formerly-shared costs entirely to their US parent corporations. This in turn increased the domestic tax deduction associated with R&D expenses, generating a tax shield that lowered the after-tax cost of domestic R&D. We show that the regulatory change increased market value, R&D investment, and cost shifting margins among US MNCs with CSAs following the ruling. Our results demonstrate how tax minimization strategies can translate into real changes in innovative economic activity. |
| JEL: | D22 H25 H26 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33805 |
| By: | Hjalte Fejerskov Boas; Matthew Collin; Sarah Godar; Carolina Moura; Andreas Økland |
| Abstract: | The introduction of the automatic exchange of bank information under the Common Reporting Standard (CRS) marked a breakthrough in the fight against global financial secrecy. In this report, we evaluate the scope and coverage of the CRS—in a context marked by limited evidence, primarily due to restricted access to CRS data. For this purpose, we have compiled newly aggregated CRS data from 16 countries, covering roughly 30% of the global amount reported by the OECD for the year 2022. Our analysis reveals that the volume of data exchanged internationally has increased and improved substantially over recent years and that CRS-reported foreign wealth accounts for approximately 9% of household financial wealth. Moreover, the data highlights considerably higher average financial holdings in financial centers compared to other jurisdictions. At the same time, a relatively higher share of wealth in financial centers is held through passive corporate structures, indicating the CRS covers the sort of high-risk holdings for which it was designed. The household wealth held in financial centers reported under the CRS is at least 30 percent lower than previous EU Tax Observatory estimates of household offshore financial wealth which could be interpreted as an indication of underreporting. To fully leverage the CRS’s potential efforts to improve data quality and processing should continue. Greater transparency on the part of governments regarding the progress achieved, including public CRS statistics, would promote an informed public debate about international tax evasion and capital flight. |
| Keywords: | Automatic exchange of information, Common Reporting Standard, financial secrecy |
| JEL: | H26 G28 K34 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:dbp:report:007 |
| By: | Jeanne Bomare (Centre for the Analysis of Taxation, London School of Economics); Matthew Collin (EU Tax Observatory (Paris School of Economics) and NMBU) |
| Abstract: | Over the past decade, more than 100 jurisdictions have signed automatic exchange of financial information agreements (AEoI) in an effort to fight cross-border tax evasion. This paper studies the effectiveness and coverage of these agreements using account data leaked from an Isle of Man bank with a large customer base in countries participating to AEoI. We establish three sets of results. First, we find that the design of the governing AEoI agreement absolved the bank from reviewing and reporting a very large share (81%) of all the wealth owned by tax residents of AEoI participating countries, and instead the responsibility passed to smaller entities with weaker incentives to comply. Second, out of the wealth that fell under the bank’s reporting responsibility, foreign tax authorities only received reports covering 50% of what their tax residents held at the bank. We estimate that a further 32% went unreported due to loopholes in rule design. The rest of the accounts did not appear to have been reported, although through the information available in the leak we classified them as reportable. Third, we find evidence that bank clients who were more at risk of being reported on preemptively closed their accounts, potentially circumventing the AEoI reporting process. This paper provides new evidence on the potential limits of these agreements and how sophisticated individuals can ultimately avoid the AEoI transparency shock. |
| Keywords: | Tax Evasion, Information Exchange, Tax Enforcement |
| JEL: | H26 G21 F42 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:dbp:wpaper:033 |
| By: | Nicos Koussis; Francesco Menoncin; Paolo M. Panteghini; Paolo Panteghini |
| Abstract: | We extend Trade-Off Theory (TOT) by assuming that EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), rather than EBIT (Earnings Before Interest and Taxes), follows a Geometric Brownian Motion (GBM), and we thus consider the role of tax depreciation allowances (TDA) in firms’ leverage decisions. Our model also accounts for the possibility of a sudden stop in a firm’s operations and thus incorporates the impact of finite firm and depreciation tax allowances on leverage. We show that TDA act as a complement to debt leverage, generating a negative leverage-profitability relationship over a wide range of plausible parameters, consistent with empirical evidence. However, our model also predicts that this relationship may weaken in low-tax environments or at moderate levels of volatility, and may even turn positive under very high volatility. The model retains the standard TOT predictions regarding the sensitivity of leverage to volatility, taxes, growth, and bankruptcy costs, while incorporating the effects of TDA and a finite firm horizon. Furthermore, our analysis highlights that policymakers can influence corporate capital structure through both tax rates and TDA. To implement effective policy, they should also account for the volatility of the business environment. |
| Keywords: | capital structure, contingent claims, corporate taxation, profitability, trade-off model |
| JEL: | G32 H25 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11937 |
| By: | Keloharju, Matti (Aalto University School of Business, CEPR, and); Keluharju, Roope (Aalto University School of Business) |
| Abstract: | Recent developments in artificial intelligence raise fundamental questions about the future of academic accounting research. Using insights from institutional theory, existing institutional structures, and interviews with senior editors and PhD program chairs, we examine how AI advancements may transform accounting research and its supporting institutions. Our analysis highlights four key findings. First, we identify two dimensions where humans can maintain advantages over AI: higher-order reasoning skills and control over data access. AI may reshape research methods and topics based on these advantages, making quantitative studies where neither dimension offers strong protection from AI particularly vulnerable to competition. Second, AI may challenge traditional publishing processes, as lengthy review times risk making research obsolete in a rapidly evolving field. Third, AI may transform doctoral education by emphasizing selection and training of students along the two dimensions where humans can maintain advantages over AI. Fourth and last, these changes may be shaped by broader institutional forces, such as major publishers whose standardized platforms and policies may not fully serve accounting research needs. While our analysis assumes gradual AI progress allowing time for adaptation, we also consider scenarios of faster AI advancement that could create more dramatic disruption. Our findings suggest that accounting research institutions appear remarkably unprepared for these changes. |
| Keywords: | Accounting research; Artificial intelligence; Research method; Academic career; Publishing; Doctoral education |
| JEL: | I23 M41 O33 |
| Date: | 2025–07–04 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:iuiwop:1528 |
| By: | Stephen G. Cecchetti; Jeremy C. Kress; Kermit L. Schoenholtz |
| Abstract: | In 2023, US regulators proposed the “Basel Endgame, ” a long-awaited overhaul of bank capital requirements. The proposal aimed to bring the United States into compliance with international standards established by the Basel Committee on Banking Supervision in response to the 2008 Global Financial Crisis. However, fierce industry opposition to what banks viewed as a costly increase in capital requirements effectively killed the proposal. In this essay, we describe the purpose of bank capital and the history of international standard-setting in bank regulation. We then highlight the most important aspects of the Basel Endgame, as well as the arguments for and against adopting the rule. We show that the debate unnecessarily conflated two distinct questions: (1) whether the United States should comply with international regulatory standards, and (2) whether the United States should raise large banks’ capital requirements. While there are strong grounds to answer both questions in the affirmative, they need not be addressed together. That is, the United States can implement international standards in a capital-neutral manner to preserve global cooperation in bank regulation, leaving the separate question of raising capital requirements for another day. |
| JEL: | G21 G28 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33982 |