Could Country-by-Country Reporting Increase Profit Shifting?

We model Country-by-Country reporting as increasing both tax planning and audit costs for profit-shifting multinationals, where the latter depend on the share of profits held in tax havens. 

Then, Country-by-Country reporting makes shifting profits from a high-tax country to a tax haven relatively more attractive than shifting from a low-tax country. Under plausible conditions, profit shifting from high-tax affiliates may increase relative to no Country-by-Country reporting. 

We confirm these changes in profit-shifting patterns using a staggered difference-in-differences design. The opposing effects for low-tax and high-tax countries also explain the mixed findings of previous empirical evidence on Country-by-Country reporting.

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