No. 166: Banks’ tax disclosure, financial secrecy, and tax haven heterogeneity

This study investigates the consequences of implementing mandatory public country-by-country reporting (CbCR) on European banks’ engagement in tax and regulatory havens characterized by financial secrecy. Using difference-in-differences estimation, we find a significant average decline of approximately one-third in the number of tax haven subsidiaries among European banks following the introduction of mandatory public CbCR, compared to a control group of insurance firms exempt from the disclosure requirement. Further tests document that this decline primarily stems from a decrease in subsidiaries located in economically insignificant “dot havens” and tax havens that also serve as regulatory havens. Additionally, we observe that banks with low exposure to reputational risk prior to the reform are more susceptible to reduce their subsidiary presence in bank havens. These results reveal that public CbCR leads to real effects, namely withdrawals from low-tax locations, under specific conditions. Public CbCR effectively curtails the presence in tax havens particularly when banks are exposed to both financial secrecy and reputational concerns. Our results suggest that public disclosure alone may not be effective in combating the use of tax havens. This finding is useful for future tax policy debates.