July 2022: Prof. Dr. Katharina Nicolay

Katharina Nicolay, Assistant Professor of Accounting and Taxation at the University of Mannheim, is Principal Investigator of the project B07 “Costs and Benefits of Tax Transparency”. Together with Jens Müller and Johannes Voget, she investigates how mandatory and voluntary tax reporting affects tax transparency and companies.

My path into tax research

My decision for an academic career as a tax researcher was spurred by the inspiring tax environment I experienced during my undergraduate and doctoral studies. I still remember when I was a student at the Université Panthéon Sorbonne: There was this young professor who was really passionate about his research – and he shared his enthusiasm with us. He ignited my passion for economic research and inspired me to follow his course. I always try to excite my students about tax research by closely linking research and teaching. I experienced another important key moment during my projects for the European Commission and for the Federal Ministry of Finance. Seeing how relevant our research findings were for the work within these institutions – that we could really make a difference – encouraged me to follow the academic path.

I really like the dynamics I am confronted with as a tax researcher.

Tax research: dynamic and international

And, of course, I am fascinated by the scientific examination of tax issues. I really like the dynamics I am confronted with as a tax researcher. Both tax frameworks and tax rules change frequently. Especially in recent years a lot has happened in this regard. Not only in Germany, but also in other countries and in reaction thereof. Taxes are a very international topic. Of course, there are national legislations, but all global transactions of multinational companies have tax implications. And to understand these implications, to examine how a company’s behavior changes when the tax environment changes, is very appealing to me.

We focus on the question, whether the fact that firms are – voluntarily or mandatorily – disclosing more tax information actually contributes to greater transparency.

More tax information, greater transparency?

In our TRR 266 project B07 we focus on the question, whether the fact that firms are – voluntarily or mandatorily – disclosing more tax information actually contributes to greater transparency. And we examine whether and how this affects the firms’ behavior. For example, when firms have to report on each country they generate profit in. Do companies, as a result, reduce their activities in tax havens, since they fear a negative reaction from shareholders, consumers and other stakeholders? Or because they believe that these activities could draw the attention of tax authorities to illegal tax planning? Or do companies show no reaction at all because the fact prevails that all these activities are legal.

In one of our publications we examine how country-by-country reporting for banks affects investor reactions and thus firm value.

Country-by-country reporting: no effect on firm value

In one of our publications we examine how country-by-country reporting for banks affects investor reactions and thus firm value. Since 2014, banks have been required to report, how much profit, taxes and employees they generate, pay and employ in each country they do business. This information is not only available to the tax authorities, but also to the public. In our study we find that the implementation of the CbCR reporting has no major effect on the firm value. This is because investors expect both a reduction in banks’ tax avoidance opportunities and a reduction in information asymmetries between managers and shareholders, implying both negative and positive stock price reactions which offset each other on average. By the way: my TRR 266 colleagues Raphael Müller and Stephan Weck, together with Christoph Spengel, have also published an interesting working paper on this topic.

The new data removes a major blind spot that tax authorities had to deal with when it comes to profit shifting.

CbRC reporting removes blind spot

In another study, we focus on the information gain that is achieved by the CbCR reporting. The gain in information is massive! The new data removes a major blind spot that tax authorities had to deal with when it comes to profit shifting. For 73 percent of all banks we can only find information on the profits they generate in tax havens, if we use the data from CbCR reporting. This information was not available in the “old” data. While the data of BankFocus and Orbis estimated profit shifting to tax havens at only 2.4 percent, the new data shows that 10 percent of all profits are shifted to tax havens. That makes a big difference – and it calls for action.

One of our studies shows that banks are basically complying with the regulations.

Banks are basically complying with the regulations

If you want to fully understand the impact of the CbCR reporting, there is another important aspect to investigate: To what extent do banks fulfill their disclosure obligations? And do they try to hide information through the way they present it? One of our studies shows that banks are basically complying with the regulations. The much bigger point is: initially, there were no uniform definitions of the balance sheet items to be reported. And it was also not clear, whether the data had to be taken from the separate or the consolidated financial statements. As a result, there were significant differences in the interpretation of the regulations. Mostly, they were interpreted in the context of the respective national reporting. By now, there have already been adjustments by the legislator, the requirements for companies have become much more precise.

Most of my research projects are very close to burning tax policy issues.

Making a difference

Most of my research projects are very close to burning tax policy issues. And this is very important to me. I want to make a difference by providing regulators and policy-makers with relevant findings. I had projects for the EU Commission and the BMF and I was also part of an OECD hearing on BEPS – a measure to combat tax avoidance –, where I could contribute with my research. At the same time, however, gaining knowledge is an equally great motivation for me. I really want to understand how modified tax rules and behavioral reactions of companies are interrelated. Of course, we don’t have laboratory conditions to examine this question. This is why I attach great importance to work methodologically precise and profound. Of course, it is also important to understand the limitations of the used methods and to make them transparent.

Sometimes I also get inspiration from other disciplines. I look at how they measure effects and try to transfer promising approaches to my own research.

Always looking for improvement

That’s why I’m always eager to learn about new methods and approaches. Sometimes I also get inspiration from other disciplines. I look at how they measure effects and try to transfer promising approaches to my own research. If you want to improve methodologically, the exchange on tax conferences is very enriching as well. On these conferences you get a lot of thought-provoking and helpful impulses and tips. This is why I am very happy to be part of research networks – like the TRR 266 and the Leibniz Science Campus “Mannheim Taxation”– that are very committed to an intensive exchange. Not only within the research community, but also with policy-makers, practitioners, and the public.

Being part of the TRR 266 is a really great and enriching experience. There is a lively and fruitful exchange within and between the projects.

TRR 266: completing the puzzle

Being part of the TRR 266 is a really great and enriching experience. There is a lively and fruitful exchange within and between the projects. The research questions of the different projects complement each other very well, we can learn a lot and benefit from the research of the others. The German Business Panel, the infrastructure project of the TRR 266, for example, provides us with novel data. It gives us the chance to ask questions that cannot be answered with the regularly available data. After all, it is exciting to see how researchers with different backgrounds, methodological approaches and research interests work together on this overarching question and – step by step – add another piece to the puzzle.

*The article reflects the opinion of the researcher and not necessarily the views of the TRR 266. As a scientific association, the TRR 266 is committed to both freedom of speech and political neutrality.