Mandatory extraction payment disclosures and tax haven use: Evidence from United Kingdom

Research Question: Does public country by country reporting (CbCr) deter multinationals' tax avoidance practices operating in extractive industries? Motivation: Public CbCr has already been implemented for two specific sectors, namely the financial and extractive sectors. Prior studies have focused on tax avoidance of EU banks around the implementation of public CbCr requirement (Joshi et al., 2020; Eberhartinger et al., 2020; Overesch & Wolff, 2021). However, studies on how resource-extracting multinationals respond to the CbCr regulation are scarce. This study seeks to fill this gap by examining the effect of public CbCr on tax avoidance with a special focus on extractive industries. Idea: To improve fiscal transparency, Canadian and European legislators have adopted regulations requiring multinational corporations (MNCs) to provide, annually, their Extraction Payment Disclosures (EPD) (Public CbCr standard for extractive industries) to governments (EC, 2013; Natural Resource Canada, 2014). This study examines the effect of mandatory EPD adoption on the extent of tax haven use. Data: For a 10-year period surrounding the mandatory EPD adoption (2010-2019), we selected a sample of UK MNCs operating in the oil, gas, and mining sectors and listed on the London Stock Exchange. The analysis is mainly based on firm-level information taken from DATASTREAM database. Based on hand-collected data from annual reports, we measured the extent of tax haven use using the percentage of multinational subsidiaries located in tax haven jurisdictions/countries as listed in Dyreng and Lindsey (2009). An alternative list identified by the Organization for Economic Co-operation and Development (OECD) (2006) was also used in a robustness test. Tools: To examine our research question, we estimated a linear regression model with panel data using STATA software. Findings: The results show that the increased transparency resulting from public EPD does not appear to significantly affect the intensity of tax haven use. Contribution: This study extends and complements prior literature examining the effect of CbCr on tax avoidance and profit shifting by focusing on a specific setting i.e. extractive sector. To the best of our knowledge, apart from Johannesen and Larsen (2016) and Rauter (2020), no studies have provided empirical evidence on how resource-extracting multinationals respond to the EPD regulation.