Do Private Country-By-Country Disclosures to Foreign Tax Authorities Influence U.S. Multinational Firms’ Public Financial Statement Disclosures About Foreign Operations?

We investigate whether U.S. multinational corporations (MNCs) that are required to provide private country-level financial disclosures to foreign tax authorities subsequently change their public financial statement disclosures about foreign operations. Given differing incentives to provide information about operations in tax haven and non-tax haven countries, we separately examine changes in financial statement disclosures about operations in haven vs. non-haven countries. We also investigate whether tax audit risk moderates U.S. MNCs’ public disclosure responses to an increase in required, private disclosures to foreign tax authorities. We use the implementation of country-by-country reporting (CbCR) as our research setting and we measure public financial statement disclosures about foreign operations via text analysis tools that identify offshore words that appear in the same sentence as nation words (“foreign offshore sentences”), using Hoberg and Moon’s (2017) dictionary. We provide evidence that affected U.S. MNCs significantly reduced the number of foreign offshore sentences that appear in their financial statements after the implementation of CbCR, relative to U.S. MNCs not affected by CbCR. This reduction is driven by decreases in foreign offshore sentences about operations in non-haven countries and by firms subject to higher tax audit risk. We interpret our findings as consistent with U.S. MNCs striving to downplay the significance of operations in higher tax rate countries so that public financial statement disclosures are more closely aligned with private CbCR disclosures to foreign tax authorities.