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ABSTRACT
The study investigates whether mandatory extraction payment disclosures (EPD), a policy intervention involving Country-by-Country Reporting (CbCR) in extractive industries, affects corporate tax avoidance. Based on a sample of firms listed on the London Stock Exchange over the period from 2010 to 2021, and using the Difference-in-Differences (DiD) model including firm and year fixed effects, results showed a decline in the level of tax avoidance of British extractive firms post-EPD requirement implementation, relative to U.S. extractive/British manufacturing firms not subject to such a requirement. The findings highlight one of the unstated positive consequences of the EPD regulation implementation including discouraging tax avoidance. They should be informative to tax authorities and civil society as they continue to refine existing disclosure requirements and combat tax avoidance. They also support the U.S. Government Accountability Office (GAO)’s (2008) and Organization for Economic Cooperation and Development (OECD)’s (2015) arguments that CbCR facilitates understanding of corporate tax practices.
Acknowledgements
The authors wish to express their sincere gratitude to the Editor in Chief Pr. Andrei Filip, to the Associate Editor Pr. Gilad Livne and to the anonymous referees for their valuable and constructive comments.
Disclosure Statement
No potential conflict of interest was reported by the author(s).
Notes
1 Throughout the paper, we use the terms ‘Extraction payment disclosures’, ‘EPD requirement’, ‘EPD regulation’, ‘Mandatory EPD adoption’ and ‘EPD’interchangeably.
2 See Le Billon (Citation2011, p. 10) For more discussion on international initiatives to improve governance of resource revenue in the extractive industries.
3 Johannesen and Larsen (Citation2016) described the key dates in the European legislative process that led to the adoption of the EPD requirement.
4 See Table 1 of Rauter (Citation2020, p. 10) for EPD implementation details for each adopting country.
5 See these links for more examples on payments to governments reports:
• Petra Diamonds (https://www.petradiamonds.com/wp-content/uploads/19-10-15-FY-2019-Payments-to-Government-Report-FINAL.pdf);
• Bisichi (https://s3.us-east-2.amazonaws.com/rp-20-sources/mandatory-disclosure-report-2e4be797d75102d4a03b101fc178ebb6);
• Polimetal International (https://www.polymetalinternational.com/upload/iblock/10b/2019_06_14_Report%20on-payments-to-governments-for-the-year-2018_eng.pdf)
6 To the best of our knowledge, only Joshi (Citation2020) focused on the economic consequences of private country-level disclosures under Action 13 of the OECD’s BEPS project. He found strong evidence of a decline in corporate tax avoidance, in the post implementation period of the private CbCR requirement. However, He found little evidence consistent with CbCR reduces affiliate-level income shifting.
7 Overesch and Wolff (Citation2021) defined exposed banks as those that should report, for the first time and under the new CbCR requirement, information about their activities in tax havens.
8 Under the ESTMA, Canadian firms operating in extractive industries should publicly disclose the payments made to all governments in Canada and abroad.
9 Rauter (Citation2020) defined disclosing firms as those that should publicly disclose extraction payments to governments.
10 See sample selection section for detailed discussion on the identification process of EPD disclosing firms.
11 As an additional analysis in Section 5, we used an alternative control group that is not subject to the EPD regulation during the observed period such as British firms from manufacturing industry listed on the FTSE All-Shares index. Results found are similar.
12 Companies House established a centralized repository that provides free access to all the EPD reports of UK-registered firms.
13 We exclude parent firms headquartered outside the UK because they are not necessarily subject to the British EPD regulation.
14 One of the main limitations of the UK ‘Companies House Extractive Service’ centralized repository is that it does not provide an exhaustive list of firms disclosing EPD reports, but you have to type company name to search for potential reports. That’s why to identify disclosing firms we first started looking for the list of UK firms reporting their payments to governments by accessing the ‘Natural Resource Governance Institute’ centralized repository.
15 These firms are ‘Lonmin’, ‘Rainbow Rare Earths’, ‘Energean’ and ‘Kazatomprom NAC’. ‘Lonmin’ announced, on November 2015, the admission of new shares to trading on the London Stock Exchange in 2015. ‘Rainbow Rare Earths’, ‘Energean’ and ‘Kazatomprom NAC’ became public interest entities on admission to trading on the London Stock Exchange in 2017, 2018 and 2018 respectively.
16 ‘Tullow Oil Plc’ states in page 171 of its annual report for the fiscal year 2015 that ‘The UK Regulations came into effect on 1 January 2015, but Tullow were early adopters of the EU Directive and have published our tax payments to governments in full, in its Annual Report and Accounts since 2013. The 2015 disclosure remains in line with the EU Directive and UK Regulations and we have provided additional voluntary disclosure on VAT, stamp duty, withholding tax, PAYE and other taxes’.
17 We can cite EPD reports of ‘Anglo Asian Mining’ and ‘Serabi Gold’ for the two fiscal years 2020 and 2021, EPD report 2020 for ‘Igas Energy’ and EPD reports of ‘Gemfields’ for the two fiscal years 2018 and 2021.
18 As an additional analysis in Section 5, we truncated all the three TA proxies between 0 and 1, and find results are similar.
19 A ‘Breusch -Pagan test’ for heteroscedasticity and a ‘Wooldridge test’ for autocorrelation indicate only the presence of heteroscedasticity problem.