We investigate the effects of mandatory private Country-by-Country Reporting (CbCR) to European tax authorities on multinational firms' capital and labor investments, as well as their organizational structures. We exploit the threshold-based application of this 2016 disclosure rule to conduct difference-in-differences and regression discontinuity tests. We document increases in capital and labor expenditures in Europe, but these effects are more pronounced in countries with preferential tax regimes. Cross-sectional tests and analysis using consolidated financial data provide evidence consistent with multinational firms reallocating capital across Europe to mitigate increased tax enforcement risk, as well as with CbCR hindering capital investment efficiency. We also find evidence consistent with firms responding to CbCR by reducing organizational complexity. Collectively, our results support the conclusion that mandatory private CbCR causes firms to change real investment activities to substantiate their tax avoidance activities in Europe while reducing the appearance of aggressive tax practices.

We examine how exposure to international tax competition affects domestic firms’ employment. Consistent with prior work, we find evidence that reductions in foreign tax rates affect the domestic competitive environment via increases in import competition and investment in foreign-owned subsidiaries. We posit that these changes in the domestic competitive environment can cause managers to reduce their firms’ employment levels. Consistent with our expectation, we find that relative decreases in foreign tax rates negatively affect total labor compensation at domestic firms ex ante exposed to import competition and competition from foreign-owned peers. The effect of exposure to tax competition is greater for firms more exposed to product-market competition and those that are less able to expand investment without also increasing employment levels. Taken together, our results suggest that foreign tax rate changes can affect managers’ domestic employment decisions by changing the domestic competitive environment.