Tax information exchange with developing countries and tax havens

Julia Braun and Martin Zagler

Quiz: What do they have in common?

3

Outline • • • • • •

Introduction: DTTs and TIEAs A bargaining model The data Empirical Evidence Foreign Account Tax Compliance Act (Fatca) Conclusions 4

Motivation •

•

An inquisition into every man's private circumstances, and an inquisition which, in order to accommodate the tax to them, watched over all the fluctuations of his fortunes, would be a source of such continual and endless vexation as no people could support. [...] The proprietor of stock is properly a citizen of the world, and is not necessarily attached to any particular country. He would be apt to abandon the country in which he was exposed to a vexatious inquisition, in order to be assessed to a burdensome tax, and would remove his stock to some other country where he could either carry on his business, or enjoy his fortune more at his ease. By removing his stock he would put an end to all the industry which it had maintained in the country which he left. Stock cultivates land; stock employs labour. A tax which tended to drive away stock from any particular country would so far tend to dry up every source of revenue both to the sovereign and to the society. –

Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, 1776.

5

1950

© cpb

1960

© cpb

1970

© cpb

1980

© cpb

1990

© cpb

2000

© cpb

2011

© cpb

Double Tax Treaties with Information Exchange OECD

Asia

Arabia

OECD

496

381

189

437

Asia and Oceania

381

91

75

Middle East, North Africa, and Greater Arabia

189

75

Non-OECD Europe

437

Central and South America Sub-Saharan Africa Total

Africa

Total

141

147

1791

119

15

35

716

74

85

3

33

459

119

85

117

6

20

784

141

15

3

6

61

5

231

147

35

33

20

5

59

299

1791

716

459

784

231

299

2589

13

Europe America

Double Tax Treaties with Information Exchange OECD

Asia

Arabia Europe America

Africa

Total

OECD

78,7

34,1

26,3

45,0

12,3

10,5

29,9

Asia and Oceania

34,1

19,6

12,1

14,2

1,5

2,9

13,7

Middle East, North Africa, and Greater Arabia

26,3

12,1

38,9

15,7

0,5

4,2

13,2

Non-OECD Europe

45,0

14,2

15,7

33,3

0,7

1,9

17,0

Central and South America

12,3

1,5

0,5

0,7

12,2

0,4

4,3

Sub-Saharan Africa

10,5

2,9

4,2

1,9

0,4

8,0

4,6

Total

29,9

13,7

13,2

17,0

4,3

4,6

15,2

14

Double Tax Treaties with Information Exchange OECD Asia and Oceania Middle East, North Africa, and Greater Arabia

OECD

Asia

78,7

34,1

Arabia Europe America

Africa

Total

26,3

45,0

12,3

10,5

29,9

34,1 19,6 12,1 DTAs cover a large part of relationsships among 26,3 12,1 38,9 developed economies

14,2

1,5

2,9

13,7

15,7

0,5

4,2

13,2

Non-OECD Europe

45,0

14,2

15,7

33,3

0,7

1,9

17,0

Central and South America

12,3

1,5

0,5

0,7

12,2

0,4

4,3

Sub-Saharan Africa

10,5

2,9

4,2

1,9

0,4

8,0

4,6

Total

29,9

13,7

13,2

17,0

4,3

4,6

15,2

15

Double Tax Treaties with Information Exchange OECD

Asia

OECD

78,7

34,1

26,3

45,0

Asia and Oceania

34,1

19,6

12,1

Middle East, North Africa, and Greater Arabia

26,3

12,1

Non-OECD Europe Central and South America Sub-Saharan Africa Total

Africa

Total

12,3

10,5

29,9

14,2

1,5

2,9

13,7

38,9

15,7

0,5

4,2

13,2

45,0 for the 14,2 Except muslim15,7 world, there is a lower 12,3 of DTAs 1,5within 0,5 share developing regions than 10,5 developing 2,9 4,2 between economies and OECD.

33,3

0,7

1,9

17,0

0,7

12,2

0,4

4,3

1,9

0,4

8,0

4,6

17,0

4,3

4,6

15,2

29,9

Arabia Europe America

13,7

13,2

16

Double Tax Treaties with Information Exchange OECD

Asia

OECD

78,7

34,1

Asia and Oceania

34,1

19,6

Middle East, North Africa, and Greater Arabia

Arabia Europe America

Africa

Total

12,3

10,5

29,9

2,9

13,7

26,3

12,1 14,2 1,5 We will focus on these treaties 0,5 12,1 asymmetric 38,9 15,7

4,2

13,2

Non-OECD Europe

45,0

14,2

15,7

33,3

0,7

1,9

17,0

Central and South America

12,3

1,5

0,5

0,7

12,2

0,4

4,3

Sub-Saharan Africa

10,5

2,9

4,2

1,9

0,4

8,0

4,6

Total

29,9

13,7

13,2

17,0

4,3

4,6

15,2

26,3

17

45,0

A model of information exchange 1 • DTTs to avoid double taxation (League of Nations 1900s) • Information exchange without compensation (Global Forum on Tax Transparency) • Tax Information Exchange Agreements (Tax Havens) • Asymmetric treaties: – one capital donor (resident country: “Homeland”) – one capital receiver (source country: “Foreignnation”) – Costs of information accrue only to the source country 18

A model of information exchange 2 • q … information about one unit of tax base • C = c(q) … cost of procuring info (Foreignnation) – Direct costs: information collection and audit – Indirect costs: loss of withholding taxes, FDI – ranked from cheapest to most expensive: c’(q) ≥ 0

• τq … Gain from information to Homeland (tax τ) • c’(q) ≤ τ … rent from information sharing • [ppc = c’(q) = τ … perfect competition (MR = MC)] 19

A model of information exchange 3 • sH = (τ – p)q … rent for Homeland • sF = pq – c(q) … rent for Foreignnation • N = (sH)β(sF) = (τ – p)βqβ[pq – c(q)]

– Nash bargaining solution (Rubinstein 1982) – β … relative bargaining power of Homeland (> 0) – FOCs wrt q and p

• c’(q*) = τ … efficient bargaining (cf rent before) • p = [τ + βa(q*)]/(1 + β) … weighted average – τ … reservation price for Homeland – a(q*) = c(q)/q … average cost for providing information by F – p = 0 iff a(q*) = 0 and β ➛ ∞ … TIEA pricing of information 20

A model of information exchange 4 p c’(q) a2(q)

a1(q)

a0(q)

B

τ a(q*)

A

q0

q* 21

q

The Data • Panel 2005 – 2013, 4.158 country pairs – 1262 DTTs and 181 TIEAs – 34 OECD, 131 developing countries, 23 Tax Havens

• Dependent: treaty dummy (IBFD) • Explanatory: Compensation for information (thru Official development assistance ODA): novel point • Controls: The usual suspects – Big (Population, GDP); Different (∆GDP); Open (Trade, FDI)

• Controls: The not so usual suspects – Geography; Politics (Colony, language, corruption, tax haven) 22

Methods • Stata 13 • Probit panel (fully balanced): 9 years, 4158 obs – Coefficients, no average marginal effects (yet)

• Causality issue with FDI and DTT – A DTT could (should) lead to more FDI

• IV approach – Difference in schooling as an instrument for FDI – Based on Heckscher-Ohlin 23

Results 1: Extended Gravity Model ODA

(1)

(2)

(3)

(4)

** 0.0181 (2.42)

*** 0.0187 (3.28)

*** 0.0279 (3.06)

*** 0.0281 (4.02)

*** 5.116 (8.88)

*** 7.075 (2.84)

Tax Haven Geography

yes

yes

yes

yes

GDP (Σ, ∆)

yes

yes

yes

yes

Trade + FDI

FDI

FDI

FDI

Politics

Colony + language

Colony + language

Colony + language + corruption

Colony + language + corruption

Year FE

yes

yes

yes

yes

Open

24

Results 2: IV (5) FDI ∆Schooling

*** -0.460 (-5.34)

ln_fdi (IV) ODA

(5) Treaty

(6) FDI *** -0.368 (-4.22)

** 0.525 (2.44) 0.00817 (2.91)

(6) Treaty

** 0.0261 (2.21)

Tax Haven

0.351 (0.81) 0.0146 (1.62)

** 0.0425 (2.19)

*** 3.477 (8.14)

*** 5.249 (3.08)

Geography

yes

yes

yes

yes

GDP (Σ, ∆)

yes

yes

yes

yes

Politics

yes

yes

yes

yes

Year FE

yes

yes

yes

yes

25

Results 3: Separate Samples (7) LDCs

(8) Tax Havens

(9) LDCs (IV)

(10) Haven (IV)

*** 0.0703 (5.12)

-0.002 (-0.15)

*** 0.0797 (3.06)

0.0224 (0.56)

Geography

yes

yes

yes

yes

GDP (Σ, ∆)

yes

yes

yes

yes

Politics

yes

yes

yes

yes

Year FE

yes

yes

yes

yes

ODA

26

Fatca • Firms (Banks) forced to provide information to the US government about US nationals – Sanctions for non-compliance (f)

• sf = pq – ĉ(q) + f … rents for foreign firms – threat point in case of rejection: –f

• sH = (τ – p)q – h … rent for Homeland – Loss of business for the US valued at h

• p = [τ + βa(q*)]/(1 + β) + (h/q* – βf/q*)/(1 + β) – β most likely higher as US treats with firms, not gov’ts – Higher f lowers the price received for information 27

Conclusions • Information Exchange (Global Forum, TIEA, Fatca) may reduce corporate tax evasion • This comes at a cost for developing countries with large net inflows of capital • LDCs have managed to receive compensation thus far thru official development assistance • Fatca changes the bargain in favor of developed countries 28

Thank you for your attention!

Questions?