716. Middle East, North. Africa, and Greater. Arabia. 189. 75. 74. 85. 3. 33. 459. Non-OECD Europe. 437. 119. 85. 117. 6
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?
