How Effective is the European Union’s Savings Tax Directive? Evidence from Four EU Member States
Journal of Common Market Studies, Forthcoming
31 Pages Posted: 20 Feb 2011
Date Written: February 10, 2011
This paper examines the strategies employed by individual investors to evade cross-border capital income taxation, and it evaluates the effectiveness of the EU Savings Tax Directive (STD). Using data for four European countries our results are as follows: First, individual investors adapted to the institutional changes implemented by the STD before it became effective in 2005. Second, we find that the strategy of reallocating assets from debt to equity products in the same country is more important than shifting portfolio capital out of cooperating countries into third countries. Third, countries opting for a retention tax did not experience an outflow of portfolio capital, whereas countries engaged in information exchange lost capital relative to third countries outside the scope of the STD. Finally, there is considerable heterogeneity across countries. While we find strong behavioral responses by French investors, we did not find evidence of cross border tax evasion by Italian investors, which may be explained by the absence of a national automatic reporting system on capital income in Italy. Overall, our findings show that the STD does not effectively prevent tax evasion and thus lend support to calls for tightening the directive.
Keywords: EU Savings Tax Directive, Tax Evasion
JEL Classification: F23, H25
Suggested Citation: Suggested Citation