Transparency and Tax Evasion: Evidence from the Foreign Account Tax Compliance Act (FATCA)
50 Pages Posted: 19 Sep 2017
Date Written: September 15, 2017
We examine how increased reporting requirements for U.S. individuals with offshore assets affect the location of hidden investment assets. Specifically, we study the Foreign Account Tax Compliance Act (FATCA). FATCA requires foreign financial institutions to provide information to the U.S. government regarding U.S. account holders for the purpose of reducing offshore tax evasion. Using annual country-level data on investments in U.S. securities by foreign account holders from 2006 to 2015, we document a significant decrease in foreign portfolio investment to the U.S. from tax haven countries after signing on to FATCA, consistent with a decrease in “round-tripping” investment activity attributable to U.S. investors’ offshore tax evasion activities. However, we also find weak evidence of an increase in the amount of investment out of tax haven countries that did not agree to exchange information. These results suggest that some U.S. investors with hidden offshore assets moved assets to other countries that provide secrecy, thus enabling these investors to continue to evade U.S. tax liabilities. Our study contributes to both the academic literature on tax evasion as well as the analysis of similar yet controversial regulation being contemplated by numerous countries around the world.
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