Transparency and Tax Evasion: Evidence from the Foreign Account Tax Compliance Act (FATCA)
59 Pages Posted: 19 Sep 2017 Last revised: 20 Jun 2018
Date Written: June 6, 2018
We examine how increased reporting requirements for U.S. individuals with offshore accounts affect the location of hidden investment assets. Specifically, we study investment responses to the Foreign Account Tax Compliance Act (FATCA), which requires foreign financial institutions to provide information to the U.S. government regarding U.S. account holders. We document a $15.3 billion decrease in equity foreign portfolio investment to the U.S. from tax haven countries after FATCA implementation, consistent with a decrease in “round-tripping” investment activity attributable to U.S. investors’ offshore tax evasion activities. When testing total worldwide investment out of havens post-FATCA, we find a decline of $56.6-$78.0 since 2012. Additional tests provide evidence of increases in alternative investments not subject to FATCA reporting, such as residential real estate and artwork. Our study contributes to both the academic literature on tax evasion and the analysis of similar yet controversial regulation recently implemented by numerous countries around the world.
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