Withholding Taxes, Compliance Cost and Foreign Portfolio Investment

Abstract

We examine the role of withholding taxes on foreign portfolio investment (FPI) and compliance frictions in obtaining foreign tax credits using data on bilateral FPI around the globe and on U.S. institutional investor’s foreign holdings. Exploiting variation in withholding tax rates for 36 investor countries and 110 issuer countries over 2008-2015, we find that, conversely to the intended design of the international tax system, withholding taxes adversely affect FPI because of high compliance costs to international investors in claiming foreign tax credits.

Keywords: Foreign portfolio investment, withholding taxes, shareholder taxation, home bias

JEL Classification: D25; G11; G25; H20; H24