Withholding Taxes, Compliance Cost and Foreign Portfolio Investment

Abstract

We examine the role of withholding taxes on foreign portfolio in-vestment (FPI) and compliance frictions in obtaining foreign tax cred-its using data on bilateral FPI around the globe and on U.S. institu-tional investor’s foreign holdings. Exploiting variation in withholding tax rates for 36 investor countries and 110 issuer countries from 2008 to 2015, we find that, conversely to the intended design of the interna-tional 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