Withholding Taxes, Compliance Cost and Foreign Portfolio Investment

46 Pages Posted: 23 Apr 2020 Last revised: 11 Mar 2022

See all articles by Martin Jacob

Martin Jacob

WHU - Otto Beisheim School of Management

Maximilian Todtenhaupt

Norwegian School of Economics (NHH)

Date Written: March 30, 2020

Abstract

We examine the effect of compliance frictions in reclaiming foreign withholding tax overpayments on foreign portfolio investment (FPI) using data on bilateral FPI around the globe and on U.S. institutional investors’ foreign holdings. Exploiting variation in withholding tax overpayments for 36 investor countries and 110 issuer countries, we find that withholding tax overpayments adversely affect FPI because of the high compliance costs to international investors in claiming foreign tax credits. Cross-sectional tests further show that the adverse effect of withholding tax overpayments on FPI is reduced when compliance costs in claiming these overpayments from foreign countries are lower. Our results indicate that eliminating most of the compliance costs in the reclaim process by implementing a relief at source mechanism could increase FPI by about 7.6%.

Keywords: Foreign portfolio investment, compliance cost, withholding taxes, dividend taxation

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

Suggested Citation

Jacob, Martin and Todtenhaupt, Maximilian, Withholding Taxes, Compliance Cost and Foreign Portfolio Investment (March 30, 2020). Available at SSRN: https://ssrn.com/abstract=3564149 or http://dx.doi.org/10.2139/ssrn.3564149

Martin Jacob

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
D-56179 Vallendar, 56179
Germany

HOME PAGE: http://www.whu.edu/steuer

Maximilian Todtenhaupt (Contact Author)

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway

HOME PAGE: http://https://sites.google.com/view/todtenhaupt

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
212
Abstract Views
1,043
rank
200,845
PlumX Metrics