A victim of regulatory arbitrage? Automatic exchange of information and the use of golden visas and corporate shells

Abstract

The multilateral adoption of the automatic exchange of information (AEI) on bank accounts held by nonresidents was a breakthrough in the fight against cross-border tax evasion, which led to a substantial reduction in the value of bank deposits and investment portfolios in traditional tax havens. However, there is suspicion that sophisticated tax evaders engage in regulatory arbitrage of AEI provisions. We examine whether two widely discussed secrecy schemes, namely golden visas and anonymous trusts and shell corporations, have been used to circumvent information reporting. Relying on a difference-indifference design, we only find scattered evidence for use of the secrecy schemes. Overall, our results suggest that regulatory arbitrage is not yet widespread, but it seems to increase over time. We thus provide evidence for the current effectiveness of the AEI but also show that closing remaining loopholes is of utmost importance. We link our findings to debates about the (im)possibility of re-embedding neoliberal globalization.

Capital Taxation and International Cooperation

“…At least, our secondary finding points in this direction. Similar to the primary result, we find that portfolio investment from jurisdictions with opaque or non-existent trust and company registers into the Eurozone also increased while there is no corresponding effect on portfolio investment in the United Kingdom and United States or deposits in general (Ahrens et al 2020b). Next to a golden passport scheme, opaque trusts and shell companies may thus be a vital selling point for wealth managers in secrecy jurisdictions.…”

“…Our research shows that portfolio investment from jurisdictions with golden passport schemes into the Eurozone increased relative to investment from jurisdictions without such schemes after the adoption of the CRS. However, there is no comparable effect on portfolio investment into the United States and the United Kingdom, and no effect whatsoever on internationally held deposits (Ahrens et al 2020b).…”

Escaping the Exchange of Information: Tax Evasion Via Citizenship-by-Investment

“…Closest to our paper, Ahrens et al (2021) analyze whether tax evaders engage in regulatory arbitrage to circumvent tax information exchange from a political science perspective. They study citizenship-and residency-by-investment programs as well as anonymous trusts and shell corporations as options for such regulatory arbitrage.…”

“…In contrast to our paper, they find little evidence that CBI programs are used to circumvent tax information exchange. The fundamental difference in the results can be explained by several factors: First, Ahrens et al (2021) look at over forty citizenship-and residency-by-investment programs together, while we focus on a subset of "highrisk" CBI programs defined by the OECD. Second, they use a smaller sample, focussing on investments in twelve major financial markets, while we focus on investments in tax havens.…”

Tax Dynamics and Money Laundering:

“…Hiding assets becomes a legal construct again with so-called "golden passports", in which a person purchases a foreign nationality. The associated assets are then legally exempt from being reported by the "new home country" to the "original home country" (Ahrens et al, 2020).…”