Transparency and Tax Evasion: Evidence from the Foreign Account Tax Compliance Act (FATCA)

Abstract

We examine how U.S. individuals respond to regulation intended to reduce offshore tax evasion. The Foreign Account Tax Compliance Act (FATCA) requires foreign financial institutions to report information to the U.S. government regarding U.S. account holders. We first document an average $7.8 billion to $15.3 billion decrease in equity foreign portfolio investment to the United States from tax-haven countries after FATCA implementation, consistent with a decrease in "round-tripping" investments attributable to U.S. investors' offshore tax evasion. When testing total worldwide investment out of financial accounts in tax havens post-FATCA, we find an average decline of $56.6 billion to $78.0 billion. We next provide evidence of other important consequences of this regulation, including increased expatriations of two anonymous investors for providing institutional insight. We also appreciate helpful comments from two anonymous referees, Neviana Petkova (discussant), Sonja Rego (discussant),

Tax Evasion and Incomplete Tax Transparency

“…De Simone et al (2018) show evidence consistent with U.S. taxpayers reducing their cross-border investments from tax havens in response to FATCA. Some tax evaders voluntarily disclosed their previously undeclared funds.…”

“…Some tax evaders voluntarily disclosed their previously undeclared offshore funds. However, it is possible that other tax evaders have not been deterred or caught by AEOI because they shifted their undeclared offshore financial assets to other tax evasion channels that are not subject to AEOI (De Simone et al 2018).…”

“…The experience with AEOI teaches important lessons about limited tax transparency. Blocking some tax evasion opportunities but not others may result in a limited effect on the overall tax evasion as many tax evaders could take advantage of the tax evasion opportunities still available (De Simone et al 2018). The benefit of reporting regimes and other measures that do not lead to complete tax transparency might not justify the cost of such measures.…”

Hidden Treasure

“…Prior work tends to focus on the effect of specific EOI agreements. For instance, Johannesen (2014) analyzes the effect of the EU's Savings Directive, Johannesen and Zucman (2014), henceforth JZ2014, examine the effect of the Savings Directive and EOIR, De Simone, Lester and Markle (2018) investigate the effect of FATCA on round-tripping and Casi, Spengel, and Stage (2018), henceforth CSS2018, analyze the effect of the Common Reporting Standard (CRS). 6 These studies use data covering between 3 and 13 years, and consistently find that EOI exerts some influence on foreign-owned deposits.…”

“…For similar empirical strategies seeMenkhoff and Miethe (2017) andDe Simone, Lester and Markle (2018).41 The present analysis shies away from an analysis of round-tripping investment via portfolio assets or direct investment in the resident country via shell structures in offshore jurisdictions, since our dataset only covers cash deposits. For an analysis of the same phenomenon conceptually using non-deposit investment vehicles, seeHanlon et al (2015) andHemmerich and Heckemeyer (2018).…”