The Big Bang: Tax Evasion After Automatic Exchange of Information Under FATCA and CRS

ABSTRACT

After decades of ineffective attempts to fight tax evasion, the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS) recently implemented the first encompassing international exchange of tax-related information on an automatic basis. This is an important development because tax evasion contributes to rising socio-political inequality and political sovereignty losses. This article assesses the treaties’ impact on tax evasion by conducting a difference-in-difference analysis of cross-border asset data. The results show that the treaties are successful. Household assets in tax havens that are not hidden behind corporate identities are estimated to be 67 per cent lower than they would have been without automatic exchange of information. Furthermore, this reduction is not offset by an increase in treaty circumvention using identity concealment or asset shifting to non-compliant jurisdictions. FATCA and CRS thus implement the first effective international cooperation against tax evasion. The results imply that political globalisation is capable to mitigate the political sovereignty losses and rise of inequality caused by economic globalisation.

KEYWORDS:

• Automatic exchange of information
• tax evasion
• tax competition
• international political economy
• FATCA
• CRS

Acknowledgements

We thank Thomas Rixen, Lukas Hakelberg, Frank Bandau, Nikolaus Jopke, Simon Linder, Markus Meinzer and Miroslav Palansky for helpful comments and suggestions. We are also grateful for immensely helpful feedback from two anonymous reviewers and the editors of NPE, which led to a much-improved paper.

Disclosure Statement

No potential conflict of interest was reported by the authors.

Notes on Contributors

Leo Ahrens is a researcher and doctoral candidate at the University of Bamberg and the Horizon 2020 project ‘Combating Fiscal Fraud and Empowering Regulators’ (COFFERS). His work at the project focuses on the political and economic consequences of international cooperation against tax evasion. His research interests also include political economy, inequality and redistribution.

Fabio Bothner is a researcher and doctoral candidate at the University of Bamberg. Since 2017, he is a part of the Horizon 2020 project ‘Combating Fiscal Fraud and Empowering Regulators’ (COFFERS), where his research focuses on financial transparency and international tax cooperation. He is also interested in QCA, social networks and environmental policy.

Data Availability Statement

The authors confirm that all data that support the findings are publicly available. The sources are cited at the appropriate position in the text. The reference list contains the URLs.

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

1 Not all household investments in havens serve the purpose of evading taxes. Firstly, havens can also be used to hide assets obtained from criminal activity other than tax evasion, or to protect them from the reach of creditors. Secondly, a proportion of investments are duly declared to resident authorities. Lastly, the secure property rights offered by havens allow households to keep assets safe from political threats and unstable governance, as indicated by the large proportion of Venezuelan assets in tax havens (Alstadsæter et al. 2018).

2 Zucman (2013) derives the 50 per cent share from the finding that individuals own about $1.4 trillion in bank accounts in tax havens based on official Swiss National Bank statistics and anomalies in the international investment data of countries. These $1.4 trillion make up about half of total deposits in tax havens according to BIS data. The BIS data include debt instruments in addition to bank deposits, so we further assume that their household ownership share is identical. This approach is not optimal but the best available quantification.

3 Some countries institutionalised the CRS in bi- or multilateral treaties outside the MCAA. For example, the United Kingdom concluded agreements with its overseas territories and the EU concluded an agreement with Switzerland.

4 The data inconsistently refer to one of the following three points in time: (a) bilateral treaties that govern information exchange come into law, (b) the first information exchange or (c) the first year information is collected.

5 The effect size calculation is not straightforward because the dependent variable in the regression is logged. Furthermore, we rely on the assumption that 50 per cent of assets in tax havens belong to households. The causal effect is thus calculated by: $\left(\exp \left(\text{ß}\right)-1\right)/0.5$.

Additional information

Funding

This work was supported by the European Unions’ Horizon 2020 research and innovation programme 2014–2018 under [grant number 727145] – ‘Combatting Fiscal Fraud and Empowering Regulators’ (COFFERS).