Part 1 - AL-Tax

Chapter 10The desire to maintain equity in the net benefit allocation across countries couldpotentially explain this practice. 9 Since tax authorities do not receive any directcompensation, they have little incentive to give priority to foreign informationrequests, 10 reducing its timeliness value. In addition, no formal (financial) penaltiesexist to punish noncomplying countries. Instead, countries could punisheach other by not reciprocating future information requests by the noncomplyingcountry or by not cooperating with that country on other policy issues (so-calledissue linkage).10.3 The theoretical literatureThe key challenge is to explain why any capital-importing country may choose toprovide voluntarily tax information to capital-exporting countries. By supplyingtax information, the capital-importing country helps the capital-exporting countryto enforce its capital income tax law, thereby making itself a less attractiveplace to foreign portfolio investors. As a result, information-supplying countrieswill lose banking business – and the associated banking profits – and, if theyoperate a nonresident withholding tax, also experience a loss of public revenue.Furthermore, the capital-importing country incurs administrative costs related toinformation gathering and transmission for which it does not receive any financialcompensation from the information-requesting country. Trade in tax informationis thus a form of gift exchange between countries. Accordingly, small, taxhaven jurisdictions – typically, net capital importers, reflecting their low capitalincometax rates – would be net exporters of information and thus have least togain. By the same token, there is a presumption that tax information will beunder-supplied in a decentralized equilibrium.10.3.1 Reasons for information sharingThe theoretical literature uses small game-theoretic models – of a partial equilibriumnature – to study tax information and revenue sharing between countries.Table 10.1 summarizes the main model characteristics. In general terms, theframeworks differ by assumptions made on the number of countries included,the size of countries (symmetric versus asymmetric), the game structure (oneshotversus infinitely repeated games), and the presence of tax restrictions(whether a full range of taxes can be optimized). The literature identifies four circumstancesunder which countries may indeed find it in their interest to supply tax245