Part 1 - AL-Tax

Chapter 10international tax evasion cannot be fully stemmed; As long as there is one taxhaven outside the grand coalition, all funds could (in theory) be diverted to thatsole remaining tax haven.Complete country coverage is unlikely to be an economically meaningful outcomebecause both governments and investors will conduct a dynamic cost-benefitanalysis. Foreign investors will factor in security concerns; The risk of losing theirfunds through bank default makes it less attractive for tax evaders to deposit fundsin financial centers without a proven track record. Investors’ transactions costs – forexample, travel and communication costs – are also a determinant in such costbenefitanalysis. Tax evaders are therefore less inclined to deposit funds at largerdistances. In addition to the factors mentioned in section 10.3.1, governments mayrefrain from joining an information-sharing agreement because of bank secrecyrules. For information exchange to be effective, however, it is important that keyfinancial centers and tax havens participate in an agreement. The EU savings taxdirective, therefore, has concluded ‘equivalent measures’ with five outside taxhavens (see section 10.4.2).10.3.3 Alternative instrumentsIt was argued above that tax information sharing buttresses the enforcement ofthe residence principle. What other instruments are available to tax cross-bordersavings income? How do they compare in terms of efficiency and equity?Nonresident withholding taxes are a widely used and administratively simpleway of taxing cross-border income flows. Under withholding, taxes on interestincome (set by the source country) are collected by financial institutions (commercialbanks, insurance and trust companies, etc.) rather than being determinedthrough self-assessment by individual taxpayers. But, unless all countries imposethe same withholding tax rate, withholding suffers from the disadvantage of distortinginvestments in favor of locations with low effective tax rates. Taxationthrough withholding at source typically makes tax competition more aggressive,tending to lead to Nash equilibrium tax rates below the socially efficient level.Indeed, as shown by Huizinga and Nicodème (2004), the average (statutory) withholdingtax imposed on nonresidents for a group of 19 OECD countries has fallengradually from 0.40% in 1992 to 0.18% in 2000.A second feature of withholding taxes is that they allocate revenue – in the oppositedirection of the residence principle – to the country in which the income isgenerated, which is not a source of inefficiency in itself but runs counter toapparently widely held notions of inter-nation equity. Note that crediting of249