Part 1 - AL-Tax

Chapter 10regime; 26 jurisdictions (65 percent) share tax information automatically and 14apply a withholding tax and share its revenues. It can be seen that relatively largecountries (in terms of population size or surface area) have opted to operate aninformation-sharing regime. The average population size of information-sharingcountries is 17 million against 1.9 million for the jurisdictions levying a withholdingtax. If the three EU Member States in the transition regime are excluded,the average population size of countries with a withholding regime drops to0.7 million. Removing Switzerland reduces the average population size to 62,400.These countries are thus dot sized. Similarly, in terms of square kilometersfound, the average size of information sharing jurisdictions is 147,000 squarekilometers versus 11,500 square kilometers in the withholding regime. Biggercountries are not necessarily wealthier if measured by GDP per capita. A smallcountry like Liechtenstein has, with US$101,600, the highest GDP per capita ofall savings tax jurisdictions, which is substantially above the average ofUS$27,430 for all savings tax jurisdictions. It is noteworthy that countries in thewithholding regime – which are on average smaller – feature a higher per capitaGDP than countries in the information-sharing regime.10.4.3 Effectiveness of the EU savings taxThe most obvious way for EU residents to avoid 18 the EU savings tax is to relocatetheir funds to source countries not participating in the EU savings tax or torelocate themselves to residence countries not participating in the savings tax. Ofcourse, emigration involves high transactions and emotional costs to tax evaders,which, on the margin, are unlikely to outweigh the benefits. A more profitable strategyfor EU residents is to masquerade as nonresidents (in some cases, if need be,by round-tripping their funds through intermediaries abroad), 19 which amountsto outright tax evasion. Evidently, the tax elasticity of bank deposits and financialcapital more generally is larger than that of labor, and therefore the focus is on theformer in the following discussion.Some observers in policy circles claim that important financial centers such asCanada, Hong Kong SAR, Japan, and Singapore should be added to the list of countriesparticipating in the EU savings tax to make the arrangement effective (seeWeiner, 2002). To investigate this claim, Table 10.4 has been constructed. 20 Column4 calculates the GDP share of external deposits of nonbank investors for 39 jurisdictionsas reported by the BIS. In the sample, on average, external deposits amountto 12.9% of GDP. Of 39 cases, nine jurisdictions have an external deposits-to-GDPshare exceeding 100%, being an indicator of their position as key financial centers.257