Part 1 - AL-Tax

Chapter 10owner. Due to tax crediting, the power of taxation of cross-border income is effectively sharedbetween the residence and source countries.6. As Keen and Ligthart (2006a) pointed out, the Diamond–Mirrlees theorem is silent on equityissues. It does not specify whether the revenue from the residence tax should accrue to thesource or residence country.7. It is safe – and common practice in the literature – to assume that residents do not report theirincome to the tax authorities at all, turning the residence system (without information sharing)into effectively a pure source tax system.8. The Mutual Assistance directive (concluded in 1977) is a multilateral instrument providing forthe sharing of information on direct and indirect taxes among EU authorities. See Keen andLigthart (2006a) for further details.9. In an overview on the economics of reciprocity, Fehr and Gächter (2000) concluded that there issome disagreement about its determinants. Generally, three determinants are important: Equitymotives, boundedly rational behavior, and the reward to kind intentions.10. A solution is to let the information-providing country share in the additional revenue obtainedby the information receiving (or residence) country (see section 10.3.1).11. In a world in which explicit revenue transfers are feasible, which in practice is difficult thoughnot infeasible (see section 10.4.2), the residence country may want to claim back (part of) the taxcredit from the source country.12. This requires that the tax categories under consideration are administered by a single tax administrationor, if administered by different administrations, assumes a great deal of cooperationbetween them.13. Luxembourg and Austria have bank secrecy regulations, which are moderately strong in the caseof Austria. In Belgium, bank secrecy is not explicitly written down, but is observed as a tradition.14. The minimum amount of information typically consists of: Interest income earned, accountnumber, identity and residence of the beneficial owner, and contact information of the payingagent. Under the ‘know-your-customer’ rules of anti-money laundering legislation, commercialbanks have already collected the identity and residence of their customers.15. In addition to these two pure regimes, a third regime is theoretically possible (but nonexistentin practice) in which a Member State applies a combination of automatic information sharingand a (source-type) withholding tax on interest paid to nonresidents.16. QIs levy a withholding tax provided by the tax treaty between the USA and the respective countryof source and transfer the proceeds to the IRS. In this case, the withholding tax rate is determinedby the residence country and revenue-sharing amounts to 100% (rather than the 75%specified by the EU savings tax). Gérard (2005) proposed a QI-like system as an alternative to theEU savings tax.17. Tax fraud (a criminal tax matter) is loosely defined to include the intentional violation of a legalrequirement concerning the accurate reporting, determination, or collection of tax. The definitionof tax fraud varies by country. Switzerland, for example, employs a much narrower definitionthan that employed in the average EU country (see OECD, 2000).18. Tax avoidance – reducing one’s tax liability within the boundaries of the law – should be distinguishedfrom tax evasion, which involves illegal behavior.19. Masquerading as nonresidents will not be that easy, although there is evidence that it is a relevantconcern in the design of tax policy (Keen and Ligthart, 2005). An individual who claims to263