Tax Havens, Tax Evasion and Tax Information Exchange Agreements in the OECD

Date01 June 2017
Published date01 June 2017
Tax Havens, Tax Evasion and Tax
Information Exchange Agreements
in the OECD
David M. Kemme
Fogelman College of Business and Economics, University of Memphis, Memphis, TN, USA
Bhavik Parikh
Gerald Schwartz School of Business, St. Francis Xavier University, Antigonish, Nova Scotia,
Tanja Steigner
School of Business, Emporia State University, Emporia, KS, USA
Using data on Foreign Portfolio Investment (FPI), we nd a positive relationship
between higher tax burden and OECD residentstax evasion, especially via tax
havens. Contrary to established investor preference for certain country
characteristics, we nd they are less important to tax evaders who value privacy
and want to remain undetected by their home tax authorities. We nd very limited
evidence that OECD Tax Information Exchange Agreements (TIEAS) reduce tax
evasion, controlling for other determinants of overall OECD FPI. Without the US
in the OECD sample, tax havens play a lesser role and OECD policies appear to
make a marginal impact.
Keywords: tax haven, tax evasion, foreign portfolio investment, tax information
exchange agreements, OECD
JEL classification: F38,G38,H26
We thank John Doukas and an anonymous referee for very helpful comments and
suggestions on an earlier draft.
European Financial Management, Vol. 23, No. 3, 2017, 519542
doi: 10.1111/eufm.12118
© 2017 The Authors. European Financial Management Published by John Wiley & Sons Ltd
This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and
reproduction in any medium, provided the original work is properly cited.
1. Introduction
With an estimated USD 190 billion per year in lost revenues, tax evasion via offshore tax
havens challenges tax authorities of many nations.
We provide empirical evidence of
OECD country residentstax evasion using the concept of round tripping, i.e., when
OECD residents funnel money through an undeclared offshore account and,
unbeknownst to their local tax authorities, subsequently reinvest back into their home
countrys capital market posing as a foreign investor.
Thus, as a result these OECD
residents (typically) pay a lower tax rate on their investment returns. For the period
20022013 we nd that foreign portfolio investment (FPI) ows increase with tax
benets from round tripping, which is an indirect measure of tax evasion.
For the entire
OECD sample we also nd that higher tax savings result in more FPI ows from tax
havens. This nding appears to be driven by US ows.
In addition to tax savings , what other factors might tax evaders value? We argue
that certain country char acteristics make collabo ration between tax author ities more
challenging, and are therefo re desirable for evasion. Genui ne investors want to
reduce information costs and pre fer investing in close-by countri es with which they
are familiar in terms of lan guage, legal system and cor ruption oversight (Chan et a l.,
2005; Gaston et al., 2005; Grinb latt and Keloharju, 2001; and Wei and Shleifer, 2000).
In the case of round tripping v ia tax havens, we nd opposite re sults where FPI ows
are positively related to gr eater distance, different le gal systems and greater
corruption. Different le gal systems and higher pote ntial corruption likely res ult in less
efcient information shari ng and subsequent detection o f tax evasion by the tax
authorities. This new ndin g adds to the existing literature by highlighting the ten acity
and persistence of tax evade rs.
The Organisation for Economic Co-operation and Development (OECD) addressed
its memberscall for measures against harmful tax competition in its 1998 report,
Harmful Tax Competition: An Emerging Global Issue (OECD, 1998), with
recommendations for legislation, tax treaties and intensied international cooperation.
Subsequently, the OECD developed a standard for Tax Information Exchange
Agreements (TIEAs), of which more than 800 were signed by 2013.
In addition to
TIEAs, the Council of the European Union introduced information exchange for taxation
of interest income between member states in 2003 (Council Directive 2003/48/EC), and
the European Union Savings Tax Directive (STD) implemented in 2005 provided a
multilateral institutional means of collecting taxes and exchanging information
See Grifth (2015). Approximately half of the global ows of foreign direct investment are
routed through offshore nancial centres (Palan et al., 2010; Palan and Nesvetailova, 2013),
and the accumulated private nancial wealth in registered offshore tax havens was estimated
to be between USD 21 and USD 32 trillion in 2010 (Henry, 2012).
A more in-depth explanation of round tripping is provided in the Background section below.
See Hanlon et al. (2015).
See also Dermine (1996).
Oversight of Tax Co-operation and Information Exchange is currently facilitated by the
OECDs Global Forum, consisting of 126 member jurisdictions and the European Union. See and
© 2017 The Authors. European Financial Management Published by John Wiley & Sons Ltd
520 David M. Kemme, Bhavik Parikh and Tanja Steigner

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