Transparency and Tax Evasion: Evidence from the Foreign Account Tax Compliance Act (FATCA)

ABSTRACT We examine how U.S. individuals respond to regulation intended to reduce offshore tax evasion. The Foreign Account Tax Compliance Act (FATCA) requires foreign financial institutions to report information to the U.S. government regarding U.S. account holders. We first document an average $7....

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Published inJournal of accounting research Vol. 58; no. 1; pp. 105 - 153
Main Authors DE SIMONE, LISA, LESTER, REBECCA, MARKLE, KEVIN
Format Journal Article
LanguageEnglish
Published Chicago Blackwell Publishing Ltd 01.03.2020
Subjects
automatic exchange of information
Compliance
Crime
cross‐border deposits
F42
Financial institutions
Foreign Account Tax Compliance Act 2010-US
H24
H26
investment
Investments
M48
offshore locations
Policy analysis
Real estate
Regulation
Tax evasion
Tax havens
Taxation
Transparency
United States > US
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Summary:ABSTRACT We examine how U.S. individuals respond to regulation intended to reduce offshore tax evasion. The Foreign Account Tax Compliance Act (FATCA) requires foreign financial institutions to report information to the U.S. government regarding U.S. account holders. We first document an average $7.8 billion to $15.3 billion decrease in equity foreign portfolio investment to the United States from tax‐haven countries after FATCA implementation, consistent with a decrease in “round‐tripping” investments attributable to U.S. investors’ offshore tax evasion. When testing total worldwide investment out of financial accounts in tax havens post‐FATCA, we find an average decline of $56.6 billion to $78.0 billion. We next provide evidence of other important consequences of this regulation, including increased expatriations of U.S. citizens and greater investment in alternative assets not subject to FATCA reporting, such as residential real estate and artwork. Our study contributes to both the academic literature and policy analysis on regulation, tax evasion, and crime.
Bibliography:Accepted by Christian Leuz. We thank Peter Barnes, Brandi Caruso, Peter Cotorceanu, Richard Harvey, Susan Segar (discussant), Devon Youngblood, John Zarobell, and two anonymous investors for providing institutional insight. We also appreciate helpful comments from two anonymous referees, Neviana Petkova (discussant), Sonja Rego (discussant), Jake Thornock (discussant), Andrew Belnap, Patty Dechow, Omri Even Tov, Michelle Hanlon, Stefan Huber, Alastair Lawrence, Jim Omartian, Joel Slemrod, and workshop participants at Iowa State University, Santa Clara University, the 2017 National Tax Association Annual Conference, 2017 Stanford‐Berkeley Joint Seminar, the 2018 University of California–Davis Accounting Research Conference, the University of Illinois Symposium on Tax Research XV, and the 2018 Norwegian Tax Accounting Symposium. An online appendix to this paper can be downloaded at
http://research.chicagobooth.edu/arc/journal-of-accounting-research/online-supplements
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SourceType-Scholarly Journals-1
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ISSN:0021-8456
1475-679X
DOI:10.1111/1475-679X.12293