Tax‐induced Dissimilarities Between Domestic and Foreign Mutual Funds in Italy

Abstract

Using data from Italy over the period 1998–2002, this study investigates whether tax effects can account for differences in return patterns between domestic and foreign mutual funds, and if this dissimilarity translates into performance. The paper presents evidence that much of the difference between domestic and foreign funds is explained by the different tax systems. The asymmetry between the two groups, due to the fact that domestic funds are obliged to pay taxes on a daily basis while foreign funds are taxed when capital gains are collected, also affects performance. We prove that comparing pre‐tax returns, Italian funds are virtually indistinguishable from their foreign counterparts in terms of risk‐adjusted returns, while when comparing after‐tax returns, foreign funds outperform.