Abstract
Tax authorities worldwide are implementing voluntary disclosure schemes to recover tax on offshore investments. The US and UK, in particular, have implemented such schemes in response to bulk acquisitions of information on offshore holdings, recent examples of which are the “Paradise” and “Panama” papers. Schemes offer affected investors the opportunity to make a voluntary disclosure, with reduced fine rates for truthful disclosure. Might such incentives, once anticipated by investors, simply encourage evasion in the first place? We characterize the investor/tax authority game with and without a scheme, allowing for the possibility that some offshore investment has legitimate economic motives. We show that a scheme increases net expected tax revenue, decreases illegal offshore investment and increases onshore investment, but could either increase or decrease legal offshore investment. The optimal disclosure scheme offers maximal incentives for truthful disclosure by imposing the minimum allowable rate of fine.
Highlights
An estimated 10% of world GDP is held in tax havens, much, though by no means all, of which goes unreported (Zucman 2013; Alstadsæter et al 2018)
As our model examines both the initial decision by the investor to evade, as well as the investor’s subsequent disclosure decision, it is closely associated with the literature investigating anticipated tax amnesties, by which we mean voluntary disclosure schemes run in the absence of new information, which offer investors reduced penalties if they wish to disclose an illegal offshore investment [see, e.g., Bayer et al (2015) and the references therein]
To the extent that tax authorities do care about the timing of tax receipts, not just their level, our results suggest that the implementation of a scheme is beneficial
Summary
An estimated 10% of world GDP is held in tax havens, much, though by no means all, of which goes unreported (Zucman 2013; Alstadsæter et al 2018). In the absence of a scheme, if an investor’s offshore investment is observed, the tax authority can, if it chooses, verify whether any tax is owed, but at a cost. If an investor does make a disclosure, they can either disclose their offshore investment to be illegal and pay the tax owed plus a fine at the incentivized rate, or disclose their investment as legal. Even if an investor decides not to make a disclosure within the scheme, the tax authority can choose to verify their investment and, where appropriate, levy fines. Tax authorities benefit from schemes: expected net revenue increases due to the additional voluntary compliance that occurs when some investors switch from investing offshore illegally to investing offshore legally.
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