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Economic Effects of Simplified Procedures for Claiming Cross-Border Tax Reliefs

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Abstract

We examine the effect of compliance frictions in reclaiming foreign withholding taxes on Foreign Portfolio Investments (FPI) using a comprehensive panel of FPI stocks of 83 countries, including EU Member States, between 2005 and 2019 and country-pair-specific withholding tax rates. We find a negative and statistically significant elasticity of the FPI stock of equity and debt holdings to non-refundable withholding taxes. The estimated elasticities imply that a 10 percentage point reduction in non-refundable withholding taxes increases the FPI stock of equity holdings by 8.2%. In a second step, we employ a general equilibrium model to quantify the macroeconomic implications of compliance frictions. In absence of costs in the withholding tax reclaim process, average GDP in the EU27 countries would increase by 0.10%, capital and wages would rise by 0.21% and 0.06%, respectively, suggesting noticeable macroeconomic costs arising from such compliance frictions.

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  • FATICA Serena & PYCROFT Jonathan & STASIO Andrzej Leszek & STOEHLKER Daniel, 2023. "Economic Effects of Simplified Procedures for Claiming Cross-Border Tax Reliefs," JRC Working Papers on Taxation & Structural Reforms 2023-09, Joint Research Centre.
    • Handle: RePEc:ipt:taxref:202309
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    1. Weidner, Martin & Zylkin, Thomas, 2021. "Bias and consistency in three-way gravity models," Journal of International Economics, Elsevier, vol. 132(C).
    2. Pitt, Mark M & Slemrod, Joel, 1989. "The Compliance Cost of Itemizing Deductions: Evidence from Individual Tax Returns," American Economic Review, American Economic Association, vol. 79(5), pages 1224-1232, December.
    3. Youssef Benzarti, 2020. "How Taxing Is Tax Filing? Using Revealed Preferences to Estimate Compliance Costs," American Economic Journal: Economic Policy, American Economic Association, vol. 12(4), pages 38-57, November.
    4. Nabeshima, Kaoru & Obashi, Ayako & Kim, Kunhyui, 2021. "Impacts of additional compliance requirements of regulations on the margins of trade," Japan and the World Economy, Elsevier, vol. 59(C).
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    More about this item

    JEL classification:

    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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