Faculty of Economics and Business Administration Publications Database

Interest Income Tax Evasion, the EU Savings Directive and Capital Market Effects

Klautke, Tina
Volume: 31
Number: 1
Pages: 151 - 170
Month: March
ISSN-Print: 0143-5671
Link External Source: Online Version
Year: 2010
Keywords: Savings Directive; Interest Taxation; Tax Capitalisation; Andorra; Austria; Belgium; Luxembourg; Liechtenstein; Monaco; San Marino; Switzerland
Abstract: The EU Savings Directive has been celebrated as a major political breakthrough in coordinating taxation in Europe. Against this background, the present paper evaluates the real-world effects of this directive. The directive has left a loophole by providing grandfathering (exemption from withholding tax) for some securities. In this paper, we compare the pre-tax returns of exempt bonds and comparable taxable bonds. If working around the Savings Directive is difficult for income tax evaders in Europe, then investors should be willing to pay a premium for bonds that are exempt from the withholding rate. Conversely, if such a premium is absent, then this suggests that the supply of existing loopholes (exempt bonds included) is large enough to allow tax evaders to continue evasion at no additional cost. The findings of our study are in line with this latter interpretation.