Tax Evasion Crackdown on US Minor Outlying Islands Leads to Shift in Investments

The Foreign Account Tax Compliance Act (FATCA) was implemented by the US government in 2010 to curb tax evasion by requiring foreign financial institutions to report on US account holders. A recent study has found that this effort has led to a significant decrease in equity investments from tax havens into the US, with a decline of 21% between 2012 and 2015.

Unintended Consequences of FATCA

While the regulation may have curbed individual tax evasion based on foreign financial accounts, it has also led to some unintended consequences. The study found that:

• Over six times as many people left the US in 2015 compared to 2006
• A shift from financial assets to alternative investments such as real estate and art works, which are not covered by FATCA

Recommendations for a Broader Approach

The authors of the study warn that changes in investment behavior may mitigate the effectiveness of FATCA. They recommend introducing broader reporting requirements to cover these alternative investments and further investigation into the effectiveness of regulatory interventions aimed at combating tax evasion.

Data Sources and Methods

The researchers used a range of data sources, including:

• US Treasury International Capital System
• IMF’s Coordinated Investment Portfolio Surveys
• IRS quarterly publications

They employed various regression analyses to identify trends in investment patterns before and after the implementation of FATCA.

Implications for Banking Secrecy and Tax Evasion in the US Minor Outlying Islands

The unique status of the US Minor Outlying Islands as offshore financial centers makes them vulnerable to abuse by individuals looking to evade taxes through secret bank accounts and shell companies. The study’s findings have implications for the broader issue of banking secrecy and tax evasion in these islands.

A Comprehensive Approach to Combating Tax Evasion

The authors argue that a comprehensive approach is needed to tackle tax evasion, including:

• Stricter regulations
• Increased transparency
• Cooperation between governments to combat banking secrecy and tax evasion in all its forms.