From the EU Savings Directive to the US FATCA, Taxing Cross Border Savings Income

This paper is motivated by the recent innovations regarding the taxation of cross-border savings that took place in the European Union and the United States. We develop a model to assess the functioning of the different systems of international taxation used on both sides of the Atlantic Ocean. We consider agents as investors able to diversify their portfolio between countries and kinds of financial assets. Furthermore, we show the effects of the various settings investigated not only on the taxation of foreign savings income, but also on the tax rates applied to domestic savings. Finally, comparing the respective merits of diverse regimes of information exchange and coordinated withholding taxation, we explore the consequences of the loopholes in both the EU Savings Directive and the US Qualified Intermediary mechanism, and cope with the cost of information sharing. We find that only three tax designs ensure efficiency: a framework of taxation based on the principle of residence, perfect information exchange for all substitutable assets and strategies, and a system of withholding taxation where the residence country can choose the withholding tax rate and also receives all the withholding tax revenues collected abroad.