Withholding-tax non-compliance: the case of cum-ex stock-market transactions
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Withholding‑tax non‑compliance: the case of cum‑ex stock‑market transactions Thiess Buettner1,2 · Carolin Holzmann1 · Felix Kreidl1 · Hendrik Scholz1
© The Author(s) 2020
Abstract This paper explores withholding-tax non-compliance in the context of dividend taxation. It focuses on a specific type of stock-market transactions around ex-dividend dates, so-called “cum-ex” trades, which caused considerable revenue losses due to illegitimate tax refunds in Germany and other countries. We use a stylized model of the stock-market equilibrium to analyze the incentives of traders on the German stock market and find that cum-ex trades are only profitable for both buyer and seller in the presence of collusive tax fraud. Our empirical analysis of market data for publicly traded German stocks from 2009 to 2015 confirms that transaction numbers of stocks suitable for cum-ex trades show the expected increase shortly before exdividend dates in the period before the tax refunding was reformed. In line with the collusion hypothesis, effects on stock-market prices are not found. Keywords Tax compliance · Tax evasion · Withholding taxes · Collusion · Tax fraud · Tax refunding · Cum-ex trades · Ex-dividend date · Dividend taxes · Capital gains taxes JEL Classification H26 · G12
Previous versions of the paper were circulated under the title “Stock Market Behavior on ExDividend Dates: The Case of Cum-ex Transactions in Germany.” Electronic supplementary material The online version of this article (https://doi.org/10.1007/s1079 7-020-09602-9) contains supplementary material, which is available to authorized users. * Thiess Buettner [email protected] Felix Kreidl [email protected] Hendrik Scholz [email protected] 1
FAU (Friedrich-Alexander-Universität Erlangen-Nürnberg), Nürnberg, Germany
2
CESifo, München, Germany
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1 Introduction Withholding taxes are a key instrument to ensure tax enforcement. Also taxation of dividends strongly relies on withholding taxes. In 2015, 23 out of 34 OECD countries levied withholding taxes on dividend income (Milanez 2017). The instrumental role of these taxes for enforcement is obvious in the debate on tax havens (Johannesen and Zucman 2014). In the EU, for instance, the EU Savings Directive requires countries to either engage in an automatic information exchange, or to levy a withholding tax on income of investors which are domiciled in other European countries (Johannesen 2014). A characteristic of withholding taxes is that the remitter is not the statutory bearer of the tax. This reduces the incentive to evade taxes since the remitter does not directly benefit from evasion. However, the use of withholding taxes shifts the risk of non-compliance to the remitter (Slemrod 2008), and it may happen that taxes are not withheld or not remitted to the tax authorities. A further problem arises since withholding taxes are typically associated with a refundable tax credit: If no taxes have been withheld, tax refunding results in negative taxes
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