Tax Enforcement in a Globalized Economy

Last registered on October 28, 2021

Pre-Trial

Trial Information

General Information

Title
Tax Enforcement in a Globalized Economy
RCT ID
AEARCTR-0008351
Initial registration date
October 27, 2021

Initial registration date is when the trial was registered.

It corresponds to when the registration was submitted to the Registry to be reviewed for publication.

First published
October 28, 2021, 12:40 PM EDT

First published corresponds to when the trial was first made public on the Registry after being reviewed.

Locations

Region

Primary Investigator

Affiliation
university of copenhagen

Other Primary Investigator(s)

PI Affiliation
university of copenhagen
PI Affiliation
university of copenhagen
PI Affiliation
university of copenhagen
PI Affiliation
UC Berkeley

Additional Trial Information

Status
In development
Start date
2021-05-18
End date
2023-07-01
Secondary IDs
Prior work
This trial does not extend or rely on any prior RCTs.
Abstract
To combat offshore tax evasion, a large number of countries have agreed to exchange bank information about financial assets and income. In collaboration with the Danish tax authorities, we conduct a study of this enforcement policy. We first identify taxpayers whose self-reported foreign financial income is significantly smaller than the corresponding income categories reported by foreign banks. We then randomly select taxpayers for a “treatment group” who will be subject to a targeted tax audit and a “control group” who will not be subject to a tax audit. The main goal of the experimental intervention is to estimate the effect of a targeted tax audit on subsequent compliance.
External Link(s)

Registration Citation

Citation
Boas, Hjalte Fejerskov et al. 2021. "Tax Enforcement in a Globalized Economy." AEA RCT Registry. October 28. https://doi.org/10.1257/rct.8351
Experimental Details

Interventions

Intervention(s)
The intervention is a targeted tax audit focused on foreign interest and dividend income performed by the Danish tax authorities. The tax authorities will request information from the taxpayer about foreign financial assets and income to determine to what extent the tax liabilities have been assessed correctly, and collect any additional taxes due. If the taxpayer does not furnish the requested information, the tax authorities may obtain it by taking contact to foreign financial institutions or foreign tax authorities.
Intervention Start Date
2021-10-04
Intervention End Date
2022-08-31

Primary Outcomes

Primary Outcomes (end points)
The goal of the experiment is to estimate the effect of the audits on subsequent taxpayer compliance. The main outcome captures the potentially non-compliant CRS/FATCA income:

• Discrepancy between foreign interest and interest income as reported by foreign banks under CRS/FATCA and self-reported on the tax return
Primary Outcomes (explanation)

Secondary Outcomes

Secondary Outcomes (end points)
We further consider outcomes that allow for a decomposition of the main outcome by income type and bank-reports vs self-reports as well as secondary outcomes that capture spill-overs to non-treated and total tax consequences (see explanations under design):

• Discrepancy foreign interest income (CRS+FATCA reports and tax return)
• Self-reported foreign interest income (tax return)
• Bank-reported foreign interest income (CRS+FATCA reports)
• Discrepancy foreign dividend income (CRS+FATCA reports and tax return)
• Self-reported foreign dividend income (tax return)
• Bank -reported foreign dividend income (CRS+FATCA reports)
• Self-reported foreign dividend and interest income (tax return)
• Bank -reported foreign dividend and interest income (CRS+FATCA reports)
• Self-reported foreign capital gains / losses (tax return)
• Self-reported total foreign capital income (tax return)
• Taxes paid (tax return)
Secondary Outcomes (explanation)

Experimental Design

Experimental Design
Through the Common Reporting Standard (CRS) and the Foreign Account Tax Compliance Act (FATCA), the Danish tax authorities receives information from foreign banks about the financial assets and income of Danish taxpayers in foreign banks.

We measure, for each taxpayer, the potential underreporting of foreign dividends and interest income as the discrepancy between foreign income reported by banks under CRS and FATCA and the foreign income reported by the taxpayers themselves.

We stratify the sample of taxpayers into three groups by the size of their discrepancies:
• “Top group”: the 100 tax payers with the largest discrepancies
• “Middle group”: the 1000 tax payers outside the top group with the largest discrepancies
• “Bottom group”: All other tax payers with discrepancies larger than DKK 5,000

We randomly select 264 taxpayers from the “Middle group” and 136 taxpayers from the “Bottom group” for the audit intervention (Treatment group of 400 taxpayers). We randomly select the same number of taxpayers from each group for a control group, which is not audited (Control group of 400 taxpayers). In addition, we randomly select a buffer group of 66 taxpayers from the Middle group and 34 from the Bottom group (total of 100 taxpayers).
The tax authority should include taxpayers from this buffer group in the treatment group if the audits are less costly than expected. All 100 taxpayers in the “Top group” are selected for audit; however, as there is no comparable control group for these individuals, we will not use these observations when we estimate the effect of the intervention. Taxpayers in the middle and bottom group who are not selected for either the treatment group (including the buffer) or the control group may or may not be audited depending on the normal procedures of the tax authorities and we will not use these observations when we estimate the effect of the intervention. The number of taxpayers selected from each group is chosen to minimize the variance on the estimate of aggregate non-compliant income reported by foreign banks under CRS and FATCA (see below).

The Danish tax authorities conduct targeted audits focused on foreign interest and dividend income on the taxpayers in the Treatment group. The audits started on 4 October 2021. We expect them all to be initiated by 31 December 2021 and to be complete by 31 August 2022 although some uncertainty remains about these dates.

The goal of the experiment is to estimate the effect of the targeted audit on subsequent taxpayer behavior as observed on self-reported income and reports from foreign banks under CRS and FATCA in 2022. The main outcome reflects potentially non-compliant CRS/FATCA income:
• Discrepancy between foreign interest and interest income as reported by foreign banks under CRS/FATCA and self-reported on the tax return

We also investigate the effect on the following outcomes, which allows for a decomposition of the main outcome by income type and bank-reports vs self-reports:
• Discrepancy foreign interest income (CRS+FATCA reports and tax return)
• Self-reported foreign interest income (tax return)
• Bank-reported foreign interest income (CRS+FATCA reports)
• Discrepancy foreign dividend income (CRS+FATCA reports and tax return)
• Self-reported foreign dividend income (tax return)
• Bank -reported foreign dividend income (CRS+FATCA reports)
• Self-reported foreign dividend and interest income (tax return)
• Bank -reported foreign dividend and interest income (CRS+FATCA reports)

Finally, we will also consider the following secondary outcomes, which capture potential compliance spill-overs to other foreign income classes (e.g. capital gains) as well as the total tax consequences of the intervention:
• Self-reported foreign capital gains / losses (tax return)
• Self-reported total foreign capital income (tax return)
• Taxes paid (tax return)

As the sample is relatively small and the distribution of raw amounts is likely to be heavily skewed, we will consider outcomes expressed as raw amounts as well as alternative transformations:
• Logarithm / Inverse hyperbolic sine
• Indicators capturing the extensive margin (e.g. any foreign interest income)

We will also use the data collected in the context of the audits for other purposes. First, we will use it to estimate how much of the income reported by foreign banks under CRS and FATCA is non-compliant. We will do this by scaling up the non-compliant income found in the audits to population level by applying sampling weights. Second, for the cases where the audits find that the discrepancy between foreign income reported by banks under CRS and FATCA and the foreign income reported by the taxpayers do not reflect non-compliance, we will investigate the reasons for the discrepancy by conducting a survey for the auditors.
Experimental Design Details
Not available
Randomization Method
In office on computer
Randomization Unit
individual
Was the treatment clustered?
No

Experiment Characteristics

Sample size: planned number of clusters
The treatment is not clustered
Sample size: planned number of observations
800-900 taxpayers, 400 in the treatment group (plus a buffer of 100) and 400 in the control group.
Sample size (or number of clusters) by treatment arms
800-900 taxpayers, 400 in the treatment group (plus a buffer of 100) and 400 in the control group.
Minimum detectable effect size for main outcomes (accounting for sample design and clustering)
IRB

Institutional Review Boards (IRBs)

IRB Name
IRB Approval Date
IRB Approval Number