How Effective is the European Union's Savings Tax Directive? Evidence from Four EU Member States

This article examines the strategies employed by individual investors to evade cross-border capital income taxation, and evaluates the effectiveness of the European Union Savings Tax Directive (STD). Using data for four European countries, the results are, first, individual investors adapted to the institutional changes implemented by the STD before it became effective in 2005; second, the strategy of reallocating assets from debt to equity products in the same country is more important than shifting portfolio capital out of co-operating countries into third countries; third, countries opting for a retention tax did not experience an outflow of portfolio capital, whereas countries engaged in information exchange lost capital relative to third countries outside the scope of the STD; and finally, there is considerable heterogeneity across countries. While there are strong behavioural responses by French investors, no evidence was found of cross-border tax evasion by Italian investors, which may be explained by the absence of a national automatic reporting system on capital income in Italy. Overall, the findings show that the STD does not effectively prevent tax evasion and thus lend support to calls for tightening the directive.