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The recent leaks of the Panama and Paradise Papers have highlighted the difficulty of taxing the income of residents of developed and developing offshore countries. The basic problem is that such income is subject to neither withholding at source nor information reporting. In the absence of both withholding and reporting, it is easy to use tax havens to hide such income from tax authorities. Estimates of the scope of the problem vary widely, but it is certainly larger than the $200 billion in estimated losses from legal corporate tax avoidance.

This article explains the historic roots of this problem, which dates back to the 1984 unilateral US decision to abolish withholding on portfolio interest. It then suggests a coordinated, refundable withholding tax scheme to be imposed by the USA, EU, and Japan, which are the main destinations of portfolio investments. No cooperation by tax havens is needed for such a scheme. Finally, the article addresses some common counter arguments.


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