Incentive theory 2. Incentives and Information Exchange in International Taxation- Keen & Ligthart (2006a): 54
Incentive theory 2. Incentives and Information Exchange in International Taxation- Keen & Ligthart (2006a): The purpose of this study is addressing whether all countries ever could perceive, or be made to perceive, the exchange of information as optimal. The assumptions; The authors assume that the world consists of two countries. Further, the two countries are assumed to be asymmetric with respect to geographical size and the number of inhabitants. It is also assumed that the residents of each country have one unit of savings to invest. The authors treat the before tax return as fixed and equal for the two countries. Whether or not to make a foreign investment is assumed to depend on transaction costs as well as the tax savings included in investing abroad. Both countries are assumed to be able to keep track of all investments made domestically. It is also assumed that the contracting parties are allowed to exchange information and levy withholding taxes at the same time. The countries are also able to share the revenues from information exchange. Last, the authors assume information exchange to be costless. The main variables; ρ is the before tax return, while μ denotes the proportion of the income gained from information exchange that is kept by the resident country. (1- μ) of the respective revenue is transferred to the source country. The situation where the residence country retains all revenue is referred to as simple information exchange; μ =1, as opposed to μ = 0 where all the revenue is transferred to the source country. The populations are assumed to consist of homogenous and risk-neutral agents, denoted by N and n26. The population in the large country is assumed to be at least as big as the population of the small. This yields the expression θ n/N ! 1 The conclusions; Based on the assumptions and the main variables, the authors gain insights regarding the feasibility of both the contracting parties preferring information exchange at the same time. The most important results for the purpose of this paper will be described in the following. The authors show that both contracting parties will be indifferent to information exchange compared to simple withholding given that all income from the information exchange is transferred to the source country. Simple withholding may in this situation be understood as a scenario where all income obtained from non-resident withholding taxes remains in the source country. Second, the authors claim that the large country prefers i...
