Withholding Taxes, Compliance Cost, and Foreign Portfolio Investment

Research output: Contribution to journalArticleResearchpeer review

Authors

  • Martin Jacob
  • Maximilian Todtenhaupt

External Research Organisations

  • WHU - Otto Beisheim School of Management
  • Norwegian School of Economics (NHH)
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Details

Original languageEnglish
Pages (from-to)299-327
Number of pages29
JournalAccounting Review
Volume98
Issue number2
Publication statusPublished - Mar 2023
Externally publishedYes

Abstract

We examine the effect of compliance frictions in reclaiming foreign withholding tax overpayments on foreign portfolio investment (FPI) using data on bilateral FPI around the globe and U.S. institutional investors' foreign holdings. Exploiting variation in withholding tax overpayments for 36 investor countries and 110 issuer countries, we find that withholding tax overpayments adversely affect FPI because of the high compliance costs to international investors in claiming foreign tax credits. Cross-sectional tests further show that the adverse effect of withholding tax overpayments on FPI is reduced when compliance costs in claiming these overpayments from foreign countries are lower. Our results indicate that eliminating most of the compliance costs in the reclaim process by implementing a relief at the source mechanism could increase FPI by about 7.6 percent.

Keywords

    compliance cost, dividend taxation, foreign portfolio investment, withholding taxes

ASJC Scopus subject areas

Cite this

Withholding Taxes, Compliance Cost, and Foreign Portfolio Investment. / Jacob, Martin; Todtenhaupt, Maximilian.
In: Accounting Review, Vol. 98, No. 2, 03.2023, p. 299-327.

Research output: Contribution to journalArticleResearchpeer review

Jacob M, Todtenhaupt M. Withholding Taxes, Compliance Cost, and Foreign Portfolio Investment. Accounting Review. 2023 Mar;98(2):299-327. doi: 10.2308/TAR-2020-0721
Jacob, Martin ; Todtenhaupt, Maximilian. / Withholding Taxes, Compliance Cost, and Foreign Portfolio Investment. In: Accounting Review. 2023 ; Vol. 98, No. 2. pp. 299-327.
Download
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