Voluntary disclosure schemes for offshore tax evasion

Abstract

Tax authorities worldwide are implementing voluntary disclosure schemes to recover tax on offshore investments. The US and UK, in particular, have implemented such schemes in response to bulk acquisitions of information on offshore holdings, recent examples of which are the “Paradise” and “Panama” papers. Schemes offer affected investors the opportunity to make a voluntary disclosure, with reduced fine rates for truthful disclosure. Might such incentives, once anticipated by investors, simply encourage evasion in the first place? We characterize the investor/tax authority game with and without a scheme, allowing for the possibility that some offshore investment has legitimate economic motives. We show that a scheme increases net expected tax revenue, decreases illegal offshore investment and increases onshore investment, but could either increase or decrease legal offshore investment. The optimal disclosure scheme offers maximal incentives for truthful disclosure by imposing the minimum allowable rate of fine.