Dual Citizenship and the Directive on Administrative Cooperation(DAC6) of the European Union : An empirical study on dual citizenship as a method of regulatory arbitrage

Abstract

The DAC6 directive was introduced by the EU in the year 2018 with a policy objective to increase the effectiveness in tackling cross-border tax avoidance and evasion. Dual citizenship is one of the methods of achieving dual tax residency and therefore, this thesis tries to verify whether dual citizenship can also be one of the methods of regulatory arbitrage in circumventing the DAC6 directive and reduce the probability of detection and repatriation of offshore deposits. An empirical framework is built to study the movement of cross-border deposits before and after the initiation of the DAC6 guidelines for a period of 19 quarters staring from Q1 2016 to Q3 2020. The analysis is done by verifying the cross-border deposits of countries offering dual citizenship against those countries not offering dual citizenship. Also, the countries are further classified as EU countries and non-EU countries and the study also tries to verify the changes in the cross-border deposits of these groups before and after DAC6. The results show that residents and resident companies of countries having dual citizenship in general have more deposits when compared to countries not offering dual citizenship. The results also show that the increase of deposits in tax havens post-DAC6 is much more from the countries offering dual citizenship than from countries not offering dual citizenship. The study finds that the deposits of residents and resident companies across the European Union have increased considerably post the DAC6 indicating that a stricter reporting structure is possibly having an effect. However, the study also finds that EU deposit locations are becoming less lucrative for residents and resident companies of non-EU countries offering dual citizenship post-DAC6 indicating the use of dual citizenship as a method of regulatory arbitrage against DAC6. Moreover, an analysis is also done for the countries offering Citizenship by Investment(CBI) schemes and the findings indicate that people might also be pro-actively pursuing these schemes post DAC6, indicating that such schemes could also be used as methods of regulatory arbitrage against DAC6.