Dual Citizenship and the Directive on Administrative Cooperation (DAC6) of the European Union
Master Thesis by Rohit Reddy Muddasani.
The sixth amendment to the Directive on Administrative Cooperation (commonly known as DAC6), introduced the mandatory disclosure reporting of aggressive tax planning arrangements. Under DAC6, intermediaries such as accountants, lawyers etc., or under certain circumstances the taxpayers themselves have to disclose any aggressive tax planning arrangements to the respective EU tax authority. Given Norway’s plans to introduce a similar regulation and the recent introduction of dual citizenship program, the thesis intended to verify whether dual citizenship rights could be used as a method of regulatory arbitrage against DAC6. For this purpose, the study uses the data on the cross-border deposits held by residents of 215 countries in 31 deposit locations obtained from the Bank of International Settlements-Locational Banking Statistics (BIS-LBS) database. The sample period covers the 1st quarter of 2016 till the 3rd quarter of 2020.
Using a difference-in-difference research design, the results show that post-DAC6, cross-border deposits held by residents of dual citizenship countries in tax haven increased by 9.04% compared to those held by residents of countries not offering dual citizenship. Results are even stronger when exclusively focusing on countries offering citizenship-by-investment programs. In additional analysis, the cross-border deposits growth in tax-haven deposit locations from the EU residence countries was found to be 23.1% more than non-EU residence countries post-DAC6 indicating the probable impact of DAC6 on cross-border reporting.
Finally, the results showed that cross-border deposits of non-EU residence countries having dual citizenship had a negative growth of 8.58% in EU deposit locations post-DAC6 in comparison to non-EU deposit locations. A similar effect, however, was not witnessed for non-EU residence countries not having dual citizenship. All the results combined provide initial evidence that obtaining multiple citizenship rights could represent a tool for regulatory arbitrage against the reporting duty under DAC6. The results of this study are extremely timely as they could be helpful for the Norwegian authorities in future policy assessment concerning dual citizenship and the introduction of a similar mandatory disclosure regime as the one under DAC6.
Muddasani, Rohit Reddy: 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. Master Thesis, NHH, 2021.