Volume 17, Issue 2 – Wu, Brown & Brown

EVASION OF INTEREST WITHHOLDING TAX: EVIDENCE FROM TRADING VOLUMES IN AUSTRALIAN GOVERNMENT BONDS

By Yanghui (Maggie) Wu, Philip G Brown and Rob Brown

There is very little evidence on the evasion of interest withholding tax. We find such evidence by focussing on the 5 December 2009 abolition of interest withholding tax on foreign investors in Australian government bonds. Prior to this date, foreign investors had an incentive to evade the tax by selling bonds ‘just prior to’ ex-interest days and (possibly) reinvesting on or after the ex-interest day. This practice is referred to as ‘coupon washing’. To detect the presence of coupon washing, we analyse daily trading volumes in Australian government bonds between 1998 and 2013. We find clear evidence of coupon washing in the period before the abolition of the tax. Evidence of coupon washing is much weaker after the abolition. We also find that abnormally high volumes are concentrated in high-coupon bonds, which further supports our findings, because high coupons provide a greater incentive for coupon washing than low coupons.

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