By Manuel Daubenberger
Between 2000 and 2020, an estimated €150 billion in tax revenue was lost across 12 countries due to cum-ex trades, including ADRs.
This conservative estimate is based on the collaborative research of journalists around the world, organized by CORRECTIV and the University of Mannheim. Prof. Spengel and his team at UM calculated a cum-cum loss of at least €141 billion across 10 countries. The cum-ex damage was calculated at €9.1 billion across three countries. And for the first time ever, the research team calculated the loss caused by cum-ex trades including ADRs: At least €556 million across six countries.
In order to estimate the total tax revenue loss caused by cum-cum transactions, we made a few baseline assumptions. The first is that cum-cum transactions could be carried out in all years and all countries considered. The validity of this assumption is based on research conducted by CORRECTIV.
In practice, the period of consideration spans from 2000 to 2020 and includes Germany, Austria, Spain, Italy, the Netherlands, Belgium, France and Luxembourg. For Switzerland and the USA, we only took into account the years leading up to 2008, where our research suggests that trades ceased after authorities intervened.
We also took into consideration that foreign shareholders have an incentive to avoid capital gains tax through cum-cum transactions. Since we do not know exactly how many of those shareholders avoid capital gains tax, we assumed 50 percent as a conservative benchmark. We arrived at that number through investigative research, discussions with tax authorities and market participants, and plausibility checks by the team at UM.
In Germany and France, we know for certain that the estimate is conservative because of clear indications that almost all foreign shareholders avoid the tax via cum-cum transactions. We excluded countries from our calculations where we could not prove that cum-cum transactions are widespread.
We also made our calculations based on the rates of double taxation agreements (DTAs) instead of local taxes, since DTA rates are typically lower than the latter. This ensured a more conservative estimate. The resulting calculation: 50 percent of dividends paid to foreign shareholders multiplied by the DTA rate.
You can find a more detailed methodology from the University of Mannheim in this PDF document.
The estimated tax revenue loss caused by cum-ex transactions is based on two sources.
In Germany, the University of Mannheim calculated a conservative tax loss of €7.2 billion. This calculation is based on transaction details provided to the inquiry committee of the German parliament from the settlement system provider Clearstream. We then added the official government calculations for tax revenue loss due to cum-ex transactions in Denmark (€1.7 billion), Belgium (€200 million) and Austria (€187 million).
Cum-ex with ADRs
ADRs represent shares of non-US corporations that can be traded on US markets. Holders of ADRs are entitled to dividends in the same way as regular shareholders. Information from official sources like the German public prosecutors and US Securities and Exchange Commission indicate that ADRs have been used to conduct cum-ex transactions and make fraudulent tax reclaims.
In the research, we were able to identify outstanding trading activities in six countries in the period from 2009 to 2020: These include Germany, Spain, the Netherlands, Belgium, France and Ireland.
We obtained data on ADR trading volumes for all available shares of the leading stock index in each country from Bloomberg. Our partners at UM then looked for abnormal peaks in trading volume in the ten-day window surrounding dividend payments dates.
We assumed unusual increases in trading volume around dividend payment dates to be associated with cum-ex operations. Most instances occurred between 2009 and 2020. For each peak, we calculated the potential value of fraudulent tax reclaims by multiplying a few key figures: total trading volume, the capital gains tax rate, the dividend per share, and the ratio of the ADR to its underlying foreign share.
The resulting calculation is the first-ever estimate of tax revenue lost to this newest form of cum-ex transactions. However, since a majority of ADRs are not traded via stock exchanges, public data on the topic is limited. The figure of €556 million in tax revenue loss is likely just a fraction of the actual money gone to fraud.
You can find a more detailed methodology in this document.