Tax-induced Dissimilarities Between Domestic and Foreign Mutual Funds in Italy

Using data from Italy over the period 1998–2002, this study investigates
whether tax effects can account for differences in return patterns
between domestic and foreign mutual funds, and if this dissimilarity
translates into performance. The paper presents evidence that much of
the difference between domestic and foreign funds is explained by the
different tax systems. The asymmetry between the two groups, due to
the fact that domestic funds are obliged to pay taxes on a daily basis
while foreign funds are taxed when capital gains are collected, also
affects performance. We prove that comparing pre-tax returns, Italian
funds are virtually indistinguishable from their foreign counterparts in
terms of risk-adjusted returns, while when comparing after-tax returns,
foreign funds outperform.