Working Paper: CEPR ID: DP17347
Authors: Sebastian Bustos; Dina Pomeranz; Juan Carlos Suárez Serrato; José Vilabelda; Gabriel Zucman
Abstract: Profit shifting by multinational corporations is thought to reduce tax revenue around the world. We analyze the introduction of standard regulations aimed at limiting profit shifting. Using administrative tax and customs data from Chile in difference-in-differences event-study designs, we find that the reform was ineffective in reducing multinationals’ transfers to lower-tax countries and did not significantly raise tax payments. At the same time, interviews with tax advisors reveal a drastic increase in tax advisory services. The qualitative interviews also allow us to identify and then quantitatively confirm a common tax planning strategy in response to the reform. These results illustrate that when enforcement can be circumvented by sophisticated tax planning, it can benefit tax consultants at the expense of tax authorities and taxpayers.
Keywords: profit shifting; transfer pricing; tax enforcement; tax planning; Chile
JEL Codes: H25; H26; H32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Reform did not reduce propensity of multinationals to shift profits (H29) | Tax-motivated payments to foreign affiliates (H87) |
| One-percentage-point reduction in tax rate of destination country (F29) | Increase in payments to affiliates (J33) |
| Post-reform sensitivity of intragroup payments to tax rates did not decrease (H29) | Profit shifting practices remain unaffected (F69) |
| Reform did not impact prices of traded goods (P22) | Profit shifting through trade pricing remains unaffected (F69) |
| Demand for transfer pricing consulting services increased dramatically following the reform (E69) | Tax consultants benefited from new tax planning opportunities (H26) |