Working Paper: NBER ID: w30114
Authors: Sebastián 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. While transfer pricing regulations are meant to curtail profit shifting, there have been rising concerns that a sophisticated tax advisory industry can limit their effectiveness. This paper provides a comprehensive analysis of how firms and tax advisors respond to 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: tax enforcement; tax planning; profit shifting; transfer pricing; 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 that introduced OECD transfer pricing standards in Chile (H87) | Reduction in profit shifting (H26) |
| Reform that introduced OECD transfer pricing standards in Chile (H87) | Increase in tax revenue (H20) |
| Reform that introduced OECD transfer pricing standards in Chile (H87) | Sensitivity of intragroup payments to changes in destination country tax rates (H23) |
| Reform that introduced OECD transfer pricing standards in Chile (H87) | Corporate tax payments by multinationals (H26) |
| Reform that introduced OECD transfer pricing standards in Chile (H87) | Increase in demand for tax advisory services (H26) |