The Race Between Tax Enforcement and Tax Planning: Evidence From a Natural Experiment in Chile

Abstract

A large body of work highlights the key role of information reporting for tax enforcement and the development of modern tax systems. However, information reporting is not always sufficient to improve tax collection. Using micro-level administrative tax and custom data covering the universe of internationally active Chilean firms, we study a reform that greatly increased information reporting by multinational firms in 2012, following Chile's accession to the OECD. We first document that multinationals conduct tax-motivated cross-border transactions: Payments to foreign subsidiaries decrease with the destination country's tax rate, while there is no such relationship for payments to non-a ffiliated firms. We then use difference-in-differences regressions to estimate the impacts of the reform on taxes paid and intra-group flows of royalties, interests, goods, and services. The reform did not significantly raise voluntary tax payments and we find no impact on the transactions that shift profits to low-tax places. In contrast, there was a strong increase in the demand for tax advisory services, with employment of transfer pricing experts at the leading consulting firms growing more than 10-fold. These findings suggest that when the supply of tax-planning services allows to effectively circumvent regulations, devoting more resources to tax enforcement can lead to a wasteful expenditure of resources by both tax authorities and taxpayers. joint with Sebastián Bustos, Juan Carlos Su arez Serrato, José Vila-Belda, Gabriel Zucman