Monday, November 16, 2020
Juan Carlos Suarez Serrato (Duke) presents The Race Between Tax Enforcement and Tax Planning: Evidence from a Natural Experiment in Chile (with Sebastian Bustos (Harvard), Dina Pomeranz (Zurich), Jose Vila-Belda (Fribourg), and Gabriel Zucman (UC-Berkeley)) virtually today at Loyola-L.A. as part of its Tax Policy Colloquium Series hosted by Katie Pratt and Ted Seto:
A large body of work highlights the key role of information reporting for tax enforcement and the development of modern tax systems. In this paper, we provide evidence that 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, 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-affiliated firms. We then use difference-in-differences regressions to estimate the impacts of the reform on taxes paid and intra-group flows of royalties, interest, goods, and services.
The reform did not significantly raise taxes paid 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. Whenever the supply of tax-planning services is not regulated, devoting more resources to tax enforcement can lead to a wasteful expenditure of resources by both tax authorities and taxpayers.
The commentator is Kim Clausing (UCLA).