Sub-Project A: International Profit Shifting
This Sub-Project investigates the question of whether enforcing the OECD rules that currently govern the taxation of multinational firms with related subsidiary firms in several countries improve tax collection and welfare. This is one of the core debates in tax policy, with large implications for government revenue and inequality. Under current taxation regulations, subsidiaries of multinational firms are taxed separately in their respective locations, and are supposed to treat each other as if they were unrelated firms (the so-called “arm’s-length” principle). However, since these firms are in fact related through a common ownership structure, they face strong incentives to shift profits within the network of related firms into subsidiaries with low taxation, such that the subsidiaries in high-taxation countries have low profits and the network as a whole pays less taxes. To counteract such incentives, the OECD has been enacting a set of increasingly stringent norms that simultaneously require firms to report information about their international transactions and require tax authorities to monitor such transactions. In this project, we have published a journal article in the American Economic Association Papers & Proceedings that introduces the topic and the Chilean tax reform, and we have written a paper on the impact of the transfer pricing reform implemented in Chile in 2012. The paper is currently under review.
Sub-Project B: As noted in the second report, Subproject B has evolved in its focus since the original research design. The project addresses the large and widespread phenomenon of using so-called "ghost firms" (fake firms) that issue fraudulent receipts so that their clients, i.e. “ghost clients” can claim false deductions. While we cleaned and prepared the data to elaborate on the original research question, we saw interesting other patterns in the data that allowed us to investigate on the topic of ghost firms which we regarded to have more academic potential. Hence, the project focus shifted. We developed new empirical analyses in this reporting period and finished the writing process. We show that ghost transactions are widespread, prevalent among large firms and firms with high-income owners, and exhibit suspicious patterns compared to ordinary transactions: bunching at round numbers, at the end of the fiscal year, and just below financial system thresholds. Additionally, we studied an innovative enforcement intervention targeting ghost clients, rather than ghost firms themselves, which led to a substantial tax recovery. I presented the paper at several conferences and seminars, and, after implementing feedback, we have submitted it to a top-field journal and are awaiting a decision.
Sub-Project C: Foreign Direct Investment and Taxation
Similar to the process in Subproject B, the focus of the project evolved while working with the data at hand. While still using the same data as initially planned, we now studied the impact of international trade on earnings inequality. We developed new measures of export and import exposure at the individual level and provided estimates of their incidence across the earnings distribution. Thus, in this reporting period, we focused on implementing new empirical analyses and robustness checks, which were based on feedback received at conferences and seminars, as well as finishing the writing process and publishing a paper (see publications).
