Challenges of Monitoring Tax Compliance by Multinational Firms: Evidence from Chile

Out­line

In­ter­na­tion­al tax avoid­ance by multi­na­tion­al firms has been at the fore­front of pol­i­cy de­bates and news cov­er­age in re­cent years. This pa­per pro­vides a brief overview of the chal­lenges and pol­i­cy de­bates re­gard­ing tax­a­tion of multi­na­tion­al cor­po­ra­tions and pro­vides nov­el de­scrip­tive ev­i­dence on the case of Chile.

In an in­creas­ing­ly glob­al­ized cor­po­rate world, the de­bate on how to ef­fec­tive­ly tax multi­na­tion­al cor­po­ra­tion has be­come of first-or­der im­por­tance for many gov­ern­ments around the world. The mag­ni­tudes in­volved are large. In Chile, about 40 per­cent of sales come from the 2 per­cent of cor­po­ra­tions that have af­fil­i­ates in for­eign coun­tries. Many coun­tries try to at­tract in­vest­ment by multi­na­tion­al firms, as this is of­ten thought to bring pos­i­tive spillovers for eco­nom­ic de­vel­op­ment. How­ev­er, multi­na­tion­als of­ten have more av­enues to avoid tax­es, which can un­der­mine ef­forts to build do­mes­tic tax col­lec­tion ca­pac­i­ty. Guid­ance by the OECD on how to re­duce in­ter­na­tion­al prof­it shift­ing has been sub­ject to con­tro­ver­sial de­bate, but em­pir­i­cal ev­i­dence on its ef­fec­tive­ness is lim­it­ed. In 2011, Chile im­ple­ment­ed an OECD-in­spired re­form that strong­ly in­creased re­port­ing re­quire­ments for multi­na­tion­al firms and cre­at­ed a spe­cial­ized unit to mon­i­tor trans­fer pric­ing. This led to high­er mon­i­tor­ing costs and high­er com­pli­ance costs for firms and in­creased de­mand for tax con­sult­ing ser­vices. It is, how­ev­er, un­known so far whether it led to more tax col­lec­tion. The grow­ing num­ber of col­lab­o­ra­tions be­tween re­searchers and tax au­thor­i­ties, lever­ag­ing ad­min­is­tra­tive tax data, has the po­ten­tial to shed em­pir­i­cal light on this type of press­ing ques­tions and to help im­prove in­ter­na­tion­al tax pol­i­cy.

Re­search Team

Author

Dina Pomeranz

Assistant Professor of Microeconomics, endowed by the UBS Center

Zurich ZCED

Author

Jose Vila-Belda Montalt

Research Manager

Zurich ZCED

Se­bastián Bus­tos

Post-Doc

Cen­ter for In­ter­na­tion­al De­vel­op­ment, Har­vard Uni­ver­si­ty

Gabriel Zuch­man

CUC Berke­ley and NBER