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Shifting-Profits through Tax Loopholes. Evidence from Ecuador

Author

Listed:
  • Cyril Chalendard

Abstract

Based on a natural experiment that took place in Ecuador in the context of a capital outflow tax, this paper presents suggestive evidence of the emergence of an abnormal transfer pricing behavior. We exploit the fact that some imports were eligible to a tax-credit measure aiming to offset the capital outflow tax. The identification strategy relies on the fact that a foreign multinational enterprise has only an incentive to increase the unit value -transfer price- for profit shifting motivations of products eligible to the tax-credit. Then, comparing the evolution of the unit value of eligible products (the treatment group) with that of non eligible products (the comparison group) before and after the tax-credit measure, we estimate the over-reporting incentive's impact on the reported value. Results show that the declared unit value of eligible imports increased following the introduction of the tax-credit measure. Various tests suggest that this abnormal increase is attributable to a profit-shifting behavior.

Suggested Citation

  • Cyril Chalendard, 2016. "Shifting-Profits through Tax Loopholes. Evidence from Ecuador," CESifo Working Paper Series 6240, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_6240
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp6240.pdf
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    References listed on IDEAS

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    1. Ernesto Crivelli & Ruud De Mooij & Michael Keen, 2016. "Base Erosion, Profit Shifting and Developing Countries," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 72(3), pages 268-301, September.
    2. Mihir A. Desai & C. Fritz Foley & James R. Hines, 2004. "A Multinational Perspective on Capital Structure Choice and Internal Capital Markets," Journal of Finance, American Finance Association, vol. 59(6), pages 2451-2487, December.
    3. Chalendard,Cyril Romain & Raballand,Gael J. R. F. & Rakotoarisoa,Antsa, 2016. "The use of detailed statistical data in customs reform : the case of Madagascar," Policy Research Working Paper Series 7625, The World Bank.
    4. Hidalgo, Diana & Onofa, Mercedes & Oosterbeek, Hessel & Ponce, Juan, 2013. "Can provision of free school uniforms harm attendance? Evidence from Ecuador," Journal of Development Economics, Elsevier, vol. 103(C), pages 43-51.
    5. Fuest, Clemens & Hebous, Shafik & Riedel, Nadine, 2011. "International debt shifting and multinational firms in developing economies," Economics Letters, Elsevier, vol. 113(2), pages 135-138.
    6. Huizinga, Harry & Laeven, Luc & Nicodeme, Gaetan, 2008. "Capital structure and international debt shifting," Journal of Financial Economics, Elsevier, vol. 88(1), pages 80-118, April.
    7. Castellacci, Fulvio & Lie, Christine Mee, 2015. "Do the effects of R&D tax credits vary across industries? A meta-regression analysis," Research Policy, Elsevier, vol. 44(4), pages 819-832.
    8. Bauer, Christian J. & Langenmayr, Dominika, 2013. "Sorting into outsourcing: Are profits taxed at a gorilla's arm's length?," Journal of International Economics, Elsevier, vol. 90(2), pages 326-336.
    9. Dhammika Dharmapala, 2014. "What Do We Know about Base Erosion and Profit Shifting? A Review of the Empirical Literature," Fiscal Studies, Institute for Fiscal Studies, vol. 35, pages 421-448, December.
    10. Brada, Josef C. & Kutan, Ali M. & Vukšić, Goran, 2013. "Capital Flight in the Presence of Domestic Borrowing: Evidence from Eastern European Economies," World Development, Elsevier, vol. 51(C), pages 32-46.
    11. Anca D. Cristea & Daniel X. Nguyen, 2016. "Transfer Pricing by Multinational Firms: New Evidence from Foreign Firm Ownerships," American Economic Journal: Economic Policy, American Economic Association, vol. 8(3), pages 170-202, August.
    12. Sebastian Beer & Jan Loeprick, 2015. "Profit shifting: drivers of transfer (mis)pricing and the potential of countermeasures," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(3), pages 426-451, June.
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    More about this item

    Keywords

    profit-shifting; tax evasion; transfer pricing; tax loophole; capital outflow tax; customs reform;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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