IDEAS home Printed from https://ideas.repec.org/p/ces/ceswps/_6240.html
   My bibliography  Save this paper

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.
  • Handle: RePEc:ces:ceswps:_6240
    as

    Download full text from publisher

    File URL: https://www.cesifo.org/DocDL/cesifo1_wp6240.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Jarle Møen & Dirk Schindler & Guttorm Schjelderup & Julia Tropina, 2011. "International Debt Shifting: Do Multinationals Shift Internal or External Debt?," Working Paper Series of the Department of Economics, University of Konstanz 2011-40, Department of Economics, University of Konstanz.
    2. Ronald B. Davies & Julien Martin & Mathieu Parenti & Farid Toubal, 2018. "Knocking on Tax Haven’s Door: Multinational Firms and Transfer Pricing," The Review of Economics and Statistics, MIT Press, vol. 100(1), pages 120-134, March.
    3. Karkinsky, Tom & Riedel, Nadine, 2012. "Corporate taxation and the choice of patent location within multinational firms," Journal of International Economics, Elsevier, vol. 88(1), pages 176-185.
    4. Clausing, Kimberly A., 2003. "Tax-motivated transfer pricing and US intrafirm trade prices," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 2207-2223, September.
    5. Bob Rijkers & Leila Baghdadi & Gael Raballand, 2017. "Political Connections and Tariff Evasion Evidence from Tunisia," World Bank Economic Review, World Bank Group, vol. 31(2), pages 459-482.
    6. Egger, Peter & Eggert, Wolfgang & Keuschnigg, Christian & Winner, Hannes, 2010. "Corporate taxation, debt financing and foreign-plant ownership," European Economic Review, Elsevier, vol. 54(1), pages 96-107, January.
    7. Bartelsman, Eric J. & Beetsma, Roel M. W. J., 2003. "Why pay more? Corporate tax avoidance through transfer pricing in OECD countries," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 2225-2252, September.
    8. Cyril Chalendard & Gaël Raballand & Antsa Rakotoarisoa, 2019. "The use of detailed statistical data in customs reforms: The case of Madagascar," Development Policy Review, Overseas Development Institute, vol. 37(4), pages 546-563, July.
    9. 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.
    10. 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.
    11. 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.
    12. 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.
    13. Grubert, Harry & Mutti, John, 1991. "Taxes, Tariffs and Transfer Pricing in Multinational Corporate Decision Making," The Review of Economics and Statistics, MIT Press, vol. 73(2), pages 285-293, May.
    14. 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.
    15. Grubert, Harry, 2003. "Intangible Income, Intercompany Transactions, Income Shifting, and the Choice of Location," National Tax Journal, National Tax Association;National Tax Journal, vol. 56(1), pages 221-242, March.
    16. Anna Gumpert & James R. Hines Jr. & Monika Schnitzer, 2016. "Multinational Firms and Tax Havens," The Review of Economics and Statistics, MIT Press, vol. 98(4), pages 713-727, October.
    17. 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.
    18. Dischinger, Matthias & Riedel, Nadine, 2011. "Corporate taxes and the location of intangible assets within multinational firms," Journal of Public Economics, Elsevier, vol. 95(7-8), pages 691-707, August.
    19. Guido W. Imbens & Jeffrey M. Wooldridge, 2009. "Recent Developments in the Econometrics of Program Evaluation," Journal of Economic Literature, American Economic Association, vol. 47(1), pages 5-86, March.
    20. Sanjaya Lall, 1980. "Transfer-Pricing by Multinational Manufacturing Firms," Palgrave Macmillan Books, in: The Multinational Corporation, chapter 5, pages 110-136, Palgrave Macmillan.
    21. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2004. "How Much Should We Trust Differences-In-Differences Estimates?," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 249-275.
    22. V. Vicard, 2015. "Profit shifting through transfer pricing: evidence from French firm level trade data," Working papers 555, Banque de France.
    23. 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.
    24. Feld, Lars P. & Heckemeyer, Jost H. & Overesch, Michael, 2013. "Capital structure choice and company taxation: A meta-study," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2850-2866.
    25. 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.
    26. Rainer Lanz & Sébastien Miroudot, 2011. "Intra-Firm Trade: Patterns, Determinants and Policy Implications," OECD Trade Policy Papers 114, OECD Publishing.
    27. Alfons Weichenrieder, 2009. "Profit shifting in the EU: evidence from Germany," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 16(3), pages 281-297, June.
    28. Paul E. Carrillo & M. Shahe Emran & Anita Rivadeneira, 2011. "Do Cheaters Bunch Together? Profit Taxes, Withholding Rates and Tax Evasion," Working Papers 2011-03, The George Washington University, Institute for International Economic Policy.
    29. Heckemeyer, Jost H. & Overesch, Michael, 2013. "Multinationals' profit response to tax differentials: Effect size and shifting channels," ZEW Discussion Papers 13-045, ZEW - Leibniz Centre for European Economic Research.
    30. Gravelle, Jane G., 2009. "Tax Havens: International Tax Avoidance and Evasion," National Tax Journal, National Tax Association;National Tax Journal, vol. 62(4), pages 727-753, December.
    31. 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.
    32. Paul E. Carrillo & M. Shahe Emran & Gabriela Aparicio, 2011. "Taxes, Prisons, and CFOs: The Effects of Increased Punishment on Corporate Tax Compliance in Ecuador," Working Papers 2011-02, The George Washington University, Institute for International Economic Policy.
    33. 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.
    34. Michael P Devereux, 2007. "The Impact of Taxation on the Location of Capital, Firms and Profit: a Survey of Empirical Evidence," Working Papers 0702, Oxford University Centre for Business Taxation.
    35. 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.
    36. Egger, Peter & Seidel, Tobias, 2013. "Corporate taxes and intra-firm trade," European Economic Review, Elsevier, vol. 63(C), pages 225-242.
    37. Pastor, Manuel Jr., 1990. "Capital flight from Latin America," World Development, Elsevier, vol. 18(1), pages 1-18, January.
    38. Mishra, Prachi & Subramanian, Arvind & Topalova, Petia, 2008. "Tariffs, enforcement, and customs evasion: Evidence from India," Journal of Public Economics, Elsevier, vol. 92(10-11), pages 1907-1925, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bond, Eric W. & Gresik, Thomas A., 2020. "Unilateral tax reform: Border adjusted taxes, cash flow taxes, and transfer pricing," Journal of Public Economics, Elsevier, vol. 184(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sebastian Beer & Ruud de Mooij & Li Liu, 2020. "International Corporate Tax Avoidance: A Review Of The Channels, Magnitudes, And Blind Spots," Journal of Economic Surveys, Wiley Blackwell, vol. 34(3), pages 660-688, July.
    2. Sabine Schenkelberg, 2020. "The Cadbury Schweppes judgment and its implications on profit shifting activities within Europe," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(1), pages 1-31, February.
    3. Cooper, Maggie & Nguyen, Quyen T.K., 2020. "Multinational enterprises and corporate tax planning: A review of literature and suggestions for a future research agenda," International Business Review, Elsevier, vol. 29(3).
    4. Jost H. Heckemeyer & Michael Overesch, 2017. "Multinationals’ profit response to tax differentials: Effect size and shifting channels," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 50(4), pages 965-994, November.
    5. Bodo Knoll & Nadine Riedel, 2015. "Transfer Pricing Laws," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 12(4), pages 22-26, 01.
    6. Bodo Knoll & Nadine Riedel, 2015. "Transfer Pricing Laws," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 12(04), pages 22-26, January.
    7. Overesch Michael, 2016. "Steuervermeidung multinationaler Unternehmen," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 17(2), pages 129-143, July.
    8. repec:ces:ifodic:v:12:y:2015:i:4:p:19149986 is not listed on IDEAS
    9. Qian, Xuefeng & Tian, Bifei & Reed, W. Robert & Chen, Ziruo, 2018. "Searching for profit-shifting in China," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 12, pages 1-25.
    10. Heckemeyer, Jost H. & Overesch, Michael, 2013. "Multinationals' profit response to tax differentials: Effect size and shifting channels," ZEW Discussion Papers 13-045, ZEW - Leibniz Centre for European Economic Research.
    11. Petr Janský & Miroslav Palanský, 2019. "Estimating the scale of profit shifting and tax revenue losses related to foreign direct investment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 26(5), pages 1048-1103, October.
    12. Alejandro Esteller-Moré & Shafik Hebous & Niels Johannesen & Katarzyna Anna Bilicka, 2018. "The Present and Future of Tax Havens / El presente y futuro de los paraísos fiscales / El present i futur dels paradisos fiscals," IEB Reports ieb_report_4_2018, Institut d'Economia de Barcelona (IEB).
    13. Petr Janský & Miroslav Palanský, 2019. "Estimating the scale of profit shifting and tax revenue losses related to foreign direct investment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 26(5), pages 1048-1103, October.
    14. Nicolay, Katharina & Nusser, Hannah & Pfeiffer, Olena, 2017. "On the interdependency of profit shifting channels and the effectiveness of anti-avoidance legislation," ZEW Discussion Papers 17-066, ZEW - Leibniz Centre for European Economic Research.
    15. Arnt Ove Hopland & Petro Lisowsky & Mohammed Mardan & Dirk Schindler, 2014. "Income Shifting under Losses," CESifo Working Paper Series 5130, CESifo.
    16. Kato, Hayato & Okoshi, Hiofumi, 2019. "Economic Integration and Agglomeration of Multinational Production with Transfer Pricing," Discussion Papers in Economics 62013, University of Munich, Department of Economics.
    17. Ropponen, Olli, 2021. "Interest Limitation Rules and Business Cycles: Empirical Evidence," ETLA Working Papers 90, The Research Institute of the Finnish Economy.
    18. Ruud Mooij & Li Liu, 2020. "At a Cost: The Real Effects of Transfer Pricing Regulations," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 68(1), pages 268-306, March.
    19. Hayato Kato & Hirofumi Okoshi, 2019. "Production location of multinational firms under transfer pricing: the impact of the arm’s length principle," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 26(4), pages 835-871, August.
    20. Niels Johannesen & Thomas Tørsløv & Ludvig Wier, 2016. "Are less developed countries more exposed to multinational tax avoidance? Method and evidence from micro-data," WIDER Working Paper Series 010b (Revised version May, World Institute for Development Economic Research (UNU-WIDER).
    21. Fuest, Clemens & Spengel, Christoph & Finke, Katharina & Heckemeyer, Jost & Nusser, Hannah, 2013. "Profit shifting and 'aggressive' tax planning by multinational firms: Issues and options for reform," ZEW Discussion Papers 13-044, ZEW - Leibniz Centre for European Economic Research.

    More about this item

    Keywords

    profit-shifting; tax evasion; transfer pricing; tax loophole; capital outflow tax; customs reform;
    All these keywords.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_6240. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/cesifde.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Klaus Wohlrabe (email available below). General contact details of provider: https://edirc.repec.org/data/cesifde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.