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Shifting-Profits through Tax Loopholes. Evidence from Ecuador

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  • 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
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    References listed on IDEAS

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    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).

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    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

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