Evaluating Transfer Pricing Reform: Evidence from a Natural Experiment in Chile

This paper documents the extent to which multinational firms operating in Chile shift profits to offshore tax havens and evaluates a major reform designed to curb this profit-shifting. We exploit administrative micro tax data containing information on the cross-border real and financial transactions conducted by all medium and large Chilean firms. From 2007 to 2011, Chilean firms that are part of a multinational group sent as much income to the British Virgin Islands as to the United States. In 2011, the Chilean tax administration considerably increased the reporting requirements and monitoring of firms with foreign affiliates and started enforcing strict rules on how intragroup transactions should be priced. We employ a matched difference-in-differences approach to estimate the impacts of this reform. Preliminary results suggest that the reform increased corporate income tax payments and reduced interest deductions. The increase in corporate income tax falls with firm size (+55% for the median firm, +9% at the 95th percentile). In future work, we will analyze the channels that lead to these changes by investigating patterns in international payments of royalties, dividends, interest, and trade in goods and services. ∗Sebastián Bustos: Harvard University, sebastian [email protected]; Dina Pomeranz: Harvard University and NBER, [email protected]; Gabriel Zucman: UC Berkeley and NBER, [email protected]. We thank François Gerard for his valuable comments, Juan Ignacio Elorrieta Maira for outstanding research assistance, and the Weiss Foundation for financial support.