Why is it so hard for a middle-income country to tax the multinationals operating inside it?
Challenges of Monitoring Tax Compliance by Multinational Firms: Evidence from Chile
Sebastián Bustos et al. (2019) · AEA Papers and Proceedings 109
Article ↗ · Replication data ↗ (openICPSR)
The archive requires an account we do not hold, so the files were not opened. What follows rests on the published abstract and on this platform's own observations.
What the authors found
Bustos, Pomeranz, Vila-Belda and Zucman use Chile as a case study of a general problem. Multinationals account for a large share of Chilean GDP yet report lower profits and lower effective tax rates than comparable local firms. The authors describe the two main avoidance channels — transfer pricing and debt shifting — and examine Chile's 2011 reform implementing the OECD arm's length principle, questioning whether that standard is enforceable by a tax authority that cannot observe the counterparty.
What our data adds
The channel the paper describes leaves a trace this database can see, though from the outside. Chile pays out charges for the use of intellectual property, and among middle-income economies it is Costa Rica that stands out most sharply on this measure, paying 1.14 per cent of GDP for intellectual property rights — comparable to Thailand's 1.21 per cent and far above its regional peers. Both are economies with large multinational manufacturing presences, and a royalty payment abroad is deductible against domestic profit, which is precisely the mechanism the authors are describing.
| Figure | Value | Indicator |
|---|---|---|
| Costa Rica, IP payments as a share of GDP | 1.14% | BM.GSR.ROYL.CD |
| Thailand | 1.21% | BM.GSR.ROYL.CD |
Every figure here is computed from observations in this database and can be charted, downloaded or queried.
What this cannot show
This is suggestive at best, and possibly not even that. High royalty payments are exactly what a genuine technology-importing economy would show, and separating that from avoidance is the problem the paper says tax authorities cannot solve with the data they have — so an outside observer with national aggregates certainly cannot. The paper's actual evidence is confidential Chilean tax return microdata, comparing multinational and domestic firms directly.
The data behind it
Foreign direct investment, net inflows (% of GDP)
BX.KLT.DINV.WD.GD.ZS
WBCharges for the use of intellectual property, payments (BoP, current US$)
BM.GSR.ROYL.CD