Corporate Taxation and Evasion Responses: Evidence from a Minimum Tax in Honduras

Corporate Taxation and Evasion Responses: Evidence from a Minimum Tax in Honduras Felipe Lobel Thiago Scot * Pedro Zúniga July 2020 JMP preliminary draft - Please do not cite or circulate Abstract The international landscape of corporate taxation has been changing rapidly: tax rates have fallen across the world and opportunities to shift prots to low-rate locations have grown. The challenge to tax corporations is particularly stark in developing countries which often lack the institutional capacity to enforce compliance. One tool already deployed in several low-income countries and being discussed in international tax cooperation agreements are minimum taxes, provisions that tax rms on a broader base if reported prots are too low. In this paper we use administrative data on the universe of corporate taxpayers between 2011- 2018 to study the impact of a minimum tax implemented in Honduras. We rst document substantial tax evasion when costs are deductible: large corporations signicantly increase their reported prot margins when incentives to over report costs disappear, implying evasion rates of up to 17% of prots. We then show that rms strategically reduce reported revenue in order to locate below the exemption threshold for the minimum tax policy and estimate revenue elasticity around one. Bunching is less pronounced when third-party infor- mation on revenues is available, suggesting the response is partly explained by misreporting. Using these parameters, we calibrate a model of rm optimization and study the impacts of alternative tax schedules. As designed, we estimate the minimum tax policy increased tax revenues by up to 30%, but at the cost of substantially decreasing rms’ aggregate prots. We then show that the tax authority can increase revenues by up to 10% without losses on aggregate prot by introducing a small degree of production distortion through limited cost deductibility. * Thiago Scot (Job Market Paper): UC Berkeley Haas School of Business. Corresponding author at thi- [email protected]. Felipe Lobel: UC Berkeley, [email protected]. Pedro Zúniga: Servicio de Administración de Rentas (SAR), [email protected]. This research would not have been possible without the support from the team at Servicio de Administración de Rentas, specially the Intelligence and Fiscal Studies groups. We thank in particular David Pineda Pinto, Edgardo Espinal Hernandez, Oziel Fernández and Milton Maldonado. The ndings expressed in this paper are solely those of the authors and do not represent the views of SAR or any other institu- tions. 1

Corporate Taxation and Evasion Responses: Evidence from a Minimum Tax in Honduras

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