Tax credits response to tax enforcement: evidence from a quasi-experiment in Chile

Available from: 
January 2013

 By: Claudio A. Agostini (Universidad Adolfo Ibañez); Claudia Martínez A. (Universidad de Chile)

Diesel in Chile receives a different tax treatment depending on its use. If diesel is used in industrial activities the diesel taxes paid can be fully used as a credit against VAT, but if it is used in freight or public transportation -basically trucks and buses- only a fraction of diesel taxes paid can be claimed as a tax credit for VAT payments.

As a result of this different tax treatment firms have incentives to use “tax exempted” diesel in activities requiring “non tax exempted” diesel. This tax wedge, therefore, generates an opportunity for tax evasion, especially for firms with multiple economic activities, one of them being transport. In this paper we analyze the impact of a tax enforcement program implemented by the Chilean IRS, where letters requiring information about diesel purchases and use and vehicles ownership were sent to around 200 firms in 2003. Using different empirical strategies to consider the non-randomness of the selection of firms, the empirical results show consistently that firms receiving a letter decreased their diesel tax credits by around 10%.

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