Seminar: Risa Pavia, CORE

Tax Evasion by Domestic and Multinational Firms in Portugal: A Bunching Analysis”

Risa Pavia, CORE & Universidade Nova de Lisboa

In this paper I seek to distinguish tax evasion by “iceberg” firms, which report only some percentage of their income to the tax authorities, from “ghost” firms, which report no economic activity at all. I further differentiate firm behavior by multinational status, and test the effects of an exogenous shock to the cost of evasion for firms in certain sectors of economic activity. I develop a unique identification strategy using a new anti-tax evasion measure and a comprehensive dataset of the annual accounts of Portuguese firms. I find significant bunching at zero profits by all firms in all time periods, indicative of tax evasion around that threshold. The difference-in-differences analysis shows less post-reform bunching by firms in sectors targeted by the 2013 law when compared to other firms, indicating that the law had the intended causal effect of decreasing evasion in those sectors, with a larger difference for multinational firms.