They explain: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 used as a credit against VAT. 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 and opportunity for tax evasion. In this paper we analyze the impact of a tax enforcement program implemented by the Chilean IRS, where letters requiring information about diesel tax credits were sent to around 200 firms in 2003. Using different empirical strategies to consider the non-randomness of the selection of firms, we find that firms receiving a letter decreased their diesel tax credits by around 11%.
The results are consistent with other results in the literature showing that just receiving a letter from the IRS has an impact on tax compliance because it causes a substantial increase in the perceived detection risk.HT: Maximo Rossi