Improving VAT Compliance by Switching Who Remits the Tax: Evidence from Construction Firms

• In Event: Tax Enforcement, VATs, and Information Exchange

Abstract

Many countries use a reverse charge mechanism (RC) in value added tax (VAT) to combat tax evasion in specific high-risk sectors. The RC shifts the liability to remit VAT from the seller to the buyer. We study the adoption of RC in the construction sector in Finland in 2011 using tax return data on the universe of Finnish firms. Using a difference-in-differences design, we find that reported net VAT liabilities in the construction sector increased by 5%. According to our results, changing the remittance policy decreased VAT evasion by small subcontractors that provide services for large firms.

Authors

• Aliisa Koivisto, Massachusetts Institute of Technology

• Annika Nivala, VATT Institute for Economic Research