Fighting VAT Fraud: The Importance of On-Time Monitoring and Information Exchange

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

Abstract

Our study analyzes the impact of on-time monitoring and information exchange on value-added tax (VAT) fraud. VAT is a major source of revenue; however, it is susceptible to fraudulent taxpayer behavior, particularly in integrated regions such as the European Union and Latin America. Using a difference-in-differences design on international trade data obtained from the World Bank Integrated Trade Solutions, we find that the combination of on-time monitoring of e-invoices and information exchange on cross-border transactions is likely to reduce the trade data gap, the difference between the export reported by the exporter and the corresponding import reported by the importer, as our proxy for tax fraud by 5.2%. This is more than when policies are implemented alone, such as a 4.6% reduction in VAT fraud with on-time monitoring and a 2.5% reduction in VAT fraud with information exchange alone. We also find that policy enforcement in the VAT-collecting country mainly contributes to reducing VAT fraud in cross-border transactions. These estimations are especially interesting to European policymakers fighting against VAT fraud through stricter electronic surveillance models.

Author

• Ayse Sule Ozdogan Laurenz, Vienna University of Economics and Business