The centre for tax analysis in developing countries

Overseas Development Institue Institue for Fiscal Studies

On 25th May 2017 The Centre for Tax Analysis in Developing Countries (TaxDev) hosted a research workshop on the taxation of businesses in low- and middle-income countries, attended by academics and policy makers from Europe, North and South America and Africa. Professor Michael Devereux delivered the keynote address, and seven academics presented insights on tax policy and administration, enforcement and compliance from projects across Africa, South America and Asia. In addition to corporate income tax (CIT), there was a focus on VAT, turnover and simplified taxes and withholding taxes. The workshop was funded by the Department for International Development (DFID).

The presenters were as follows:

  • Professor Michael Devereux (Oxford University Centre for Business Taxation, Saïd Business School, IFS & CESifo) Business Taxation in Low- and Middle-Income Countries [Keynote Address]
  • Lucie Gadenne (The University of Warwick & IFS) Taxation and Supply Chains: An Evaluation of VAT in West Bengal
  • Miguel Almunia (The University of Warwick & CAGE) Fiscal Capacity and Tax Revenues in Uganda
  • Tuomas Matikka (VATT Institute for Economic Research) How Do Small Firms Respond to Tax Schedule Discontinuities? Evidence from South African Tax Registers
  • Anne Brockmeyer (World Bank & IFS) Taxation, Information and Withholding: Evidence from Costa Rica
  • Mazhar Waseem (The University of Manchester) Is Value Added Tax Self-enforcing? Evidence from Pakistan
  • Joana Naritomi (LSE, CEPR, IFS & CESifo) The Economic and Fiscal Impacts of Special Tax Treatments in Value Added Tax Systems
  • Michael Best (Stanford University, CEPR & IFS) Small Business Taxation, Income Volatility and Investment

Introducing the workshop, Richard Disney (Co-Director of TaxDev) welcomed the speakers and participants. He pointed to the commonality of many of the problems in designing business taxation systems across low- and middle-income countries that would be highlighted by the papers to be presented in the workshop. These included problems of compliance, of distortions to incentives created by the co-existence of different tax regimes for similar firms, of over-complicated rate structures and non-indexation of tax thresholds to inflation.

Michael Devereux (Oxford, IFS & CESifo) delivered the keynote address of the workshop, offering insights into the purpose of business taxation and issues of efficiency, fairness, avoidance and evasion and international tax design (and administration). In the context of developing countries, especially those characterised by many ‘hard-to-tax’ firms (from unregistered small and micro-businesses to professionals and multinationals), Michael stressed the possible trade-offs in tax design, collection and enforcement, and questioned the extent to which production efficiency should be preserved at the expense of, say, sub-optimal revenue collection. Michael concluded with some thoughts on what is and what should be the focus of research in this area, and pointing to examples of good practice in research, including many of the papers presented at the workshop.

Lucie Gadenne (Warwick & IFS) hypothesised that the co-existence of VAT and non-VAT firms impacts upon firms’ choices as to supply chain partners, with the potential for inefficiencies as firms trade-off match quality against the tax status of potential trading partners. Using panel data on tax status choice and sourcing decisions of firms in West Bengal, India, she presented preliminary evidence on how differential tax registration distort supply chain choices. In particular, she finds that VAT-registered firms have more VAT-registered suppliers, suggesting network inefficiencies are relevant in this context.

Miguel Almunia (Warwick & CAGE) presented findings from a long-term research collaboration with the Uganda Revenue Authority (URA) on the interaction between fiscal capacity and information. Miguel estimated VAT misreporting in Uganda using transaction level tax return data, and is using this and goods coding to map production and trade networks, including imports and exports. Miguel also presented preliminary ideas on the design of a randomised control trial to to understand the effectiveness of different mechanisms to increase taxpayers’ perception of URA capacity and the threat of punitive action, so as to provide evidence on the optimal types of firms to treat in order to maximise impact given a limited enforcement budget.

Tuomas Matikka (VATT Institute for Economic Research) offered evidence of the impact of progressive corporate income tax (CIT) schedule in South Africa on Small and Medium Enterprises (SMEs) behaviour. Making use of new tax returns data, he showed that firms respond very strongly to the Small Business Corporation (SBC) tax schedule, observing large and distinctive excess bunching at kink points in the schedule. He finds that a significant part of the response arises from reporting rather than real responses, with the implication that a graduated tax structure may distort incentives for small firms to produce at the optimal level.

Anne Brockmeyer (World Bank & IFS) presented findings from a paper analysing the impact of tax withholding on business sales, which made use of a ten-year panel of income tax and sales tax records from 400,000 firms in Costa Rica, and over 20 million third-party information and withholding reports.  In the paper, Anne isolated the impact of withholding by exploiting a quasi-experimental increase in the withholding rate applied by credit/debit card companies to firms’ cards in a difference-in-difference and regression continuity design. She finds that a doubling of the withholding rate led to a 34% increase in sales tax payment among treated firms and an 8% increase in aggregate sales tax revenue. Exploring the mechanisms, she finds incomplete reclaim of the tax withheld and reduced misreporting drive the result.

Mazhar Waseem (Manchester) presented research on the self-enforcing properties of VAT, using evidence from two large-scale natural experiments in Pakistan: the staggered introduction of VAT, and the roll-out of a nationwide enforcement survey in 2000-2002. Mazhar finds evidence in support of the self-enforcement hypothesis, with the expansion of VAT-coverage causing a significant increase in the reported sales of incumbent firms. Mazhar also explores the two mechanisms which facilitate self-enforcement through the invoice credit system: information trails on inter-firm transactions and tax withholding at the upstream stage. Although the former has been discussed in the literature, the latter has received less attention. Future work will focus on disentangling these two mechanisms.

Joana Naritomi (LSE, CEPR, IFS & CESifo) offered new insights from work in progress investigating the economic and fiscal impacts of special tax treatments in the VAT system of São Paulo, Brazil. Joana makes use of administrative tax data on formal firms, as well as data on formal transactions between formal firms, to investigate the impact of a substantial change in the VAT threshold on sales and value added for directly affected firms as well as for competitors, suppliers and buyers (and thus on firms’ networks).

Michael Best (Stanford University, CEPR & IFS) presented preliminary research findings on  the question of whether post-tax income volatility leads businesses to change the timing of their income and investment choices. Using administrative data on all small business taxpayers and exploiting the introduction of a reform reducing post-tax income volatility, Michael explored the ways in which the timing of businesses’ income changed, and how their investment responded.

Published on: 30th May 2017

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