Technology Evolution and Tax Compliance: Evidence from Rwanda

Naphtal Hakizimana and Fabrizio Santoro

No 18354, Working Papers from Institute of Development Studies, International Centre for Tax and Development

Abstract: Data on economic transactions is crucial for tax administrations to be able to enforce tax compliance, and technology can be key to obtaining information. In the last decade, African tax administrations have increasingly adopted technological advances such as integrated systems, electronic filing, and electronic billing machines (EBMs). EBMs allow taxpayers to digitise their transactions and transfer billing information automatically to the revenue authority. They have high potential, as they allow firms to lower their administrative and compliance costs, streamline transactions, improve record-keeping, strengthen their administrative capacity and, in the case of small businesses, improve their ability to attract clients and engage in trade thanks to improved accuracy and transparency. Rwanda is one of Africa’s fastest growing and most technology-oriented countries. The government is highly reliant on technology to improve tax revenues. In 2013, the Rwandan Revenue Authority (RRA) introduced EBMs through a machine called EBM1. This used a SIM card, through which VAT-registered taxpayers transmitted sale transaction data to the RRA in real time. Like any technology, there were practical challenges, such as the cost of acquiring and maintaining the machine, limitations in storing information and lack of remote support. As a result, an improved, free, software version called EBM2 was rolled out in 2017 and is still in use. This can digitise and store receipts, capture core business information like inventory and type of items sold, automatically validate buyers’ identity and provide support online. This paper evaluates the impact of the implementation of EBM2 on VAT and income tax compliance. Thanks to a collaboration with the RRA, we looked at around 60,000 EBM users’ monthly/quarterly VAT and annual income tax returns from 2013 to 2020. We focus specifically on two groups: those who had previously used EBM1 and shifted to EBM2 (shifters), and those who only adopted EBM2 (new users). Taking advantage of the fact that EBM2 adoption happened over time, we conduct a difference-difference strategy to estimate the impact of EBM2 on key outcomes for both VAT and income tax, including the discrepancy in reported turnover between the two tax heads.

Date: 2024
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