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A general framework for measuring VAT compliance rates

James Giesecke and Nhi Hoang Tran

Applied Economics, 2012, vol. 44, issue 15, 1867-1889

Abstract: Summary measures of Value Added Tax (VAT) compliance rates are valuable for identifying problem areas in VAT implementation. They are also essential for meaningful crosscountry and crosstime comparisons of VAT compliance. We present a comprehensive and general framework for calculating VAT compliance rates at both the economy wide and detailed sectoral levels. Unlike existing measures of VAT compliance, our framework isolates a compliance measure from the effects on VAT receipts of detailed features of VAT systems as actually implemented by tax authorities. These features include multiple VAT rates, exemptions, registration rates, refund limitations, informal activity, taxation of domestic nonresidents and undeclared imports. We implement our comprehensive VAT compliance measure for Vietnam, a country with a complex VAT system. Our estimate of Vietnam's VAT compliance rate is about 13 percentage points higher than that calculated by the most popular measure of compliance, Collection Efficiency (CE). Our method facilitates decomposition of the difference between CE and our VAT compliance measure into individual contributions by the statutory and structural features of Vietnam's VAT regime.

Date: 2012
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DOI: 10.1080/00036846.2011.554382

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