VAT Refunds and Firms’ Performance: Evidence from a Withholding Reform in Honduras

David Pineda Pinto, Jose Carlo Bermúdez and Thiago De Gouvea Scot de Arruda

No 10996, Policy Research Working Paper Series from The World Bank

Abstract: Late or unreliable refunds of credits undermine the best traits of value-added tax (VAT) systems and might affect firms' growth and investment opportunities. This paper uses administrative tax records in Honduras to study a tax reform that decreased the withholding rate of value-added tax liabilities by credit and debit card (DCC) providers, aiming to curb unrefunded credits. Using a difference-in-differences approach, exploiting differential exposure to the reform, the paper documents that it caused a decrease in excessive withholding and was equivalent to a cut of 1.1 percentage points in effective tax rates faced by treated firms. The paper then evaluates the effects on firms' economic performance and estimate null effects on several indicators of economic growth and investment. The results challenge the premise that unrefunded VAT credits are an important constraint to firm growth in certain settings. Keywords: VAT refunds, withholding, firms’ performance.

Date: 2024-12-11
New Economics Papers: this item is included in nep-acc and nep-pbe
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