Using third-party data to improve tax compliance in a context of low enforcement
Developing countries typically face with low tax compliance both at the extensive and intensive margins. In the presence of weak enforcement capacity by state institutions, leveraging information diffusion through firm networks may be a cost-effective way of improving tax compliance. Senegal is confronted with two major challenges in terms of tax compliance. Firstly, the tax base is very narrow: of the 420,000 firms counted in the country’s recent firm census (Agence Nationale de la Statistique et de la Démographie (ANSD), 2016) less than 10 % regularly file taxes. Secondly, our first estimates suggest that under-reporting of revenues by firms that do file taxes is highly prevalent, we estimated for instance that, under rather conservative hypotheses, about 15-20% of these tax-filling firms under-reported their income while filing their income tax in the last four years. We also have evidence strongly suggesting that tax fraud is significant with respect to other tax instruments. In line with these observations, the recent rebasing of Senegalese GDP – transiting from a 1999 to 2014 base year – which led to a 30% appreciation of the GDP, automatically translated into a decrease in tax to GDP ratio now estimated at 15%, which is 5 percentage points lower than the regional target.
The proposed network-based intervention which we put forward jointly with the Senegalese tax authority (Direction Générale des Impôts et Domaines, DGID), holds the potential to improve tax compliance at both the intensive and extensive margins. Firstly, we will test ways to leverage supply chain network information to reduce under-reporting by formal firms. By formal firms we understand those having filed a tax return at some point during the period of data availability. Secondly, our project aims at increasing tax revenues at the extensive margin as well, by experimenting with innovative (in)direct approaches to nudge informal firms (those who have never filed) to enter the tax base. The target group are informal firms that are large and stable enough to entertain supply relationships with formal ones. The overall objective of our project is to leverage supply chain network information in different ways to measure direct and indirect
effects on both formal and informal firms of different deterrent measures.