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Improving VAT Compliance by Switching Who Remits the Tax: Evidence from Construction Firms

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  • Junttila, Juho
  • Koivisto, Aliisa
  • Nivala, Annika

Abstract

Many countries use a reverse charge mechanism (RC) in value added tax (VAT) to combat tax evasion in specific high-risk sectors. The RC shifts the liability to remit VAT from the seller to the buyer. We study the adoption of RC in 2011 in the construction sector in Finland using tax return data on the universe of Finnish firms. Using a difference-in-differences design, we find that reported net VAT liabilities in the construction sector increased by 5% compared to unaffected firms. The results show that the remittance policy can be effective in decreasing VAT evasion by subcontractors that provide services for large firms.

Suggested Citation

  • Junttila, Juho & Koivisto, Aliisa & Nivala, Annika, 2024. "Improving VAT Compliance by Switching Who Remits the Tax: Evidence from Construction Firms," Working Papers 170, VATT Institute for Economic Research.
    • Handle: RePEc:fer:wpaper:170
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    File URL: https://www.doria.fi/handle/10024/190620
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    References listed on IDEAS

    as
    1. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
    2. Keen, Michael, 2008. "VAT, tariffs, and withholding: Border taxes and informality in developing countries," Journal of Public Economics, Elsevier, vol. 92(10-11), pages 1892-1906, October.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    tax compliance; value added tax; reverse charge mechanism; firm behavior; Business taxation and regulation; H25; H26; L74; O17; Z18; fi=Verotus|sv=Beskattning|en=Taxation|;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • L74 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Construction
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • Z18 - Other Special Topics - - Cultural Economics - - - Public Policy

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