Tax evasion from cross-border fraud: does digitalization make a difference?

ABSTRACT

How can governments reduce the prevalence of cross-border tax fraud? This paper argues that the use of digital technologies offers an opportunity to reduce fraud and increase government revenue. Using data on intra-EU and world trade transactions, we present evidence that (i) cross-border trade tax fraud is non-trivial and prevalent in many countries; (ii) such fraud can be alleviated by the use of digital technologies at the border; and (iii) potential revenue gains of digitalization from reducing trade fraud could be substantial. Halving the distance to the digitalization frontier could raise revenues by over 1.5% of GDP in low-income developing countries.

KEYWORDS:

• Panel data
• fiscal policy
• carousel fraud
• e-government
• technology
• taxation
• digitalization
• tax evasion

JEL CLASSIFICATION:

• H30
• H26
• O30
• C23

Acknowledgments

The authors thank one anonymous referee for useful comments. The usual disclaimer applies and any remaining errors are the authors´ own responsibility. Prof. Jalles acknowledges financial Support from FCT – Fundação para a Ciência e Tecnologia (Portugal), national funding through research grant UIDB/05069/2020. The opinions expressed herein are those of the authors and not necessarily those of their employers.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ https://www.europol.europa.eu/crime-areas-and-trends/crime-areas/economic-crime/mtic-missing-trader-intra-community-fraud

² Studies examining the impact of sector specific tariff rates on trade fraud relied on disaggregated industry-by-industry measures of trade misreporting (see e.g. Javorcik and Narciso 2008; Mishra, Subramanian, and Topalova 2008;; Jean and Mitaritonna 2010).

³ The trade gap as defined can have a maximum value of 2 and a minimum value of – 2. Estimations are robust to the exclusion of such extreme values.

⁴ It is significantly correlated to other digitalization indices available and has broader sample coverage across countries and over time compared to WB’s Digital Adoption Index and WEF’s Government Success in ICT Promotion.

⁵ This instrumental variable is positively and strongly correlated to the endogenous digitalization index both for importers and exporters (columns 2 and 3). The exclusion restriction relies on the assumption that the trade gap itself is not correlated with differences in the instruments once macro-variables are explicitly controlled for.

Additional information

Funding

This work was supported by the Fundação para a Ciência e Tecnologia.