VAT thresholds and tax assessment: evidence from Taiwan

ABSTRACT

Based on a dataset from the unique two-tier VAT (value-added tax) thresholds in Taiwan, this paper suggests that poor assessment of the sales of business entities by the competent tax authority has brought about severe underestimates of the amount of sales. It has resulted in a shortfall of tax revenue from small business entities and underscores the importance of tax enforcement.

KEYWORDS:

• Value-added tax
• tax assessment
• thresholds
• Taiwan

JEL CLASSIFICATION:

• H25
• H26
• H32

Disclosure statement

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

Notes

¹ Apart from a few exceptions, most business entities that are taxed based on the amounts of assessed gross turnover are subject to a tax rate of 1%; by contrast, business entities belonging to the VAT system are subject to a VAT rate of 5%.

² For example, the business may be reported anonymously (and verified by the competent tax authority) to have actual turnover higher than the VAT threshold.

³ There are many reasons for this underestimate. First, since these excluded businesses are most likely to be small, there may be some ‘unjustified’ application of the ability-to-pay principle to lower the assessed sales. Second, the Ministry of Finance may succumb to the political pressures of special interest groups composed of small businesses. Finally, a lack of bookkeeping records complicates the estimation of sales.

⁴ As previously explained, the sales data for period t + 1 are excluded because they may be for a VAT period that is less than the full period of two months.