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Tax Authority’s Attempt to Crack Down on Tax Evasion Falls Short

Ecuadorian Tax Authority’s Initiative Fails to Yield Desired Results

QUITO, Ecuador - The Ecuadorian tax authority recently implemented a program aimed at cracking down on tax evasion by providing third-party information to firms with discrepancies in their reported revenues and costs. However, a new study suggests that the initiative may not have had the desired effect.

Study Findings

According to the study, only 36% of firms matched the specific amount of the detected discrepancy exactly. The remaining firms adjusted their revenues by an average of 93 cents per dollar of notified discrepancy. Furthermore, firms also increased reported costs by 96 cents for every dollar of revenue adjustment, indicating that third-party reporting had little effect on the ultimate levels of tax evasion.

Consequences

The study found that notifications resulted in an average taxable profit increase of 3.7% of notified discrepancy, or $1,850 in actual tax payments. However, if all amending firms had fully adjusted their revenues to third-party information and held other line items constant, the Ecuadorian tax authority would have received approximately $23 million in additional tax payments.

Limitations

The study’s authors argue that the limitations in enforcement capacity and corruption can undermine the effectiveness of even conditional improvements in informational transparency. They also suggest that some firms may be underreporting their costs, which poses a challenge for enforcement based on third-party reporting.

Conclusion

Despite these challenges, the study notes that third-party reporting and traditional tax enforcement can complement each other. Strengthening auditing and enforcement capacity in tandem with comprehensive third-party information cross-checks could be a desirable strategy for continually improving overall tax enforcement.

Implications

The findings of this study have significant implications for policymakers seeking to address tax evasion in developing countries. They suggest that relying solely on third-party reporting may not be enough to curb tax evasion, and that a combination of measures is needed to effectively combat the problem.

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