Do tax audits have a dynamic impact? Evidence from corporate income tax administrative data

Abstract

Making use of a unique administrative data set for the period 2013-2018 consisting of the universe of administrative filings in Rwanda this paper investigates the impact of tax audits on incorporated businesses’ reporting behaviour. Using matched-Difference In-Difference the evidence suggests that the average aggregate effect - estimated across different matching approaches - corresponds to an increase of 20.7% in Corporate Taxable Income (CTI) reported by audited businesses the year after receiving the audit that in turn corresponds to an increase of 12.3% in Corporate Income Tax (CIT) paid by those taxpayers. The results also suggest that the type of audit matters. While comprehensive (face to face) tax audits have a significant pro-deterrence effect with an average increase of 28.5% (24.6%) in CTI reported (and CIT payable), narrow scope (desk-based) tax audits, exhibit a counter-deterrent effect on future reporting behaviour leading to a size able reduction of 23.5% (9.5%) in CTI (and CIT payable) reported by taxpayers that experienced this kind of tax audit. The implication of this is that narrow scope audits are not a substitute for comprehensive audits, and doing more of the former and less of the latter might have a negative impact on tax compliance.