Abstract

This paper focuses on estimates of the VAT gap in WAEMU Member States using the “top-down approach” and conducts econometric analysis to help understand the nature and causes of the VAT gap, and to identify country-specific characteristics that appear related to different levels of the VAT gap. The VAT gap is the difference between the theoretical VAT liability and the VAT actually collected, expressed in relative terms as a share of theoretical VAT liability. Across all Member States, the overall VAT gap stood at 68% in 2006 and declined, on average, by approximately 7 percentage points to 61% by 2015. At the country level, the estimated VAT gap ranges from 37.7% in Togo to 64.9% in Côte d’Ivoire. Econometric analysis, using Panel Corrected Standard Errors, robust OLS regression, and IV methods, was conducted to identify the factors that explain the different levels of the VAT gap. Two variables were found to have the strongest relationship with the level of the VAT gap: the VAT gap share increases with the final consumption ratio-to-GDP of households and non-profit institutions serving households, and, when the VAT burden (the ratio of theoretical VAT liability to GDP) is included as a candidate explanatory variable, a significantly positive association with the VAT gap emerges. After accounting for the risk that this correlation could be biased by measurement errors through IV regression, the relationship becomes negative and significant.