Using third-party data to improve tax compliance in a context of low enforcement

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This paper investigates a potentially cost-effective way to improve tax compliance when enforcement capacity is low, by leveraging inter-firm relationships and third-party reporting. Using rich administrative data from Senegal, we first document persistent concentration of tax revenue among the largest taxpayers and significant under-reporting among smaller firms. We randomize a low-cost communication intervention which induces the largest firms to comply with a policy whereby they must declare payments made to their suppliers and either withhold a 5% tax from those which are not tax-registered, or provide their suppliers' fiscal identifier to the tax authority. Early results suggest large firms do not correct withholding payments for past transactions but do provide more complete information about their suppliers. In a follow-up intervention, we will test whether exploiting this new information reinforces the efficiency of legal procedures targeting suppliers which have been detected as significantly under-reporting their revenues.