Active Ghosts: Nil-filing in Rwanda. (April 2022)

• Record Type: Journal Article
• Authors: Mascagni, Giulia; Santoro, Fabrizio; Mukama, Denis; Karangwa, John; Hakizimana, Napthal
• Is Part Of: World development. Volume 152(2022)
• Publication Date: 2022-04
• Subjects: Tax compliance -- Tax administration -- RCT -- Nil-filing -- Taxpayer behaviour; H25 -- H26 -- H32 -- D22; Economic history -- 1990- -- Periodicals; Economic assistance -- Developing countries -- Periodicals; 330.9
• DOI: 10.1016/j.worlddev.2021.105806
• Languages: English
• ISSNs: 0305-750X

Abstract

Highlights: Nil filing refers to taxpayers reporting zero in all fields of their declaration: zero income, zero expenses, and zero tax. It is a puzzling but widespread phenomenon in many countries. We show that nil-filers in Rwanda account for half of all corporate tax declarations and about a quarter of personal income tax declarations. Nil filers are more likely to be small and young firms, often they are not yet operating. Evasion is only a small part of the explanation behind nil-filing. A major reason lies at the interaction between aggressive recruitment campaigns by the RRA and taxpayers' response to a complex and confusing tax system. Our results challenge the idea that expanding the tax base to the informal sector, usually intended as micro and yet unregistered firms, would generate substantial gains in revenue collection. Such strategy can instead have important unintended consequences. Abstract: Nil-filing refers to taxpayers reporting zero in all fields of their tax declaration. It is a largely ignored phenomenon in the public finance literature, despite being well known to tax administrators and widespread: half of all registered corporations in Rwanda file nil. This paper sheds light on this issue, using descriptive analysis of administrative data, a randomised controlled trial (RCT), and qualitative interviews with taxpayers and tax officials. We argue that a major reason for nil-filing lies at the intersection between aggressive recruitment campaigns by the Rwanda Revenue Authority (RRA) and taxpayers' response to a complex and often confusing tax system. Through the lens of nil-filing, we also shed some light on the practical challenges of public administration in low-income countries more generally. By doing this, we challenge the prevailing narrative that governments should always expand the tax base to small and yet unregistered firms, showing some previously undocumented – and unintended – consequences of such a strategy.