Jose Carlo Bermudez, UC (ME) & World Bank

Paper: VAT refunds and firms’ performance: Evidence from a withholding reform in Honduras

Abstract: Value-added taxes (VAT) have been widely adopted across the world. One key issue in the effective administration of VAT are refunds: late or unreliable refund of credits undermine the best traits of VAT systems and might affect firms’ growth and investment opportunities. In this paper, we use administrative data on the universe of VAT taxpayers in Honduras to estimate the impact of a tax reform aimed at curtailing excessive unrefunded credits. First, we document the substantial expansion of unrefunded credits in the period 2011-2019, equivalent to 1.5% of GDP, and characterize its drivers. We then study a reform that substantially decreased the withholding rate of VAT liabilities by credit card providers. Using a differences-in-differences approach, we document that the reform causally decreased unrefunded credits of affected firms and thus was equivalent to a tax cut. We then evaluate whether this reform affected firms’ economic outcomes such as investment, wage bill, or revenue, and are unable to reject the null hypothesis of zero effects on firm growth.