Reversing the VAT Gap: How the IMF Estimates Global Tax Compliance Without Costly Audits

The IMF Fiscal Affairs Department and the International Finance Corporation introduce the Reverse Method as a low-cost, indirect way to estimate VAT compliance gaps worldwide by reversing the C-efficiency framework used in standard RA-GAP assessments. Applied to 111 countries from 2010–23, the method shows gradual improvements in VAT compliance in advanced and low-income economies, while emerging markets remain broadly stagnant, offering a practical tool for global monitoring and comparison.

Estimating how much value-added tax (VAT) governments fail to collect is inherently difficult because tax evasion is hidden by nature. Taxpayers do not disclose what they underreport, making exact measurement impossible. Yet knowing the scale of VAT noncompliance is crucial. It tells governments how much revenue they lose because of evasion and weak administration, and how much could potentially be recovered. Over the years, the International Monetary Fund (IMF) has addressed this challenge through its Revenue Administration Gap Analysis Program (RA-GAP), which produces detailed VAT gap estimates using national accounts and administrative data. While RA-GAP is widely seen as the global gold standard, it is costly, data-intensive, and difficult to apply frequently or across all countries. This limitation has left a gap in global monitoring, which the new Reverse Method is designed to fill.

The Idea Behind the Reverse Method

The Reverse Method is an indirect technique that builds on an existing concept known as C-efficiency. C-efficiency compares actual VAT revenue with the revenue that would be collected if all final consumption were taxed at the standard VAT rate under perfect compliance. When C-efficiency is low, it reflects two things: policy choices, such as exemptions or reduced rates, and compliance failures, such as evasion or underreporting. Traditionally, analysts estimate compliance gaps directly and then infer policy gaps. The Reverse Method deliberately flips this logic. Instead of starting with compliance, it begins with observed C-efficiency and an estimate of the policy gap, and then calculates the compliance gap as the remaining unexplained portion. This reversal allows analysts to estimate compliance even when direct information is unavailable.

Turning Theory into a Practical Tool

To make this approach workable, the authors break the policy gap into two simpler parts. The first is the tax expenditure gap, which reflects revenue lost because of exemptions, reduced rates, and special VAT treatments compared with a benchmark where most goods and services are taxed at the standard rate. The second is the nontaxable goods and services gap, which covers public administration, public education, and public health, sectors that are usually exempt from VAT and not treated as tax expenditures. Using publicly available data, tax expenditure figures are taken from the Global Tax Expenditure Dataset, while national accounts are used to approximate the size of nontaxable sectors. These components are combined with the IMF Fiscal Affairs Department data on C-efficiency to estimate the VAT compliance gap indirectly. Because these inputs are imperfect, the method does not rely on simple arithmetic alone but uses statistical calibration to correct for systematic biases.

How the Method Is Tested and Calibrated

To ensure credibility, the Reverse Method is calibrated against real-world VAT gap estimates produced by past RA-GAP missions. The authors use data from 43 countries and more than 200 country-year observations between 2010 and 2023. Statistical models adjust the indirect estimates so that they closely match observed RA-GAP results. The calibration performs well, showing strong alignment in both levels and trends. Separate calibrations for European Union and non-EU countries further improve accuracy, reflecting differences in VAT design, especially in cross-border trade. While the method cannot claim perfect precision, it consistently produces results that mirror established benchmarks, making it suitable for large-scale monitoring.

What the Global Results Show, and Why They Matter

Using the calibrated model, the authors estimate VAT compliance gaps for 111 countries from 2010 to 2023, creating one of the most comprehensive global datasets to date. The results show clear patterns. Advanced economies have the lowest VAT compliance gaps relative to GDP, followed by emerging market economies, while low-income developing countries experience the largest losses. Encouragingly, compliance has improved over time in both advanced and low-income countries, with gradual declines in gaps relative to potential VAT revenue. Emerging market economies show less progress, with gaps remaining broadly stable. Regionally, most parts of the world record modest improvements, although the Middle East and Central Asia stand out as areas where compliance gaps have increased slightly.

The authors emphasize that the Reverse Method is not a replacement for detailed country studies. Instead, it is a powerful screening and monitoring tool, one that allows governments, researchers, and international institutions to track VAT compliance trends, compare countries consistently, and identify where deeper analysis or reform efforts may be most urgently needed.