Responses of Firms to Tax, Administrative and Accounting Rules: Evidence from Armenia

Abstract

Using panel data on the full population of corporate tax returns from Armenia, we study behavioral responses of firms to three size-dependent regulations. We find: i) a strong response to an accounting notch where IFRS becomes mandatory; ii) a moderate response to an administrative notch below which the frequency of filing taxes declines; and iii) no response to the VAT registration threshold notch. Exploiting tax audits, we provide evidence suggesting that income under-reporting drives the bunching response of firms. Additional evidence suggests that firms respond to audits by compensating additional reported income by a 0.90 dollar increase in deductions.

Keywords: small and medium enterprises, size-dependent regulation, value added tax, tax administration, tax accounting, tax evasion

JEL Classification: H250, H260, O120