Captioned ‘Current Challenges in Revenue Mobilization: Improving Tax Compliance', the Paper observes: “Measuring and analyzing ‘compliance gaps' is a powerful first step to addressing noncompliance—and reducing them can raise significant amounts.”

It says: “Estimating and dissecting the difference between tax due and collected is becoming more common, but remains the exception—even in advanced economies. The aim is not to eliminate gaps, but reducing them can raise significant amounts: reduced VAT gaps in Latin America in the early 2000s, for example, may have raised revenue by about 15 percent.”

The Paper notes that gap estimates are very rare in developing economies. Even some of the most advanced tax administrations do not construct them.

It has found that compliance gaps are generally greater in developing countries. The gaps were widened by the financial crisis in the most-affected countries. Many RAs were ill-prepared to cope with the crisis, which exposed structural weaknesses.

Tracing the origin of tax compliance gaps measurement, the Paper point out that it started with the ‘Taxpayer Compliance Measurement Program' in the U.S., The initiative is a highly rigorous random audit program. Denmark has used a similar approach. Several European countries produce gap estimates, but only the U.K. publishes them routinely.

It observes that estimated VAT gaps for 26 EU members (from 2000), prepared for the European Commission, are provided in Center for Social and Economic

Research. Many Latin American countries have regularly estimated their total tax gaps since 2000. The Australian Tax Office has also published its estimated GST compliance gap.

The compliance gas measuring methods can be grouped into two categories. The first is the ‘Bottom up' approach, which gross up from audit results or other operational information. This may involve random audits, whether intended to identify the full range of noncompliant behavior or drawn from populations known to be problematic. Random audits can be costly, but provide direct intelligence on the nature of noncompliance.

The second approach is ‘Top down' approach that uses national accounts and perhaps other data to model the tax base and estimate revenue under perfect compliance, subtracting actual collections to arrive at the compliance gap. This has the advantage of using fairly readily available data, but its accuracy depends on that of those data, and may provide little insight into how compliance might be improved.

The bottom-up approach is most often used for income tax gap estimates, and top-down more commonly for consumption tax gap estimates. Within each approach a variety of methods can be employed.

The Paper has also dealt with the issues of ‘hard-to-tax' categories of tax payers and taxing E-commerce-centric business to consumer transactions that often take place across the borders.