Trade misreporting: Evidence from Pakistani importers

Abstract

AbstractThis paper provides direct evidence of attempted tax evasion in response to changes in tariff rates in a small open economy using transaction‐level customs data for Pakistani importers. Our results show that there exists a systematic relationship between the difference in declared and assessed import values of the shipment, and the duty rate charged to the importer. We demonstrate that higher duty rates are associated with a greater misdeclaration of imports. In particular, a one‐percentage point increase in duty rates, on average, is linked with 0.4% increase in under‐invoicing of imports by Pakistani firms. The study explores several dimensions to examine the variation in estimates obtained across product types, import origins, modes of processing import transactions and the role of firm characteristics, such as, frequency of imports, in determining the extent of misdeclaration.