Evaluation of the factors affecting tax audits effectiveness. Evidence from EU tax administrations

Abstract

The purpose of this paper is to assess the factors that influence the effectiveness of tax audits carried out by the tax administrations of the European Union economies and to draw useful conclusions on the development of an effective European tax audit strategy. More specifically, using panel data from 21 member states of the European Union, for the period 2016-2019, we analyze the causal relationships between the effectiveness of tax audits and various economic, institutional and political factors. To analyze the long-run and short-run interdependence and causality relationships between these factors, we use panel cointegration theory and estimate error correction models (ECM). The results of the research revealed the existence of significant causal relationships between the effectiveness of tax audits and factors related to per capita income, gross domestic product, tax rates, tax capacity, time to comply, the level of corruption, adherence to the rule of law and the quality of institutions in an economy. It was also found that increased efficiency of tax audits significantly affects the per capita income of the economy, the quality of institutions, the political stability of a country and the tax buoyancy.

JEL classification: C3, H2, H7, H8

Keywords: Taxation, tax audits, efficiency, causality, European Union