Incomplete VAT Rebates, Trade Misreporting, and Export Tax Evasion: Evidence from Resource-Based Products in China

Since incomplete VAT rebates act as an export tax, they may incentivize firms to manipulate trade data to evade taxation. This paper, motivated by the widespread bilateral trade discrepancies in China’s resource-based product exports and the 2007 rebate reform, develops a theoretical model to illustrate how changes in the net VAT rate shape firms' cost-benefit structures and affect incentives for evasion. Using bilateral trade data on China’s resource-based exports to 115 countries during 2003–2011 and exploiting the 2007 policy adjustment as an exogenous shock, the study uses a difference-in-differences strategy to identify the causal impact of higher net VAT rates on tax evasion. The results indicate that the policy adjustments significantly increased the level of evasion in the treatment group compared to the control group by 12.7 percentage points. The effect is robust to placebo and sensitivity tests. Mechanism analysis shows that evasion increases along both intensive and extensive margins, primarily through quantity under-reporting and product misclassification. Further heterogeneity tests reveal stronger underreporting in destinations with higher corruption and weaker trade liberalization, and more pronounced evasion in products with higher value-to-weight ratios and larger tax hikes. JEL Classification: F14 , H26 , H32