VAT Compliance Incentives

VAT evasion is a collusive behavior between the two counterparts in a transaction, jointly interacting with the Tax Authority. We first check the tax parameters for Buyer and Seller to agree on complying or evading, under different tax policy scenarios: (i) normal taxes, (ii) tax allowances. Then we check if, how and for which fiscal parameter thresholds, compliance resists, in a Bayesian game, against a Tax-Authority auditing with a random probability. Fiscal parameter thresholds are designed to make compliance a dominant strategy even under No-Audit. In particular thresholds are not only functions of audit probability or tax allowances, but also of the cost structure of the firm.