Estimating audit based tax gaps in Zambia

Abstract Assessing tax gaps-the difference between the potential and actual taxes raised-plays a vital role in achieving positive domestic revenue objectives through improved and reformed taxation. This is particularly pertinent for growth outcomes in developing countries. This study uses a bottom-up approach based on micro-level audit information to estimate the extent of tax misreporting in Zambia. Our methods predict the extent of tax evasion using a regression and a machine learning algorithm with a sample of audited firms. We then estimate tax gaps using a standard approach. We estimate total tax gaps of 55% and 47% for the two approaches, respectively. This represents potential revenue with the least assumed tax evasion. These gaps are mainly driven by Corporate Income Taxes (CIT). Applying our gap to key industries shows that the extractives sector in Zambia records the highest gaps in terms of CIT and one of the lowest gaps in terms of VAT.