Electronic Payment Technology and Tax Compliance: Evidence from Uruguay's Financial Inclusion Reform

The idea that the digitization of transactions in an economy might increase tax compliance has been prominent in the academic literature and in policy debates. This paper studies the effect of financial incentives on the adoption of electronic payment technology by firms and consumers and on tax compliance by firms. Exploiting administrative tax and transaction records and quasi-experimental policy variation from Uruguay, we present three findings. Consumer VAT rebates for credit/debit card transactions trigger an immediate 50% increase in the number of card transactions. Firms’ use of POS terminals, however, increases only on the intensive margin but not on the extensive margin. Tax compliance is unaffected. Endogenous POS adoption and the fact that electronic sales constitute less than 30% of total reported sales among firms with a POS can rationalize the findings.