# **1 Introduction**

The COVID-19 (Coronavirus) pandemic and the associated containment measures are causing far-reaching damage to firms around the world. Firms are suffering from reduced demand due to lockdowns and movement restrictions. Yet, the limited availability of firm censuses and survey data in many developing countries hampers policymakers’ ability to quantify the economic impact of the pandemic and the effect of policy measures to support firms. In this paper, we use a novel dataset of administrative corporate tax returns from 10 low- and middle-income countries to provide plausible estimates of the direct effects of the lockdown on firms’ profits, payrolls, and exit rates. We then derive the implications for tax revenues and government support policies. On average across countries, our lower-bound predictions (optimistic scenario) suggest that only half of all firms remain profitable, tax revenue remitted by corporations falls by 1.5% of GDP, and aggregate corporate losses increase by 2.9% of GDP.

Our analysis relies on a few simple and transparent assumptions about the shock firms face and the adjustments they make. We simulate scenarios in which a demand shock induces a drop in firms’ sales over either three or five months – which can be thought of as the length of the lockdown with perfect compliance to governments’ instructions, or of reduced activity for a longer period with imperfect compliance. The severity of the shock — the percentage drop in monthly sales — differs across economic sectors. We assume that firms produce a unit of output with a Leontieff production function which requires capital, labor and material inputs in fixed proportions, with the proportions estimated from each firm’s tax declaration. In our very stylized world, firms can reduce their material costs proportionally to the drop in demand; they reduce labor costs only when making losses because re-contracting workers is costly; and they cannot adjust their fixed costs. Implicitly, we assume that firms aim to weather the shock in a way that allows them to scale their production back up quickly at the end of the lockdown. In practice, some of the loss in demand might be permanent, and the losses are likely to occur over a longer span than three or five months, albeit at a lower rate once movement restrictions are eased.<sup>1</sup> While simplistic, these transparent assumptions provide plausible lower bounds of the pandemic’s effect on formal firms and on tax revenue, which can later be complemented with general equilibrium analyses and realized data.

This paper uses for the first time a novel dataset of corporate income tax records across countries assembled by the authors as part of a project to promote the use of administrative tax data from developing countries for research and policy evaluation.<sup>2</sup> Administrative tax data often represent the most recent source of firms’ balance sheets in developing countries, they include the largest firms which are often missing in survey data, and they typically constitute the only panel data of firms. Our dataset contains the entire formal corporate sector of 10 countries at different levels of development, in Sub-Saharan Africa, Eastern Europe and Latin America. While the structure of corporate tax returns differs across countries, we harmonize the

> 1Balla-Elliott et al. (2020) shows that firms expect demand to be a third lower than pre-COVID levels upon re-opening.

> 2See Pomeranz and Vila-Belda (2019) and Slemrod (2018) for a summary of recent studies using administrative tax data.

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