This study examines the role of VAT compensation and subsidy mechanisms in promoting the formalization of businesses, enhancing transparency, and reducing shadow economic activity. Drawing on international experiences from countries including South Korea, the Netherlands, Poland, Italy, Mexico, Germany, and France, the analysis demonstrates that linking VAT incentives to compliance requirements, electronic accounting, and proper registration effectively encourages businesses to operate legally. The evidence shows that such mechanisms not only improve fiscal efficiency but also strengthen tax discipline and governance in sectors of high social and economic significance. The findings suggest that targeted VAT reforms, combined with digital reporting, licensing, and continuous oversight, provide a practical tool for both increasing government revenue and reducing the informal economy.

VAT, tax incentives, compensation mechanisms

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