VAT Introduction-Administrative issues
By Paulo dos Santos
CARTAC
Who is afraid of the VAT????
The VAT today
• 120 countries have a VAT
• 4 billion people pay it
• It raises more than US$18 billion
or 25% of total tax revenue
VAT introduction—The
Chronology
•
•
•
•
1948
1967
1970/80
1990
•
•
•
•
France, at manufacturing level
Brazil, at all levels (Brazilian states)
It spread to 63 countries
More than 120 countries have VAT
VAT is efficient in small islands
(Under 1 million population)
90
80
83
70
60
64
50
58
40
30
20
62
57
38
10
0
C-Efficiency
57
Sub-Saharan Africa
Asia and Pacific
Americas
EU (plus NW & CH)
Central Europe
N. Africa Middle East
Small Islands
The situation in the Caribbean
region
• In operation
– Barbados, Dominican Republic, Haiti, Jamaica,
and Trinidad & Tobago
• Repealed
– Belize, Grenada
Why some countries repeal VAT?
• Political commitment to repeal it
• Poor performance due to poor planning for
introduction
• Inadequate definition of registration
threshold
The VAT implementation flow
Decide on VAT
Introduction
Prepare for VAT
introduction
Decide on policy
Aspects
Introduce
the VAT
Decide on administrative aspects
Operate
the VAT
The most-mentioned constraints
to VAT introduction
•
•
•
•
Tax administration effectiveness
Culture of bookkeeping
Adult literacy level
Implementation cost
Tax administration effectiveness
• Weak administration = poor VAT
performance
• But…
• Under a weak administration any tax
performance will be poor
• Some countries use VAT as part of a
strategy to strengthen tax administration
• Train staff during VAT introduction
Culture of bookkeeping
Why bookkeeping?
• Pricing product accurately
• Knowing if business is making or losing
money
• Knowing the cash flow (short & long run)
• Working with bankers (financing)
• Paying taxes due
Culture of bookkeeping
How to change it?
• The Peruvian culture regarding invoices
• Enforce bookkeeping requirement
• Establish threshold that ‘filters’ those
unable to bookkeeping
Country
Niger
Adult Literacy
Rate
14
VAT Revenue
(% of total)
27.6
Burkina Faso
19
28.7
Mali
31
27.0
Senegal
33
37.1
Egypt
51
17.9
Decide on the VAT policy aspects
• Tax base
• Tax rate
– 1 positive rate
– Zero rate for exporters
• Registration threshold
Registration threshold
(in selected countries)
•
•
•
•
•
•
•
•
•
Ivory Coast
Madagascar
Chad
Sri Lanka
Barbados
Rwanda
Trinidad & Tobago
Fiji
El Salvador
•
•
•
•
•
•
•
50,000
45,000
40,000
33,000
30,000
28,000
25,000
• 7,000
• 5,700
Decide on VAT administrative
aspects
• Which organization is going to administer
the VAT?
• How frequently should taxpayers file and
pay?
• What the invoicing requirements should be?
• How will VAT refund operate?
Which organization is going to
administer the VAT?
• Customs
– Most VAT revenue come from imports
• Inland Revenue Department
– VAT is based on financial records as income tax
– VAT applies to domestic transactions as well
– VAT should apply on services too
Despite the decision,
coordination is a must.
• Customs information on VAT paid on
imports
• Customs information on exports
• Joint audit (post release)
How frequently should taxpayers
file and pay?
• Transaction-based tax requires frequent reporting
• But the volume of returns and payment can be
large
• Different treatment according to taxpayer size
• Possible problems
– Compliance control
– Cross-checking
– Revenue flow
Invoicing requirements
• Invoices are like checks drafted on the
Treasury.
• What should be the invoice contents?
• How final-consumer invoice should be?
• How to enforce compliance with invoicing
requirements?
Invoice information
•
•
•
•
•
•
Seller and purchaser names and TIN
Seller’s address
Date of issuing
Invoice number
Description of goods and services
Indication of unit and total selling price, including
VAT paid
• Date of printing
• Range of serial numbers printed on that date
Final consumption invoice: a
decision has to be made…
• Invoice or tickets show the VAT paid
• Invoice or tickets do not show the VAT paid
How to enforce compliance with
invoicing requirements?
• Controlling invoicing printing
– L.A. experience
• Controlling invoicing issuing
– Massive control
• Controlling invoice registration
– Invoicing information cross-checking
– Start with large taxpayers' purchases
How will VAT refunds operate?
• Why the refunds?
• How to deal with VAT excess credit
– Carry forward
– Refund tax credit
• Computer screening of refund claims
– Information cross-checking
• Audit of claims
–
–
–
–
Focus on the period of the claim
First time claimers
Usual claimers
In-depth audit (fraud indications)
Prepare for VAT introduction
Establish the VAT introduction
team
• The team leader
• The team members
–
–
–
–
–
–
–
Legal issue
Training, taxpayer education and publicity
Customs controls
Registration and taxpayer assistance
Filing and payment procedures
Audit
IT
Prepare the introduction budget
• To be managed by the project leader
• Subject to audit by the Auditor General
• Should cover all the project expenses:
training, travel, office accommodations,
consultants, publicity, IT, etc.
Get external assistance
• International expert for 18-24 months
• Short-term experts
–
–
–
–
Training
Legislation drafting
Design of audit and refund programs
Etc.
Prepare VAT legislation
•
•
•
•
Draft VAT legislation and regulations
Consultation with relevant parties
Review related legislation
Get legislation passed
Develop and deliver staff training
and taxpayer education
• Start training with implementation team
• Train all staff to be involved with VAT
operation
• Train trainers (updating training)
• Educate VAT payers, accountants and tax
preparers
Prepare and execute publicity
programmes
• Publicity expert can be required
• But, implementation team will do most of
the work
–
–
–
–
Participate in radio and TV shows
Participate in seminars
Setting up help telephone line
Setting up Internet site
Develop and put in place
registration procedures
• Ensure that those with sales above the
registration threshold are registered
• Try to unify the TIN
• VAT introduction can be an opportunity to
clean up the old taxpayer register.
Develop taxpayer assistance
procedures
• Prepare the VAT information guide
– (What is VAT? Why is it better than other taxes? Which
rates will apply? What will be exempted?)
• Prepare the guide to VAT registration
– Registration form, post-registration procedures
• Prepare the guide to completing the VAT return
– Explain VAT legislation and operation
Develop filing and payment
procedures
• Unique form for filing and payment
• Full self-assessment system
• Prompt action on non compliance.
Develop audit procedures
• VAT audit is different from income tax
• Duration of visits vary
– Trader complexity, size, reliability
• First months, focus on taxpayer education
• Following months, enforce compliance
Prepare procedure and policy
manuals
•
•
•
•
Prepare instruction manuals asap
Manuals should be clear and comprehensive
Should be available through Intranet
Should be used for training of new staff or
retraining of old staff
Develop and test IT systems
•
•
•
•
•
•
•
Taxpayer registration
Processing monthly returns and payments
Information validation
Detection returns with inconsistencies
Controlling stopfiling and delinquent accounts
Selecting taxpayers for audit
Screening of refund applications for audit
Develop the procedures for the transition
from a consumption tax to a VAT
• Credit should be granted to traders to avoid
double taxation
• But, require evidence that tax was
effectively paid to avoid excessive claims
Implement the VAT
• Set up taxpayer service unit
• Set up unit to monitor compliance with
filing and payment
• Set up audit unit
• Put in place IT systems
• Deliver VAT return forms to registered
taxpayers
Operate the VAT
• Review VAT operations
• Put in place the systems for enforcement of
Filing & Payment requirements
• Put in place the audit program
Conclusions
• In administrative terms, VAT is feasible in
the Caribbean countries
• Strong political commitment
• Well prepared implementation plan
• Resources for implementation
• International/regional assistance