## htnea2021004

## Source details

**Canonical URL:** [htnea2021004](https://www.imf.org/-/media/files/publications/howtonotes/2021/english/htnea2021004.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/howtonotes/2021/english/htnea2021004.pdf.md)
- [Structured JSON version](/-/media/files/publications/howtonotes/2021/english/htnea2021004.pdf.json)

---

### Executive summary and context
- VAT introduced in more than 160 countries and accounts for over 30 percent of the total central- and federal-level government taxes collected worldwide (WoRLD 2019).
- Recovering excess input VAT credits is critical; improper refund practices can lead to inaccurate deficit measurement, spending overruns, poor budget credibility, impaired treasury operations, and arrears accumulation.
- Common administrative outcomes when refunds are poorly managed:
  - Long processing times for refund claims.
  - Complex and burdensome refund requirements that discourage legitimate claims.
  - Delays or nonpayment of legitimate refunds.
  - Accumulation of large stocks of outstanding VAT refund claims.
- VAT refunds can sometimes exceed 50 percent of gross VAT collections and account for several percentage points of a country’s GDP.
- Good practice benchmark (TADAT): pay 90 percent of VAT refund claims within 30 days.

### Why issue VAT refunds: causes and principles
- VAT is a consumption tax borne by final consumers; the invoice-credit method allows taxpayers to credit input VAT against output VAT.
- Excess input VAT credits arise when output VAT is insufficient to offset input VAT; circumstances include:
  - Exports and other zero-rated transactions.
  - Investment and inventory buildup.
  - Existence of reduced VAT rates.
  - Use of VAT withholding and reverse charge mechanisms.
- Separate refund category: refunds to non-VAT payers (diplomatic missions, foreign tourists, local governments, nonresident businesses).
- Guiding principle: the sooner legitimate excess input VAT credits are refunded, the better.
- Recommendation: once VAT refund claims are approved, they should be paid in cash, using the same payment mode taxpayers use to pay their tax liabilities.

### VAT refund system approaches and taxpayer implications
- Major approaches:
  - Immediate refund system: VAT payer can claim a refund at the end of each accounting period (usually one month); common in EU countries, Australia, and Canada.
  - Limited carry-forward system: VAT payer must carry forward excess input VAT credit for a minimum period (usually between three to 12 months); used in Albania, Angola, Armenia, Bulgaria, Malta, and Spain.
  - Indefinite carry-forward approach: excess credits may be carried forward indefinitely with no refund claim rights (discussion and examples in text).
- Immediate refund vs carry-forward implications:
  - Carry-forward is costly in terms of time-value of money and business cash flow.
  - Example: Turkish taxpayers may clear excess credits only against future output VAT and may never receive cash refunds (stock of deferred VAT credit claims reached 5.5 percent of GDP in 2016).
- Noncash refunds and consequences:
  - Governments sometimes use tax certificates or government bonds instead of cash (examples: Barbados, Benin, Bolivia, Madagascar, Senegal, the Philippines, Uruguay; bonds in Mozambique and Ukraine).
  - Consequences: adverse cash-flow effects, discounted trading of certificates, potential illicit markets, and ineffective relief for taxpayers.

### What VAT refund levels reveal: cross-country patterns and statistics
- Under a standard “single rate” VAT, refunds correlate with economic structure: higher exports and capital formation → higher refunds; higher final consumption share → lower refunds.
- Observations:
  - Refunds low/moderate with investment booms in resource or infrastructure sectors (Mozambique, Tanzania, China, Turkey) or high export shares (Thailand).
  - Refunds relatively high in some countries (Canada, Democratic Republic of the Congo, Zambia).
- Income-level patterns (2015 data):
  - High-income countries paid VAT refunds equivalent to about 30 percent of gross VAT.
  - Low- and lower-middle-income countries averaged 11 percent of gross VAT in refunds.
  - Australia, Canada, Denmark, Korea, Norway, the Slovak Republic, and South Africa: VAT refunds exceeded 50 percent of gross VAT.
  - Countries below 11 percent of gross VAT in refunds include Cameroon, Colombia, El Salvador, Ethiopia, Ecuador, Guatemala, Madagascar, Paraguay, Senegal, and Uganda.
- IMF and RA-GAP findings:
  - High-income countries refunded an average of about 80 percent of excess credits vs a ratio below 20 percent in other countries.
  - Average VAT excess credit stock for high-income countries: 0.5 percent of GDP in 2012.
  - Average VAT excess credit stock for lower- and upper-middle-income countries: 1.7 percent and 2.5 percent of GDP, respectively.
  - Examples of reimbursement struggles during 2008–09: Cyprus, Greece, Madagascar, Moldova, Mozambique, Tanzania, and Ukraine.
- Good-practice benchmark: refund 90 percent of claims within 30 days (TADAT).

### VAT refund management framework and operational goals
- Framework draws on tax administration, budget, accounting, debt, fiscal statistics, and treasury management.
- Main objective: ensure genuine excess input VAT credits are returned promptly and in cash; avoid distorting VAT design to limit refunds.
- Key operational goals:
  - Prevent accumulation of VAT credits; pay excess VAT credits as quickly as possible.
  - Improve refund-processing timeliness to meet benchmarks (for example, refunding 90 percent of claims within 30 days).
  - Strengthen coordination among tax administration, treasury, and budget authorities to avoid payment constraints and improper accounting of refunds.

### Administrative design, PFM, and accounting practices
- Tax administration processes:
  - Tax return with net negative liability should serve as refund claim.
  - Real-time automated risk models and e-invoice/third-party cross-matching should screen claims.
  - Low-risk claims authorized for cash payment or offsets within legally specified time frames.
  - Medium- and high-risk claims subject to audit or verification; verified claims approved or rejected.
  - Taxpayer paid interest on delayed legitimate refunds equal to or greater than market rates, starting at end of legal period (for example, 30 days).
  - Tax administration maintains records of claims, approvals, payments, interest, rejections, and offsets.
- Inter-agency coordination:
  - Formal agreement between tax administration and budget department to agree projections for gross VAT, refunds, and net VAT for annual budgets and multiannual projections.
  - Funding modality for VAT refunds must be enshrined in law.
  - Accounting office records gross VAT, net VAT, refunds paid, and outstanding approved claims; registers unpaid refunds as arrears/debt.
  - Fiscal statistics department incorporates net VAT into general government revenue statistics (refunds as reduction of gross VAT).
- Treasury single account (TSA) and cash management:
  - Daily gross VAT payments transferred to TSA; recommend a zero-balance TSA subaccount for approved refund payments.
  - Operational points: transfer only required refund amount to subaccount; return remaining balance to main TSA end of day; tax administration provides periodic resource requirement updates.
  - Recommended predictable financing mechanism: withhold funds from gross VAT in refund TSA subaccount (used in Australia and Zambia).
  - Alternative methods observed (withholding fixed percent or amount, treasury appropriation) raise challenges.

### Refund financing modalities (observed practices)
- Withholding full amount required for refunds (good practice): Australia (HIC), Zambia (LMIC).
- Withholding a fixed percentage of gross VAT: Botswana (UMIC), Guatemala (LMIC), Madagascar (LIC), Cameroon (LIC).
- Withholding a fixed amount: Jamaica (UMIC), Kenya (LMIC), Peru (UMIC), Portugal (HIC).
- Treasury appropriation: Costa Rica (UMIC), Ecuador (UMIC), Indonesia (LMIC), Morocco (LMIC), Uruguay (HIC).
- Issuance of treasury bonds or tax certificates: Bolivia (LMIC), Uruguay (HIC).
- Carry-forward of credit balances (no cash refunds): Sierra Leone (LIC), Turkey (UMIC).

### VAT law, common poor practices, and good practices
- Poor practices and implications with recommended good practices:
  - Separate refund application after filing returns → increases compliance burden. Good practice: return is sole document for claim; submission triggers processing.
  - Excessive documentary proofs for each export/import transaction → compliance burden. Good practice: real-time cross-matching with e-invoices and customs data.
  - Restrictions on refund entitlement (sectoral or categorical) → creates cash-flow burdens. Good practice: any taxpayer with excess credits entitled to refund.
  - Refunds for exporters conditional on threshold share of zero-rated transactions → creates cash-flow burdens. Good practice: base claim on sum of output and input tax for period.
  - Mandatory carry-forward before filing claim → delays and accumulation. Good practice: if carry-forward used, keep short periods (for example, three months) and pay interest equal to or above market rates on unpaid balances after due date.
  - Use of tax certificates in lieu of cash → cash-flow difficulties if non-tradable. Good practice: avoid tax certificates; allow offsets but monitor and record frequently.
  - Long legal time limits without interest on delayed refunds → increases borrowing by taxpayers. Good practice: set, publish, monitor deadlines; interest equal to or above market rates accrues starting one month after filing.
  - Full prepayment audits of all refunds → delays and misuse of enforcement resources. Good practice: risk-based approach with post-payment verification for low-risk cases.
- Note: only Australia meets the TADAT good-practice timeline. Majority of sample countries do not pay interest on delayed refunds (Bolivia, Ecuador, Guatemala, Indonesia, Kenya, Madagascar, Morocco, Sierra Leone, Uruguay, Zambia, and Zimbabwe). Some countries (Indonesia, Kenya, Zimbabwe) provide for interest legally but limited evidence of practice.

### Anti-fraud strategy and risk-based verification
- Core anti-fraud elements:
  1. Prevent fraud at earliest opportunity (pre- and post-registration checks, profiling, eliminate invoice ambiguity, cross-reference purchases to sales, communication of zero-tolerance).
  2. Increase financial risks for perpetrators and facilitators (stronger sanctions, prosecutions, dedicated teams).
  3. Coordinate interventions across government and external stakeholders; establish special anti-fraud units with tax, customs, and other agencies.
  4. Deploy sufficient resources, particularly human resources and skilled analysts.
- Risk-based verification and audit mix:
  - Use a mix: registration checks, advisory visits, record-keeping audits, desk audits, single-issue audits, audit projects, comprehensive audits, fraud investigations.
  - Illustrative risk classifications and responses (from Table 3):
    - Low risk: approve without full audit; random post-payment review.
    - Medium risk: desk verification; management judgment on prepayment audit.
    - High risk: desk verification to inform field audit selection; conduct field audit.
  - Example: Ireland’s rules-based real-time risk scoring (green/orange/red) — in 2015, more than 58,000 red cases examined, yielding EUR 168 million.
  - Example: Georgia’s AVS reforms: sevenfold increase in number and value of approved credit returns; automatically approved credit declarations surpassed 90 percent; value of approved credits above 70 percent; only 28 percent of total credits were cash-refunded because taxpayers still had to apply; legal amendment to allow cash refunds without taxpayer request passed July 2019 with application starting July 2020.

### Dealing with backlog of outstanding claims and operational remedies
- Priority actions to clear backlog:
  1. Review each significant outstanding claim to assess real risk and clear low-risk refunds.
  2. Identify age and amount of claims.
  3. Prioritize by risk, age (oldest to newest), and claim value.
  4. Establish a small senior officer team to review priority cases and identify refunds releasable without further checks.
  5. Obtain supplementary resources from the finance ministry (for example, special lump-sum appropriations).
- Country examples of special clearance efforts: Cameroon (2017), Côte d’Ivoire (2017), Kenya (several times, latest 2019).

### Public financial management, accounting, and fiscal statistics implications
- Budgeting and recording:
  - Governments should budget only net amounts of VAT (gross collection less refunds due); VAT refunds should not be featured as expenditure in the annual budget law.
  - GFSM 2014 recommends reporting VAT revenue on a net basis.
  - Recording gross VAT as revenue and refunds as expenditures is not recommended; it leads to insufficient appropriation and delays.
- TSA and refund subaccount best practice:
  - Transfer gross VAT to TSA daily; use zero-balance VAT refund subaccount managed by tax administration to authorize payments.
  - Include refund amounts in treasury cash flow projections as a separate line and update monthly.
  - Treasury-only control of subaccount (examples: Guatemala, Ecuador, Peru) is not good practice.
- Debt and arrears treatment:
  - Unprocessed or unpaid VAT refund claims after due date should be considered government liabilities and recorded under government debt.
  - Tax administration should report monthly pending reimbursements after due date to accounting and statistics offices.
- Accounting basis:
  - Best practice: accrual accounting for VAT refunds so only net VAT counts as government revenue.
  - IPSAS 23 and GFSM 2014 guidance: recognize taxes when taxable event occurs, but record only amounts accruing to government after recognizing liabilities such as refunds.

### Conclusions and eight broad guidelines for reform
- Timely refunding of excess VAT credits is indispensable to preserve VAT as a consumption tax and to avoid turning it into a tax on production.
- Weak refund management can produce inaccurate fiscal measurement, poor budget credibility, impaired treasury operations, and arrears accumulation.
- Eight broad guidelines:
  - Review legal framework to ensure refund requirements, procedures, and documentation are as simple as possible; coordinate treasury and tax administration; minimize requirements for legitimate refunds.
  - Tax administration should prepare a refund management and anti-fraud strategy, including automated risk analysis in real time and robust information exchange with customs.
  - Ministry of finance should determine resources required to pay VAT refunds based on actual amounts required for approved refunds.
  - Produce robust assessment of net VAT based on reliable information to improve revenue and budget forecasts and strengthen treasury cash management.
  - Finance refunds out of gross VAT; only net VAT (gross VAT minus refunds paid) should be reflected as revenue in the government budget; present refund estimates as memorandum items.
  - Treasury should maintain a zero-balance subaccount within the TSA for refund payments based on tax administration information.
  - After the statutory due date, outstanding VAT refund claims should be recorded as governmental liabilities and included under government debt.
  - VAT revenue should be recorded on a net basis for fiscal statistics purposes.

_Italicized attribution: Content adapted from "HOW TO MANAgE VALUE-ADDED TAX REFUNDS," Fiscal Affairs Department, International Monetary Fund | April 2021._

### references.

### references.

### Publication identifiers and ordering
- ISBN 9781513577043 (paper)
- ISBN 9781513577050 (Web PDF)
- ISBN 9781513577067 (ePub)
- Publication orders may be placed online, by fax, or through the mail:
  - International Monetary Fund, Publication Services, PO Box 92780, Washington, DC 20090, U.S.A.
  - Tel.: (202) 623-7430 Fax: (202) 623-7201
  - Email: publications@imf.org
  - www.imf bookstore.org
- Classification: LCC HJ5711.P47 2021
- Subjects: LCSH: Value-added tax. | Tax refunds.
- Document date reference: April 2021
- Front matter page indicators: iii; v; 1

### Disclaimer and authorship
- DISCLAIMER: Fiscal Affairs Department (FAD) How to Notes offer practical advice from IMF staff members to policymakers on important fiscal issues. The views expressed in FAD How to Notes are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
- Note prepared by Mario Pessoa, Andrew Kazora Okello, Artur Swistak, Muyangwa Muyangwa, Virginia Alonso-Albarran, and Vincent Koukpaizan.
- Reviewed by Gerd Schwartz, Michael Keen, Victoria Perry, Katherine Baer, Manal Fouad, Andrea Lemgruber, Andrew Masters, Debra Adams, Eric Hutton, Therese Van der Poel, Enrique Rojas, Yasemin Hurcan, Abdoulahi Mfombouot, Racheeda Boukezia, Majdeline El Rayess, Xavier Rame, David Gentry, and Lisette Atiyeh.
- Dedication: the note is dedicated to the memory of Mario Pessoa.

### Table of contents (chapter and annex structure)
- 1 Introduction
- 2 VAT Refunds: A Primer
- 3 What Do VAT Refund Levels Reveal?
- 4 VAT Refund Management Framework
- 5 Conclusions
- Annex 1 A Framework for VAT Refund Management
- References (page 21)

### Abbreviations (selected)
- ATO Australian Tax Office
- AVS Automated VAT System
- CIAT Inter-American Center of Tax Administrations
- CIP Compliance Improvement Plan
- GFSM Government Finance Statistics Manual
- GRS Georgia Revenue Service
- ISORA International Survey on Revenue Administration
- OECD Organisation for Economic Co-operation and Development
- PFM Public Financial Management
- RA-GAP Revenue Administration Gap Analysis Program
- RST Retail Sales Tax
- SNA System of National Accounts
- TADAT Tax Administration Diagnostic Assessment Tool
- TSA Treasury Single Account
- VAT Value-Added Tax

### Executive summary points from Introduction and VAT Refunds primer
- The VAT has been introduced in more than 160 countries and accounts for over 30 percent of the total central- and federal-level government taxes collected worldwide (WoRLD 2019).
- Recovering excess input VAT credits is critical to a well-functioning VAT system; improper refund practices can lead to inaccurate deficit measurement, spending overruns, poor budget credibility, impaired treasury operations, and arrears accumulation.
- Common administrative outcomes when refunds are poorly managed:
  - Long processing times for refund claims.
  - Complex and burdensome refund requirements that discourage legitimate claims.
  - Delays or nonpayment of legitimate refunds.
  - Accumulation of large stocks of outstanding VAT refund claims.
- VAT refunds can sometimes exceed 50 percent of gross VAT collections and account for several percentage points of a country’s GDP.
- Good practice benchmark (TADAT): pay 90 percent of VAT refund claims within 30 days.

### Key concepts: why issue VAT refunds
- VAT is a consumption tax borne by final consumers; the invoice-credit method allows taxpayers to credit input VAT against output VAT.
- Excess input VAT credits arise when output VAT is insufficient to offset input VAT; such excesses should be refunded promptly to avoid turning the VAT into a turnover tax that cascades.
- Circumstances that give rise to refund claims:
  1. Exports and other zero-rated transactions.
  2. Investment and inventory buildup (new businesses or expansion where input VAT exceeds current sales).
  3. Existence of reduced VAT rates causing inputs taxed at higher rates than outputs.
  4. Use of VAT withholding and reverse charge mechanisms.
- Separate refund category: refunds to non-VAT payers (diplomatic missions, foreign tourists, local governments, nonresident businesses) which are conceptually equivalent to zero-rating but delivered via post-sale refund.

### VAT refund system approaches (three major approaches)
- Immediate refund system:
  - Common in EU countries, Australia, and Canada.
  - VAT payer can claim a refund at the end of each accounting period (usually one month).
- Limited carry-forward system:
  - Used in Albania, Angola, Armenia, Bulgaria, Malta, and Spain.
  - VAT payer must carry forward excess input VAT credit for a minimum period (usually between three to 12 months) before claiming refund.
- (The text indicates a third major approach depicted in Figure 1 but the content provided ends before describing it.)

### Empirical and survey coverage
- The note builds on earlier IMF analytical work (Harrison and Krelove 2005) and analyzes a brief survey of VAT refund practices in 18 selected countries:
  - Australia, Bolivia, Botswana, Costa Rica, Ecuador, Guatemala, Indonesia, Jamaica, Kenya, Madagascar, Mauritius, Morocco, Peru, Portugal, Sierra Leone, Uruguay, Zambia, and Zimbabwe.
- Diagnostic tools and datasets referenced:
  - Tax Administration Diagnostic Assessment Tool (TADAT)
  - Revenue Administration Fiscal Information Tool / International Survey on Revenue Administration (ISORA)
  - Revenue Administration Gap Analysis Program (RA-GAP)

### Document emphasis and policy orientations
- An efficient VAT refund system should:
  - Not impose layers of administrative requirements and stringent legal restrictions on legitimate refund claims.
  - Be based on risk analysis to ensure claims are processed while guarding against refund fraud as part of a broader VAT compliance and anti-fraud strategy covering registration, filing, payment, and accurate reporting.
  - Be fully resourced, with revenues and refunds reconciled, accounted for, and registered in the national accounts to ensure transparency; cooperation among Ministry of Finance, Tax Administration, Statistics Department, and other interested government departments is essential.
- VAT refund fraud is significant; examples cited:
  - EU 2013 total VAT collection gap almost EUR 170 billion, with cross-border (refund) fraud accounting for around EUR 50 billion.
  - Australia: 2013 gold-related VAT refund fraud investigation indicated the treasury lost about AUD 700 million over a five-year period, representing about 5.5 percent of net VAT receipts.

*Source: htnea2021004 - references (How to Manage Value-Added Tax Refunds), International Monetary Fund, April 2021.*

### 3. Indefinite carry-forward approach, where a VAT

### 3. Indefinite carry-forward approach, where a VAT

### Immediate refund versus carry-forward: taxpayer and cash-flow implications
- The immediate refund system is by far superior to the carry-forward system because carry-forward:
  - Is costly for taxpayers in terms of the time-value of money and strain on business cash flow.
  - Becomes especially costly when excess input VAT credits must be carried forward indefinitely with no refund claim rights.
- Example: Turkish taxpayers with excess input VAT credits arising from investments may only recover their input VAT against future output VAT and have no right to claim refunds; clearing excess VAT credits may take several years, and some taxpayers (for example, those who are bankrupt or have otherwise ceased operations) will never obtain refunds for their input VAT.
- Principle: once VAT refund claims are approved, they should be paid in cash, using the same payment mode taxpayers use to pay their tax liabilities.

### Noncash refunds and consequences
- Countries experiencing government cash liquidity shortages sometimes pay VAT refunds using government securities (tax certificates or government bonds) rather than cash.
  - Examples where tax certificates are used: Barbados, Benin, Bolivia, Madagascar, Senegal, the Philippines, and Uruguay.
  - Examples where government bonds are used to clear stocks of unrefunded credits: Mozambique and Ukraine.
- Consequences of noncash payments:
  - Tax certificates are mainly used to satisfy future tax liabilities and enable taxpayers to offset VAT refunds against other taxes.
  - In many developing countries tax certificates are nontransferable or markets for trading government securities are limited or nonexistent, so paying VAT refunds in kind adversely affects taxpayers’ cash flow and may be equivalent to not paying them at all.
  - Where markets exist (for example, Senegal), tax certificates are often traded at discounted rates, forcing taxpayers to absorb decline in VAT refund value.
  - The use of tax certificates may create illicit markets involving corrupt practices.

### Causes of excess input VAT credits and management principle
- Excess input VAT credits arise when a taxpayer has more purchases (and corresponding VAT on inputs paid) than sales (and corresponding VAT collected) in a given tax period; they are inherent to VAT design.
- Guiding principle: the sooner legitimate excess input VAT credits are refunded, the better.
- Deferral mechanisms that burden taxpayers and should be avoided:
  - Carry-forward provisions (especially indefinite carry-forward).
  - Complex tax administration procedures that delay payment of approved refund claims.
  - Use of non-cash payments in lieu of cash refunds.
- Recommendation: Governments should not view VAT refunds as tax benefits, incentives, or budget expenditures; policymakers should establish a robust VAT refund management system.

### Distorting VAT design to avoid refunds: practices and costs
- Authorities sometimes alter VAT design to limit refund obligations rather than fixing refund management. Typical measures aimed at limiting input VAT include:
  - Import exemptions.
  - Zero-rating of domestic transactions.
  - Deferral of import VAT.
  - Deemed VAT liability schemes.
  - VAT grouping.
- These measures may be designed as:
  - “Objective” reliefs: selected goods/services believed to be capital goods or predominantly used as business inputs.
  - “Subjective” reliefs: available to certain taxpayer categories (investors, exporters, sector-specific businesses).
- Problems with reliefs:
  - They increase VAT complexity, administrative costs, and compliance burden.
  - They undermine VAT revenue productivity through weakened self-policing and associated leakage.
  - Zero-rating based on nature of supply can cause unintended revenue loss when items are purchased by final consumers.
  - Zero-rating or deemed liability schemes push the refund problem up the value chain, increasing the number of refund claimants and administrative burden.
  - VAT preference creep: demands for similar reliefs spread to newly affected businesses.
  - Exemptions on imports create bias against the domestic market and are difficult to police.
  - VAT deferral requires close monitoring; deferred VAT may never be paid if activity is bogus or subsequent returns are not filed.
  - VAT grouping requires high administrative capacity and may be used by traditionally exempt businesses as an alternative to vertical integration.
- Example of misuse: Nepal uses VAT mechanism to provide industry subsidies and cash benefits:
  - Refunds (subsidies) equal to 25, 50, or 70 percent of output VAT for certain industries.
  - For mobile phones, refund (subsidy) is calculated based on input VAT at 60 percent.
  - For certain products, refunds are calculated based on taxpayers’ net VAT liabilities at 25 percent for flour and 100 percent for match and tire tube production.
  - Such practices violate fundamental VAT principles and may contravene international trade rules that prohibit hidden trade subsidies.

### VAT refunds and fiscal policy implications
- Delaying or improperly accounting for VAT refunds creates fiscal policy challenges:
  - Governments that record gross VAT without properly accounting for VAT refunds inflate tax revenue and overstate genuine VAT collections (should be net: gross collection minus refunds).
  - Indefinite carry-forward systems (no refund rights for certain taxpayers) exacerbate misrepresentation of fiscal position (examples: Latin American countries, Senegal, Sierra Leone, and Turkey).
- Two main fiscal risks from overstating revenue:
  - False picture of available resources may result in less prudent spending, higher deficits, accumulation of payment arrears, and debt.
  - Implies policymakers are committing resources that do not accrue to the government and will eventually have to be repaid—tantamount to unauthorized borrowing and harmful to PFM and budget credibility.
- Interest considerations:
  - When governments must pay interest on delayed refunds at levels exceeding market rates, financing through delayed refunds complicates procedures and increases costs.
- Accumulation of unpaid VAT refunds:
  - Delaying legitimate refund claims increases the government’s stock of arrears, blurs actual indebtedness, and complicates budget execution and cash and debt management.
  - Excessive unpaid VAT refunds can trigger taxpayer pressure to withhold regular VAT payments and force governments to find alternative financing, including issuing government securities directly to taxpayers (as done in Mozambique and Ukraine), increasing government liabilities.
- Transparency and accountability:
  - Improved VAT refund management enhances fiscal transparency and accountability, including better revenue forecasts and reliable payment systems.
  - Large share of refunds in gross VAT (which can be as high as 50 percent) can encourage misuse as a tool to create fiscal space through delayed payment or nonpayment.

### What VAT refund levels reveal: cross-country patterns and statistics
- Under a standard “single rate” VAT system, refunds should correlate with economy structure:
  - Higher export shares and capital formation (investment) in gross output → higher shares of gross VAT to be refunded.
  - Higher share of final consumption in GDP → lower VAT refunds.
- Observations in practice:
  - Refunds are low or moderate in countries with investment booms related to natural resource extraction (Mozambique and Tanzania) or infrastructure and construction (China and Turkey), or with high export shares (Thailand).
  - Refund levels are relatively high in some countries (Canada, Democratic Republic of the Congo, Zambia).
- Income-level correlation (2015 data):
  - High-income countries paid VAT refunds equivalent to about 30 percent of gross VAT.
  - Low- and lower-middle-income countries averaged 11 percent of gross VAT in refunds.
  - In several advanced and upper-income emerging market economies (Australia, Canada, Denmark, Korea, Norway, the Slovak Republic, and South Africa), VAT refunds exceeded 50 percent of gross VAT.
  - Countries with refund levels below 11 percent of gross VAT were mostly in Africa and Latin America (Cameroon, Colombia, El Salvador, Ethiopia, Ecuador, Guatemala, Madagascar, Paraguay, Senegal, and Uganda).
- IMF findings and country examples:
  - Lower-income countries face greater challenges managing VAT refunds even after controlling for rate-structure differences.
  - Countries that struggled to reimburse VAT on time during 2008–09 include Cyprus, Greece, Madagascar, Moldova, Mozambique, Tanzania, and Ukraine.
  - Turkey example: stock of deferred VAT credit claims reached 5.5 percent of GDP in 2016. This exceeded annual net VAT revenue (5.0 percent of GDP in 2016) and continued to grow by 0.7 percent of GDP every year.
- Good-practice benchmark:
  - According to TADAT benchmarks, good practice involves refunding 90 percent of claims within 30 days.
- IMF RA-GAP sample statistics:
  - High-income countries refunded an average of about 80 percent of excess credits compared to a ratio that remained below 20 percent in other countries.
  - Average VAT excess credit stock in IMF sample of high-income countries: 0.5 percent of GDP in 2012.
  - Average VAT excess credit stock for lower- and upper-middle-income countries: 1.7 percent and 2.5 percent of GDP, respectively.
- Drivers of large stocks of outstanding claims:
  - Delayed claim processing (for example, Guatemala, Kenya, Tanzania, and Zambia).
  - Payment constraints (for example, Burkina Faso and Cameroon).
  - Both processing delays and payment constraints (for example, Jordan).

### VAT refund management: framework and objectives
- The note presents a framework for managing and paying VAT refunds that draws on international good practices across tax administration, budget, accounting, debt, fiscal statistics, and treasury management.
- Main objective: ensure genuine excess input VAT credits are returned to taxpayers promptly and in cash, eliminating the need to distort VAT design with reliefs that undermine revenue productivity and VAT integrity.
- Key operational goals implied by the framework:
  - Prevent accumulation of VAT credits; pay excess VAT credits as quickly as possible.
  - Improve refund-processing timeliness to meet benchmarks (for example, refunding 90 percent of claims within 30 days).
  - Strengthen coordination among tax administration, treasury, and budget authorities to avoid payment constraints and improper accounting of refunds.

*Italicized attribution: Content adapted from "HOW TO MANAgE VALUE-ADDED TAX REFUNDS," Fiscal Affairs Department, International Monetary Fund | April 2021.*

### Appendix 1 should be guided by carefully planned,

### htnea2021004 - Appendix 1 should be guided by carefully planned,

### RA-GAP and VAT gap analysis
- RA-GAP is an IMF tool that enables countries to estimate the sizes of their tax gaps (differences between potential and actual taxes).
- To calculate the VAT gap, detailed data on VAT liabilities, payments, credits, and refunds are required for all VAT payers across all sectors of economic activity.
- To date, IMF staff has conducted 30 VAT gap estimates across Fund member countries.
- Analyses of VAT credit stocks and refunds is based on RA-GAP data.

### VAT refunds: administrative process and taxpayer entitlements
- If a taxpayer’s VAT return has a net negative liability, they are entitled to a refund. The tax return should also serve as the VAT refund claim.
- As part of a broader VAT compliance and anti-fraud strategy, the tax administration screens the claim in real time using automated risk models and associated rules, as well as the cross-matching of electronic invoices (e-invoices) and third-party data.
- The tax administration authorizes low-risk claims for cash payment or offsets them against other tax liabilities within a legally specified time frame.
- Medium- and high-risk claims are subject to audit or other verification processes in accordance with the national audit and verification plan for the year, and within legally specified time frames. Auditing or verifying the claim may entail a simple desk review, single-issue audit, or comprehensive audit. Verified claims are either approved for payment or rejected.
- The taxpayer is paid interest on delayed legitimate refunds that is equal to or greater than the market rates, starting at the end of the legally specified period (for example, 30 days after filing the claim).
- The tax administration maintains records of the number and values of VAT refund claims, approved claims, and amounts due to taxpayers; it also documents claims paid, interest paid for delayed refunds, claims rejected or readjustments made, and outstanding claims. When the tax administration chooses to offset VAT refunds against other tax liabilities, it must account for all taxes collected and offset for each taxpayer.

### Public financial management and inter-agency coordination
- The tax administration and budget department of the finance ministry must establish a formal agreement, typically mandated in the country’s regulations, to avoid ad hoc decisions.
  - The budget department and tax administration agree on projections for gross VAT, refunds, and net VAT (gross VAT minus refunds) when establishing the annual budget plan and multiannual projections.
  - The tax administration should provide the most reliable information on projected gross VAT, net VAT, and VAT refunds and submit periodic updates throughout the year according to an agreed procedure.
  - The funding modality for VAT refunds (that is, drawn from gross VAT) must be enshrined in law and related procedures must be established.
- The finance ministry’s accounting office maintains information on gross VAT, net VAT, refunds paid, and outstanding refund claims (including claims that have been processed and approved by the tax administration and those that have not been processed). The accounting office should enter this information into the government’s balance sheet.
- The ministry of finance registers information on unpaid VAT refunds after the due date has passed and includes this information in the arrears and public debt reports.
- The department responsible for maintaining fiscal statistics keeps a register of the net VAT and incorporates it into the general government’s revenue statistics (refunds as a reduction of gross VAT).

### Treasury single account (TSA) and cash management practices
- Daily gross VAT payments are transferred to the treasury single account (TSA), or central bank account if a TSA has not been created. This avoids storing idle money in other accounts, maximizes the fungibility of cash resources, and reduces borrowing requirements and interest payments. It also ensures the timely payment of refunds.
- A subaccount of the TSA, with a zero balance, is established for periodically receiving (typically monthly) the approved amount required for the period’s VAT refund payments. Key operational points:
  - Transfer to the subaccount only the amount needed to pay the refunds, as instructed by the tax administration.
  - The remaining balance should be transferred to the main TSA account at the end of the day to avoid holding idle funds.
  - The tax administration periodically provides the treasury with information about resource requirements, based on refund claims it has approved, to allow inclusion in the cash forecast.
- The tax administration issues instructions for transferring the refund amounts from the TSA subaccount (usually lodged at the central bank) directly to the taxpayer’s account at a commercial bank.
- The recommended practice is a predictable financing mechanism that withholds the required funds from gross VAT in a special VAT refund TSA subaccount (practice cited as used in Australia and Zambia). This preserves the VAT’s nature and ensures sufficient funds to meet refund claims.
- Alternative methods observed raise challenges, including budget appropriation of refunds or withholding fixed amounts or percentages of gross VAT.

### Refund financing modalities (observed country practices)
- Withholding full amount required for refunds (good practice): Australia (HIC), Zambia (LMIC)
- Withholding a fixed percentage of gross VAT: Botswana (UMIC), Guatemala (LMIC), Madagascar (LIC), Cameroon (LIC)
- Withholding a fixed amount: Jamaica (UMIC), Kenya (LMIC), Peru (UMIC), Portugal (HIC)
- Treasury appropriation: Costa Rica (UMIC), Ecuador (UMIC), Indonesia (LMIC), Morocco (LMIC), Uruguay (HIC)
- Issuance of treasury bonds or tax certificates: Bolivia (LMIC), Uruguay (HIC)
- Carry-forward of credit balances (no cash refunds): Sierra Leone (LIC), Turkey (UMIC)

### VAT law, administrative design, and common poor practices
- The VAT refund system is part of a broader self-assessment system and requires a clear and simple VAT law that avoids unreasonable administrative demands or significant burdens on taxpayers.
- Examples of poor legislative and administrative practices and corresponding good practices:
  - Bad practice: A taxpayer is required to apply separately for a refund, having filed a return with a negative net VAT liability.
    - Implication: Adds to taxpayer compliance burden and delays refund triggering if combined with other requirements.
    - Good practice: The tax return is the sole document for claiming a refund. Refund processing is automatically triggered by the submission of a return with a negative net VAT liability.
  - Bad practice: Refund claims are required to show proof of payment with respect to every single export transaction or import document from a third country.
    - Implication: Adds to taxpayer compliance burden.
    - Good practice: Real-time cross-matching techniques are used to screen returns based on data from e-invoices, customs declarations, and other third-party sources.
  - Bad practice: Restriction on refund entitlement (for example, refunds are not permissible for certain sectors or categories of goods or services).
    - Implication: Creates cash flow burdens for taxpayers with credit balances; results in tax credit accumulation.
    - Good practice: Any taxpayer with excess tax credits is entitled to a refund.
  - Bad practice: Refunds for exporters are allowed only if zero-rated transactions exceed a certain percentage of all transactions.
    - Implication: Creates cash flow burdens for affected taxpayers equivalent to the unrefunded amounts.
    - Good practice: Claim is based on the sum of all output and input tax accrued during an accounting period.
  - Bad practice: Mandatory carry-forward requirements must be met before a claim can be filed.
    - Implication: Refund delays and tax credit accumulation.
    - Good practice: If carry-forward provisions are implemented, then short periods—for example, three months—are considered. Interest equal to or above market rates apply on balances that remain unpaid after the legal due date has come and passed.
  - Bad practice: Use of tax certificates to compensate for refund payment.
    - Implication: Cash flow difficulties arise if tax certificates are not tradable in the domestic financial market.
    - Good practice: Avoid the use of tax certificates. When unavoidable, tax certificates are tradable in the domestic financial market, but this can pose future budget deficit risks. Allow offsetting against other tax liabilities but monitor it frequently to identify irregularities quickly and include them in accounting records.
  - Bad practice: Long time limits are set, within which a taxpayer can be refunded, and interest is not paid on delayed legitimate refunds.
    - Implication: Cash flow difficulties for businesses that will have to borrow money from the market to finance their operations or investments.
    - Good practice: Set, publish, and monitor refund processing deadlines in accordance with good practices. Interest equal to or above market rates accrues on all outstanding legitimate refunds, starting one month after filing.
  - Bad practice: All refunds are verified or audited prior to payment.
    - Implication: Delays refunds and results in accumulation of tax credits and misallocation of enforcement resources.
    - Good practice: A risk-based approach (except when subject to random audit) is preferable, with post refund verification of lower-risk cases.

- Note: To date, only Australia meets the TADAT’s good practice timeline. The majority of the sample countries do not pay taxpayers interest on delayed refunds (Bolivia, Ecuador, Guatemala, Indonesia, Kenya, Madagascar, Morocco, Sierra Leone, Uruguay, Zambia, and Zimbabwe). Some countries, like Indonesia, Kenya, and Zimbabwe, provide for interest payments on delayed refunds, but there is no evidence that this is being done in practice.

### Improving tax administration procedures and anti-fraud strategy
- First step: conduct a comprehensive review of existing administrative procedures to identify steps that do not contribute to the process and that can be eliminated without increasing compliance risk.
- Redesigned administrative procedures should be accompanied by effective internal controls that address process gaps.
- VAT compliance risks should be monitored continuously in (or close to) real time to:
  - Identify low-risk claims for quick refund.
  - Provide information on medium- and high-risk refund claims to determine necessary verification actions.
- Defining objective risk factors requires analyzing past refund audit results and other taxpayer behaviors to identify characteristics that suggest false refund claims. Selected profiling indicators are typically programmed into real-time automated risk rules to screen VAT returns and flag suspicious ones for verification.
- The broader anti-VAT-fraud strategy must include special programs aimed at preventing refund fraud and deploy a coordinated set of measures. Core elements include:
  1. Preventing fraud or tackling it at the earliest opportunity (pre- and post-registration checks, profiling suspected businesses, laws eliminating ambiguity on invoice use, cross-referencing purchase invoices to declared sales, and a communication strategy asserting zero-tolerance on fake invoices).
  2. Increasing the financial risks for participants and facilitators of fraud (stronger sanctions, specific audits, prosecutions, and dedicated specialist teams).
  3. Developing, implementing, and coordinating interventions across government departments and with external stakeholders, including information exchanges concerning fraud trends and establishing a special anti-fraud unit comprising officials from tax, customs, and other relevant agencies.
  4. Ensuring deployment of sufficient resources, particularly human resources and skilled analysts, to combat fraud.

*Source: IMF staff, “HOW TO MANAGE VALUE-ADDED TAX REFUNDS,” Fiscal Affairs Department, April 2021.*

### Box 1. Key Elements of an Anti-VAT-Fraud Strategy

### Box 1. Key Elements of an Anti-VAT-Fraud Strategy

### Risk-based VAT refund verification and audit mix
- VAT refund verification should reflect compliance risks and be intrinsic to the tax administration’s annual verification plan.
- Effective revenue administrations use a mix of audit types: registration checks, advisory visits, record-keeping audits, desk audits, single-issue audits, audit projects, comprehensive audits, and fraud investigations.
- Developing countries often lack structured approaches; automatic full audits of refund filers can create backlogs and delays.
- Evaluating audit results is important to improve risk assessment parameters and compliance initiatives; high rejection rates signal system problems that require analysis of root causes (for example, excessive documentary requirements, fraud, or lack of taxpayer knowledge).

### Illustrative risk-based approach for VAT refund claims (from Table 3)
- Low risk
  - Indicators:
    - Regular exporter with two years of export history.
    - Records show that account books have been properly maintained for the last two years.
    - No evidence of fraud or significantly overstated refunds have been found in the last two years.
    - History of accurate, timely remittance of all taxes.
    - VAT monthly returns have been audited twice in the last 36 months.
    - Refund claim level is in line with previous valid applications.
    - Claim is below trigger value.
  - Appropriate response:
    - Claim would be approved without conducting a full audit.
    - Claims would be subject to random selection for post payment review.
- Medium risk
  - Indicators:
    - Refund claim exceeds previously approved amounts considerably.
    - Claim exceeds stipulated trigger value, but otherwise meets the low-risk classification.
    - All past VAT and income tax returns filed with no material arrears.
  - Appropriate response:
    - Conduct desk verification.
    - Management judgment to be applied regarding appropriateness of prepayment audit.
- High risk
  - Indicators (taxpayer meeting any one of the following tests):
    - First-time refund claim.
    - Refund claim exceeds trigger value.
    - Claim deviates significantly from normal claim pattern.
    - Previous claims rejected or significantly reduced during audit.
    - Currently in arrears for any tax.
    - Penalized for late payment or underreporting within last 12 months.
  - Appropriate response:
    - Automatic desk verification used to inform field audit selection.
    - Conduct field audit of this VAT return only.
- Note: Trigger value refers to the claim’s size. Its (associated/assigned) threshold, as defined by the tax administration, determines risk level. It may be a stipulated amount or combination of other risk criteria.

### Ireland: real-time risk model example
- Rules-based real-time risk analysis applies primary controls and taxpayer-specific data (return and payment history, company status, return and payment compliance for other taxes).
- Risk scoring categorizes cases as green (low-risk), orange (medium-risk), or red (high-risk).
- In 2015, more than 58,000 VAT cases categorized as red were examined, resulting in an indirect yield of EUR 168 million.

### Georgia: AVS and comprehensive reform experience
- Prior system: only 9 percent of cash refund requests were automatically approved; cash refund requests were required by law, resulting in taxpayers avoiding requests and a stock of 1.6 billion GEL (about $0.5 billion).
- Reforms under IMF-supported project:
  - Align VAT processing with international good practice (TADAT requirement: 90 percent of all credit declarations approved for refund within 30 days, subject to risk screening, ex post audits, and some ante checks).
  - Introduced an automated VAT system (AVS) in February 2019 to assess risks of all VAT declarations with broad refund risk indicators and ranking/prioritization methodology.
  - Results after AVS:
    - Sevenfold increase in both number and value of approved credit returns.
    - Number of automatically approved credit declarations surpassed 90 percent.
    - Value of approved credits is now above 70 percent.
    - Value of cash refunds requested remains low: only 28 percent of total credits having been refunded (taxpayers must continue to apply for refunds).
  - Legal amendment passed in July 2019 allowing GRS to issue cash refunds without taxpayer requests; beginning in July 2020 the GRS will apply this amendment to VAT refund issuance.
- Compliance improvement plan (CIP) for 2019–20 focuses on top compliance risks, including VAT compliance.
  - A VAT filing compliance follow-up unit formed in January 2018.
  - On-time filing rates increased from 65 percent in 2015 to 92 percent in July 2019.

### Common causes of high refund-claim rejection rates
- IMF capacity development experience indicates in some countries claims are rejected because taxpayers cannot meet excessive requirements (for example, providing copies of supporting documentation such as VAT invoices).
- Example rejection rates during 12-month TADAT periods:
  - Guatemala and Jordan: about 10 percent of claims (by value) rejected.
  - Kenya: 23 percent rejected.
  - Tanzania: 34 percent rejected.
- Remedies include audits, taxpayer education campaigns, and targeted responses for recalcitrant sectors or taxpayer groups.

### Customs administration role
- Customs provides real-time data on the VAT base, amounts of VAT paid, timing of imports and exports, and intelligence.
- Robust exchange of information programs enable customs and tax administrations to share investigations and intelligence and to establish high-risk taxpayer profiles.
- Controls should mitigate fictitious VAT claims involving imports (fraudulent overstatement of VAT paid) and exports (goods not actually leaving the country); selective border checks of exported goods and their valuation are recommended for high-value export declarations.

### Dealing with buildup of outstanding refund claims (priority actions)
- Review each significant outstanding claim (subject to funding and human resources).
- Objectives: assess real risk of each case and quickly clear low-risk refunds.
- Possible process:
  1. Review all outstanding claims and identify the age of the claim and amount involved.
  2. Prioritize cases for clearance based on risk, age (oldest to newest), and claim value.
  3. Establish a small team of competent senior officers to review priority cases and identify refunds that can be released without further checks.
  4. Obtain supplementary resources from the finance ministry to manage the refund claim backlog.
- Finance ministry commitment (for example, special lump-sum appropriation) is critical. Examples of countries applying similar strategies: Cameroon (2017), Côte d’Ivoire (2017), and Kenya (several times, the latest being in 2019).

### Public financial management and accounting practices
- Budgeting for VAT refunds:
  - Governments should budget only net amounts of VAT (gross collection less refunds due); VAT refunds should not be featured in the annual budget law.
  - Gross VAT presented on budget reports is informational only; net VAT should be the revenue basis.
  - First budget revenue estimate for VAT should be updated during budget execution with tax administration information.
  - Recording gross VAT as revenue and refunds as expenditures is not recommended; it can lead to insufficient appropriation, unpaid claims, supplementary budgets, and delays.
  - GFSM 2014 recommends reporting VAT revenue on a net basis.
- Treasury operations and VAT refund TSA subaccount:
  - All gross VAT revenue should be transferred to the TSA daily; commercial banks should only receive deposits and transfer daily to the TSA or central bank.
  - Refunds should be paid out of the TSA or central bank account, not from commercial bank deposit accounts.
  - Best practice: tax administration manages the VAT refund TSA subaccount (zero balance) and authorizes payments according to risk-based verification procedures (examples of countries using this approach: Australia, Kenya, Madagascar, Mauritius, Zambia, and Zimbabwe).
  - Refund amounts should be included in treasury cash flow projections on a separate line and updated monthly.
  - Treasury-only control of the subaccount (examples: Guatemala, Ecuador, Peru) is not good practice because the treasury lacks tax administration information and may prioritize cash pressures over prompt refunds.
  - VAT refund TSA subaccount design: zero-balance, receive exact approved amounts for a period according to an agreed timeline, and avoid holding idle funds; tax administration should periodically inform treasury of required transfers.
  - Complementary legal framework should require government to pay interest on unpaid or unprocessed claims after due date.
- Impact on public debt:
  - Unprocessed or unpaid VAT refund claims after the due date should be considered government liabilities and recorded under government debt for accounting and statistical purposes.
  - Tax administration should report monthly amounts pending reimbursement after the due date to accounting and statistics offices; these are governmental tax arrears and debt.
- Accounting and financial reporting:
  - Accounting office should record gross VAT collected, refunds paid, refunds due as debt, and reconcile accounts with treasury and tax administration.
  - Best practice: accrual accounting for VAT refunds so only net VAT counts as accruing to the government.
  - Under accruals: revenue recorded when earned; refund recorded when due to taxpayer. Under cash basis: refund recorded at payment.
  - IPSAS 23 guidance:
    - “An inflow of resources from a non-exchange transaction [taxes and transfers] recognized as an asset shall be recognized as revenue, except to the extent that a liability is also recognized in respect of the same inflow.”
    - “Revenue from non-exchange transactions shall be measured at the amount of the increase in net assets recognized by the entity.”
    - “An entity shall recognize an asset in respect of taxes when the taxable event occurs, and the asset recognition criteria are met.”
  - Transitioning to accrual accounting: recognize accounts payable (including tax refunds) as liabilities and VAT receivables as assets; disclose age of payables due to potential interest after legal due date.
- Fiscal statistics:
  - GFSM 2014 and 2008 SNA state that only taxes that are likely to be collected should be considered revenue and that VAT is a deductible tax.
  - GFSM 2014 (Section 5.27): “In the case of a value-added tax, taxpayers other than final consumers normally are allowed a refund of taxes paid on purchases. Even if this refund exceeds the taxes payable by an individual taxpayer, the net refund is recorded as a reduction in that category of tax.”
  - GFSM 2014 (Section 5.58): “only the net amount of VAT is recorded after deducting refunds.”
  - Applying these guidelines is straightforward on an accrual basis; cash-basis recording may cause substantial lags between collection and corresponding future refunds.

*Source: IMF staff, from "How to Manage Value-Added Tax Refunds," Fiscal Affairs Department, April 2021.*

### Conclusions

### Conclusions

### Importance of timely VAT refunds
- The timely refunding of excess VAT credits is indispensable for the proper functioning of the VAT.
- Failure to refund legitimate excess VAT credits promptly turns the VAT into a tax on production, leading to cash flow problems for compliant taxpayers and discouraging investment and production.

### Fiscal and operational implications of weak refund management
- Weak VAT refund management practices could have profound fiscal policy implications, including:
  - an inaccurate measurement of the deficit and spending overruns,
  - poor budget credibility,
  - impaired treasury operations, and
  - the accumulation of tax arrears.
- For the refund mechanism to be credible, the tax administration must ensure that it has the strategies, processes, and powers to identify and quickly act to combat VAT refund fraud.

### Eight broad guidelines for improving VAT refund administration
- This note offers eight broad guidelines for improving the administration of VAT refund mechanisms, which are critical to good VAT management:
  - The legal framework should be reviewed by the government to ensure that VAT refund requirements, procedures, and documentation are as simple as possible. The treasury and tax administration should coordinate closely and VAT regulations should reflect the minimum number of requirements for the effective payment of legitimate VAT refunds.
  - As part of its overall refund management approach, the tax administration should prepare a strategy and be prepared to deploy a range of measures to combat VAT refund fraud, including automated risk analysis procedures for assessing claims in real time. There should be a robust exchange of information program between the tax and customs administrations, and they should keep each other fully informed of investigation cases, share intelligence collected, and cooperate to establish the profiles of high-risk taxpayers.
  - The ministry of finance should determine the resources required to pay VAT refunds based on the actual amounts required to pay approved refunds within a given period.
  - A robust assessment of net VAT based on reliable information is needed as this will improve tax revenue and budget forecasts and strengthen treasury cash management.
  - All refunds should be financed out of gross VAT. Only net VAT (gross VAT minus refunds paid) should be reflected as revenue in the government budget. VAT refund estimates could be presented as memorandum items in the budget.
  - The treasury should maintain a zero-balance subaccount within the TSA, where the amounts needed to pay the VAT refunds are transferred based on tax administration information.
  - After the statutory due date, the outstanding stock of VAT refund claims should be recorded as governmental liabilities and included under government debt. This would improve the visibility of tax arrears for better monitoring.
  - VAT revenue should be recorded on a net basis for purposes of fiscal statistics.

### Framework and recording practices
- A framework for VAT refund management is presented (Annex Figure 1–1), emphasizing roles for Treasury, Tax Administration, Finance Ministry and Treasury, and the Taxpayer in: agreeing projections for gross VAT, refunds, and net VAT for annual budget and refund financing modalities and procedures; subjecting claims to risk assessment; verification/audit; advising refund amounts; paying taxpayers; compiling monthly statistics of gross VAT and refund flows; and recording approved but unpaid, and yet-to-be-audited refunds as government debt (domestic borrowing).
- Specific recording recommendations:
  - All refunds should be financed out of gross VAT.
  - Only net VAT (gross VAT minus refunds paid) should be reflected as revenue in the government budget.
  - VAT refund estimates could be presented as memorandum items in the budget.
  - After the statutory due date, outstanding VAT refund claims should be recorded as governmental liabilities and included under government debt.
  - VAT revenue should be recorded on a net basis for purposes of fiscal statistics.

*Source: Conclusions, HOW TO MANAGE VALUE-ADDED TAX REFUNDS (International Monetary Fund | April 2021).*

---


_Source: https://www.imf.org/-/media/files/publications/howtonotes/2021/english/htnea2021004.pdf_