IMF/RMTF Webinar Series on the VAT

March 16, 2021

The IMF and the RMTF will host a series of virtual events on the VAT in the coming months. The series, comprising four webinars covering different aspects of the VAT, will be short, each running for up to two hours, and targeted at strategic-level VAT issues. The webinars will mainly entail an organized discussion among small panels, leading to an exchange of views and Q&A. 

Back to Top

Overview

It is time to refocus tax discussions on the fiscal contribution of the VAT. The workhorse of budgets in many countries has been the VAT for decades, and this will continue to be the case in the foreseeable future. However, in many countries, the VAT remains a source of controversy related to VAT policy design and legislation, difficulties in properly managing VAT compliance, and the overall distributional concerns. Key issues to be addressed in the webinars are: what have we learned in the last 20 years; the role of VAT in the post-COVID-19 recovery; equity, efficiency, and administrative complexity; and VAT compliance and administration.

Back to Top

Objectives

The objectives of the virtual events on the VAT are to: (1) solicit views and feedback on what have we learned in the last 20 years and more recently during the crisis; (2) exchange ideas and engage in discussions on country experiences and new research regarding what could be done differently to address perceived problems in the VAT; and (3) brainstorm on how we can continue improving its efficiency and effectiveness as a collection vehicle going forward.
 

Back to Top

Webinars

Webinar 1: The VAT Experience
Wednesday, September 23, 2020 | 8am – 10am

Opening remarks (Mr. Vitor Gaspar): The remarks emphasized the importance of the VAT within the financing for development agenda. 

The keynote presentation (Mr. Michael Keen): The presentation provided an overview of key developments and issues about the VAT:

  • Popularity of the VAT has been steadily increasing, new countries are still introducing every year. Accordingly, the share of revenues delivered by the VAT has been increasing across country groups and countries with a VAT tend to raise more revenues.
  • There are good reasons for the popularity of the VAT: it is a growth friendly tax and has built-in safeguards to protect revenue even if the VAT chain breaks. But this assumes that the design remains as intended: broad base, with few or no exemptions or other special treatments. Still, there is a lot of variation across countries, such as in the number of VAT rates and the level of the registration threshold.
  • One of the most persistent questions around the VAT is whether it is regressive, and if there is a way to make it more progressive by adjusting VAT design parameters. Analysis shows that preferential rates actually benefit the better off, and that there are generally more efficient fiscal instruments outside the VAT to benefit poor households and improve redistribution.
  • Some common concerns around the VAT are related to its administration. However, the administration of the VAT is not more complex than that of other taxes and indeed less so than the income tax, the other principal source of revenue for most countries. 
  • Other important design issues include digitalization of the economy, financial sector, VAT in the context of subnational governments, and cross border services, some of which were then discussed by our panel.

Panel discussions (moderated by Ms. Victoria Perry)

Recent issues discussed in the academic literature about the VAT (Ms. Rebecca Millar):  

  • Legal academic literature frequently discusses whether it is possible to keep the VAT simple, considering the increasing complexity of business transactions and digitalization.
  • Legal academics are particularly interested in the issue of VAT fraud, how it is used to break the VAT chain, and how authorities respond to it, while maintaining the integrity of the VAT.
  • Legal academics are also writing about international tax issues for the VAT and digitalization, including the role, if any, of digital platforms. 

EU experience with the VAT (Mr. Patrice Pillet):

  • The EU efforts in the last 20 years focused on VAT harmonization and simplification with a view to fight fraud and support the EU single market. While significant progress has been achieved, the VAT still remains prone to abuse. 
  • VAT revenue generation potential has improved over recent years, but C-efficiency in the EU is rather low.
  • While the adoption of a definitive VAT system for intra-EU trade remains at an impasse, the 2016 VAT Action Plan is more ambitious than that, including allowing member states more flexibility for VAT rate setting, further simplifying VAT for small businesses, and tackling VAT fraud.

Recent reforms in India (Ms. Indira Rajaraman) and Benin (Mr. Nicolas Yenoussi):

  • The VAT can be complex for some countries, but it raises substantial revenues. Issues around design deficiencies in India and the large VAT gap in Benin remain key concerns.
  • The countries also face practical challenges keeping to good VAT design principles, especially in the face of social, economic and political realities, such as in India where there is widespread poverty, or in Benin with its large informal sector.
  • Progressivity via public expenditure is difficult to attain in India, which is why policymakers are looking at the VAT rate structure to address progressivity.
  • The speaker from Benin remarked that VAT is challenging for African countries to administer given the lack of widespread use of standard accounting by businesses, high non-compliance rates and incidence of fraud. 

A lively Q&A session that touched on several important issues:

  • Much discussion on the VAT structure and issues raised by panelists on trying to keep to the principles of a good VAT, versus the political reality in some countries, especially those with widespread poverty, as well as the need to “get it right from the start” to avoid design distortions becoming entrenched.
  • The difficulties faced by developed and developing countries are very different. The main concern for the former is to capture financial and digital transactions, while the challenges arising from the very large informal sectors is of particular concern for the latter. Generally, there was much interest in tools for diagnosing—and countries’ experiences with improving—VAT compliance.
  • Many questions were raised on the regressivity of the VAT. The perception is very different if we look at only the VAT, versus looking at the overall tax and benefit system. There are many, better targeted instruments for the improvement of progressivity in the overall fiscal system, even in poor countries. 
  • The discussion also touched on the disadvantages of relying on the VAT to create incentives for industrial activity – and the desirability of using other instruments, including depreciation, to resist pressures to use the VAT in this way.
  • VAT is a challenge for African countries, given the high level of non-compliance and incidence of fraud, but digitalization also provides opportunities for improving administration and compliance—the Benin experience was illustrative.
  • There are also many challenges faced by small businesses.
  • The EU experience highlighted challenges in dealing with financial sector rules and dealing with e-commerce. 

Answers to technical questions raised during the panel discussion of Webinar 1: “The VAT Experience”

Presentation materials: 

The VAT: An Overview of Developments and Issues (in English)

The VAT: An Overview of Developments and Issues (in French)

The VAT: An Overview of Developments and Issues (in Russian)

The VAT: An Overview of Developments and Issues (in Spanish)

Webinar 2: VAT and COVID-19: Impact, Response, and the New Normal
Tuesday, November 17, 2020 | 8am – 10am

Summary of the Second IMF/RMTF VAT Webinar:

VAT and COVID-19: Impact, Response, and the New Normal

November 17, 2020

Keynote presentation (Ms. Victoria Perry): Ms. Perry presented on “How did the VAT weather the COVID-19 crisis so far?” and provided a summary of considerations for VAT policy makers and administrators during and following the COVID-19 crisis.

  • Revenue from VAT declined as a result of the pandemic, particularly in low income and emerging countries, due to lower consumption and policy measures aimed at providing cashflow relief to taxpayers (though about 50 percent of countries globally did not adopt any VAT related policy measures). 
  • The VAT has been an important tool for many policy makers in the crisis. Interventions were focused on providing cashflow relief such as by streamlining and speeding up VAT refunds. A few countries also introduced targeted and/or temporary reductions of VAT rates. Administrative measures were targeted at easing taxpayer compliance obligations, ensuring business continuity, and safeguarding revenue from sectors not affected by the crisis. Notably, however, many countries did not have a business continuity plan in place before the start of the pandemic (e.g., 22 of 41 Sub-Saharan African countries did not have one).
  • While we do not yet know the effect of the pandemic on VAT compliance gaps, we need to be wary as some of the relied measures that have been introduced can increase compliance risks and their implementation. This, combined with some countries’ reliance on tax administration to administer other government support policies, is consuming resources that would otherwise have been deployed for compliance management. 
  • When discussing VAT responses to the pandemic we need to distinguish priorities during the immediate crisis response from those during the reopening and recovery phases. The immediate crisis response required measures to ensure business continuity and to support vulnerable households and businesses. Some countries have used the VAT as a tool to stimulate demand as part of the reopening, relying on time-bound rate reductions or measures targeted at specific industries, but it may not be the most effective instrument to do so as the economy has been shut down on purpose and might even be counterproductive in some cases by encouraging activities that increase health risks. In the reopening and recovery phases VAT will continue to be a relatively growth friendly and revenue efficient tax instrument. 
  • Fiscal consolidation efforts will require reversal of some COVID-19 related measures and improvements in VAT compliance levels, especially in low income countries. Limited fiscal space in these economies limits options for expanding preferential treatment under the VAT in response to the crisis. To address growing debt, we should expect increased reliance on VAT for future revenue mobilization and consolidation. 

Panel discussions (moderated by Ms. Katherine Baer)

Mr. Piet Battiau (Head Consumption Taxes Unit, OECD) on VAT measures introduced to date and their impact on the business community:

  • Across countries, VAT measures were focused primarily on supporting business cash-flow, reducing compliance burdens, and on preferential treatment of health care sector supplies. Support to the business community via the VAT is widely seen as an effective part of the crisis response. Still, many businesses have indicated that reductions in VAT compliance burdens remain an urgent priority and flagged that temporary rate reductions had a negative effect on their compliance costs.  
  • The importance of deferred payments for business raises longer-term issues and challenges from the accumulation of debt. These include rising revenue risks for governments and may require a wider discussion on the desirability and design options for VAT debt relief measures, such as reducing VAT liabilities for unpaid invoices. 
  • Similarly, accelerated VAT refund procedures have been important for businesses experiencing falling sales, while continuing to incur VAT on their fixed cost base. However, adoption of these measures has been limited and more common in countries that already operate relatively efficient VAT refund processes. 

Ms. Helen Miller (Deputy Director, IFS) on the role of VAT in the pandemic and relevant lessons from the global financial crisis in 2008/09:

  • Governments will be looking to stimulate economies. In that context, temporary VAT rate reductions will likely become a popular consideration. We know from experience in the UK that they can boost consumer spending. It is not obvious, however, that VAT rate reductions will be the best tool in the current crisis. Trying to provide relief to specific sectors by introducing differentiated VAT rates is likely to complicate matters and lead policymakers down a ‘rabbit hole’.
  • The circumstances during this pandemic are different from the global financial crisis and incentivizing consumer spending may not have the desired effect where health concerns dominate consumer choices. We also need to carefully review the likely effects of VAT rate reductions when supply constraints make it less likely that VAT reductions will be passed on to consumers. In this crisis the persistent uncertainty can dampen the effect of VAT rate cuts. And, uncertainty makes the timing of introducing stimulus measures particularly challenging. 

Mr. Gabriel Yorio (Deputy Minister of Finance, Mexico) on the Mexican VAT policy response to the crisis:

  • Instead of adopting VAT related policy measures, Mexico preferred to support struggling businesses through budgetary instruments. It only introduced an accelerated VAT refund scheme and payment deferrals in response to the crisis. 
  • Even before the crisis Mexico was below the OECD average in VAT collections as a result of the comparatively narrow VAT base and tax evasion. Mexico has started reform efforts to strengthen revenue mobilization in 2019, which helped mitigate some of the negative impact of the crisis on revenue collection.  
  • For the consolidation phase, the Mexican administration is considering the possibility of pursuing structural reforms, including removal of zero-rated VAT on domestic food and health products. Such a reform tends to come with high political cost, however. The administration is also considering reintroducing the cross-crediting of excess VAT refunds with liabilities for other major taxes, a mechanism which had been phased out recently.

H.E. Khalid A. Al Bustani (Director General of Federal Tax Authority, United Arab Emirates) on the experience with the newly introduced VAT in the UAE: 

  • The VAT rate in the UAE is already very modest at 5 percent and no major changes to the VAT were introduced aside from temporarily zero rating some medical supplies. COVID-19 responses were mostly implemented relying on other instruments. For the VAT, filing and payment deadlines were extended and the refund process accelerated, without relaxing risk-based protocols to monitor compliance. 
  • The UAE has the benefit of being able to leverage its investments into a modern VAT administration during the crisis. All major VAT operations were conducted fully electronically before the pandemic. A shift to a remote work environment and remote compliance management was facilitated by the existing infrastructure to provide online support services to taxpayers and online access to critical information sources. However, enhancements had to be made to IT security protocols to ensure the safety and confidentiality of taxpayer information in a remote working environment.

The initial panel discussion was followed by several rounds of questions to the panel, incorporating Q/A’s from the audience. It touched on a number of important issues, including:

  • Giventhe surge in e-commerce, adopting VAT regimes (both the legal framework and administrative processes) to capture VAT from remote vendorsis a priority in countries that have not yet done so. This is one of the best direct responses to changing consumer behavior. About 50–60 countries have now introduced measures which primarily target online sales of services and digital products. Both observed compliance and revenue collections have exceeded initial budgetary estimates in many countries. Rules and processes to capture e-commerce and leveraging platforms should be harmonized as much as possible to avoid creating obstacles to trade. 
  • Structural reforms to broaden the VAT base and remove reduced rates and exemptions are challenging, but the current crisis may provide opportunities to establish a link between efforts aimed at expanding the welfare state and reforming social safety nets with the broadening of the VAT base. 
  • Once countries move to fiscal consolidation, VAT is likely to play its traditional role of being an engine for revenue mobilization. Reducing the compliance gap will be the easiest way to increase revenue during and after the crisis in many countries. Some may also decide to raise VAT rates, but it will be important to ensure that additional revenue is used to support the most vulnerable in society either directly or indirectly.  
  • Many administrative reforms undertaken in response to the crisis should become permanent improvements. These include remote work arrangements for tax administration staff and provision of targeted remote taxpayer services, and improvements to VAT refund processes. Going fully digital often requires further investments, however, including strong information security management systems and a robust HR function with clear performance indicators to monitor productivity in the administration.  

Answers to technical questions raised during the panel discussion of VAT Webinar 2: 

Download here

Presentation materials: 

The VAT and COVID-19 (in English)

The VAT and COVID-19 (in French)

The VAT and COVID-19 (in Russian)

The VAT and COVID-19 (in Spanish)

 

Webinar 3: Equity, Efficiency, and Administration of VAT
Tuesday, January 12, 2021 | 8am – 10am

Description: The webinar will explore VAT policy issues, including that of equity and efficiency, and administrative complexity, e.g., stemming from reduced VAT rates and exemptions, cross-border trade and digitalization. It will explore options for improving the VAT design and constraints to do so, including issues of political economy. 

Summary for IMF Webinar on “Equity, Efficiency, and Administration of the VAT”:

Keynote presentation (Mr. Ruud de Mooij): Mr de Mooij presented on “Equity, Efficiency and Administration of the VAT” and provided a summary of important policy aspects of the VAT, including some of their administrative implications, with a focus on exemptions/reduced rates.

  • Policy makers tend to employ VAT exemptions/reduced rates (including domestic zero rating)  with the intention of reducing regressivity. But the VAT is less regressive than commonly assumed. When based on lifetime income or consumption, the VAT is usually proportional or even progressive.
  • There is no clear role for the VAT to pursue equity objectives. The VAT is an instrument for mobilizing revenue in order to pay for public spending. Progressive personal income taxation and social spending instruments (cash and in-kind transfers) are superior in efficiently targeting equity objectives.
  • Exemptions/reduced rates are blunt instruments and thus poorly targeted. Their benefits may not be entirely passed on through lower consumer prices. And while the poorest benefit more relative to their consumption if the benefit is passed on, much of the total benefit flows to the richest households.
  • Empirical work is not conclusive on the use of exemptions/reduced rates to reduce labor market distortions, promote merit goods or correct externalities. Likewise, the VAT is an ill-suited instrument to incentivize businesses.
  • Exemptions/reduced rates do create consumption and multiple production distortions. Macro-regressions suggest a broad-based-low-rate VAT supports economic growth.
  • The attractive feature of the VAT is its self-enforcement mechanism. Exemptions/reduced rates, on the other hand, introduce administrative complexity and complicate compliance management (for instance, VAT refund fraud schemes). Yet, exclusions can be justified to avoid administrative challenges in applying VAT to some services (for instance, margin-based financial services, life insurance) and to limit high compliance costs for small businesses.
  • Exemptions and reduced rates cause VAT revenue shortfalls, although the impact of the former is quite subtle as input VAT cannot be claimed. Countries should systematically assess tax expenditures to estimate revenue forgone based on a benchmark VAT and analyze potential implications on efficiency and compliance.

    Panel discussions (moderated by Mr. Michael Keen)

    Sebastian James
    (Tax expert, World Bank) on Improving VAT efficiency and pursuing equity goals.
  • VAT impacts heavily on the poor as they tend to spend almost all their income on consumption. This gives the impression that exemptions and reduced rates on necessities should be employed to help reduce their tax burden. While exemptions and reduced rates can help the poor, they also help the rich. Importantly, the poor (particularly in rural areas) buy their essentials from below-the-VAT-threshold village stores or from informal businesses. So, exemptions/reduced rates often do not help the poor in practice. In fact, they may be hurting them because VAT collection diminishes, reducing resources available for redistributive spending.
  • The use of exemptions and reduced rates in a chain-based tax like the VAT creates a lot of complexity in administration opening opportunities for evasion and avoidance.
  • The question is whether the VAT on its own should be equitable. Equity objectives can be achieved within the broader tax ecosystem (for instance, using personal income taxes), or though spending instruments with strong impact on reducing poverty (for instance, cash transfers to the poor).
  • One of the biggest problems in adopting a modern VAT is the lack of understanding of good VAT policy. Policymakers and the government need to do a much better job communicating to the public what the impact of exemptions and reduced rates are to avoid suboptimal VAT designs.

    Rita de la Feria (Professor of Tax Law, University of Leeds, UK) on making the VAT a progressive tax and political economy of a VAT reform.

  • There is a general academic consensus that the VAT is not a good vehicle to achieve equity.
  • First, pass-through of reduced rates and exemptions is uncertain. Often prices do not fall in response to rate reduction. And, when they do, this commonly benefits the richest households more in absolute terms and introduces distortions.
  • The level of litigation that arises from reduced rates and exemptions is significant. For example, of all the cases on VAT fraud and avoidance over the last 15-20 years at the European Court of Justice only two do not concern reduced rates and exemptions (which includes carousel fraud cases).
  • A modern tax system should rely on welfare transfers instead of applying VAT reduced rates or exemptions but there are multiple political economy obstacles to the design of well-targeted welfare transfers.
  • There is a lot work to do on providing adequate VAT information to the public. And, it is also important to build a reasonable level of trust in government policies as people tend not to believe in the two-step policy approach of collecting revenue from taxes to redistribute them through spending.
  • When discussing reforms to broaden the VAT, narratives about fairness (e.g. tax consumption of the rich to give public services to the poor) are more likely to resonate with the public than narratives about efficiency.
  • The VAT can be made more progressive by considering individual characteristics of consumers. A system of allocating real time VAT rebates for low income households based on anti-fraud software platforms already adopted by many countries could help implement such an approach and build trust and confidence that revenue gains are indeed effectively redistributed.

    Moses Kaggwa (Director of Economic Affairs Department, Ministry of Finance, Planning and Economic Development, Uganda) on broadening the VAT base in Uganda

  • Recent VAT reform experience in Uganda has been mixed. In 2014-15, the government succeeded in removing distortionary exemptions (for instance, on goods used for intermediate consumption), but these were subsequently rolled back for a range of goods (for instance, life jackets, CCTV cameras, solar energy) due to pressure from lobbyists. Inefficiencies in the VAT refund process also served as an additional excuse to grant industry-based exemptions (for instance, on agriculture inputs and machinery). The associated tax expenditure amounted to 1.2 trillion Ugandan Shillings (or 1 percent of GDP) in 2018-19.
  • In the context of a new domestic revenue mobilization strategy, the government is aiming to remove distortionary exemptions. A communication campaign was launched with the support of civil society organizations to better explain the impact of exemptions.

    Lasha Khutsishvili (Vice-minister of Finance of Georgia) on Georgia’s efforts to improve VAT administration and plans for broadening the VAT base.

  • Improvements in the VAT refund process helped reduce pressures from the business community for exemptions and zero-rating schemes. Before improvements in refund management were made, the stock of input tax credit balances reached up to 5 percent of GDP.
  • A risk-based VAT refund process supported by automated verification of claims was launched in 2017. More than 90 percent of submitted claims are now automatically approved for VAT refunds. As a result, the stock of credit balances has significantly decreased—to less than 1.5 percent of GDP—thus alleviating businesses’ cash constraints.
  • From 2021, Georgia will report tax expenditures to raise awareness about the impact of the continued use of VAT exemptions.

    The initial panel discussion was followed by several rounds of questions from the audience. It touched on important issues, including:

  • VAT exemptions provide a competitive advantage to imported goods over the same goods when produced domestically.
  • The main objective of the VAT registration threshold is to exempt small suppliers from the VAT. This does not, however, imply that they do not pay VAT. Exempt suppliers cannot claim a credit for the VAT paid on their inputs. In setting their threshold, countries should consider revenue objectives, administrative and compliance costs, and tax administration capacity.
  • Instead of using the VAT to pursue equity objectives, countries should focus on strengthening the role of personal income tax as a key instrument to ensuring redistribution.
There is a need to promote ambitious VAT reforms to ensure countries can meet their objectives for domestic resource mobilization. 

Presentation materials: 

The VAT: Equity, Efficiency and Administration of the VAT(in English)

The VAT: Equity, Efficiency and Administration of the VAT(in French)

The VAT: Equity, Efficiency and Administration of the VAT(in Russian)

The VAT: Equity, Efficiency and Administration of the VAT(in Spanish)

Answers to technical questions raised during the panel discussion of VAT Webinar 3: Download here

Webinar 4: Managing VAT Compliance and Administration
Tuesday, March 16, 2021 | 8am – 10am

Description: The webinar will discuss revenue administration issues, including priorities for effective management of VAT. It will explore experience and lessons learned in managing VAT compliance and administration, including their interaction with VAT design. It will touch on use of tools like RA-GAP, and management of VAT credits and combating VAT fraud.

Keynote presentation – Ms. Katherine Baer, “Managing VAT Compliance and Administration” provided an assessment of the performance of the VAT, and further insight on some important components of VAT administration:

  • VAT performance, based on findings of FAD analytical tools (RA-GAP, ISORA, TADAT), notes that compliance gaps are two times higher in low income countries (LIC) than in high-income countries (HIC) which corresponds to the regional differences. Construction and trade are the economic sectors that typically demonstrate the highest compliance gaps; however, hospitality, professional services, and manufacturing also demonstrate large gaps. The manufacturing sector is particularly surprising given the VAT’s inherent self-enforcement feature.
  • The preconditions for a well-functioning VAT include good design of VAT policy (i.e., broad based, limited exceptions and exemptions, simple rate structure), careful setting of the VAT threshold in consideration of administration capacity, self-assessment and electronic processes, robust VAT refund management procedures, including an anti-fraud strategy, extensive use of third-party data, automated cross-matching, and data analytics, that includes Customs data, and a well-resourced tax administration.
  • An integrated approach of the key components of the VAT builds the basis for good compliance risk management (CRM): facilitating compliance, controlling and monitoring registrations, on-time filing and payment, controlling the veracity of invoices, verifying accurate reporting through sufficient coverage and appropriate focus, and managing VAT credits and refunds effectively.
  • HICs pay more refunds as a percentage of gross VAT collections and have lower VAT gaps. More research is needed for confirmation, however this outcome suggests that better functioning VAT refund mechanisms (including risk-based verification processes that allow paying refunds on-time to taxpayers with a sound compliance history) reinforce credibility in the VAT system and encourage compliance, contributing to lower VAT gaps, while other factors also play a role (filing, payment, audit)
  • Resourcing is an important consideration for VAT enforcement. LICs are considerably less well-resourced compared to Upper Middle-Income Countries (UMIC) and HICs as measured by staff to country population and are less able to devote resources to audit and verification activities (which are intensive in labor force).
  • VAT administrations with a greater degree of digitalization have higher tax to GDP ratios than those with less digitalization therefore as LICs enhance digitalization capabilities their VAT performance should demonstrate improvements in the coming years.
  • Digitalization affects VAT performance through multiple channels by enabling many functions: better data gathering and matching, digital services (e-invoicing, cloud services, mobile devices, apps), digital tools to reduce paper and improve service (pre-filled tax returns, electronic notifications), and as a learning machine to improve taxpayer service, reduce burden, and increase transparency and accountability.

 

Panel discussions (moderated by Mr. Juan Toro)

Mr. Michael Walpole (Professor of Taxation, University of New South Wales (UNSW), Sydney, Australia) on diagnosing the VAT compliance burden:[1]

  • As VAT is a self-assessed tax, keeping compliance burden at the lowest possible level plays a key role encouraging more compliant behaviors.
  • UNSW’s tool applied to 47 OECD or FTA member countries identified four possible factors that affect VAT compliance burden: i) complexity of VAT design (for instance, multiple rate structures, exemptions, low registration thresholds), ii) the number and frequency of administrative requirements, iii) capacity and capability of the tax administration (inadequate or poorly designed support provisions), and iv) monetary costs and benefits (for instance, delays of VAT refund mechanisms, low or no interest for delayed processing).

Ms. Mary Baine (Director of Tax Programs, African Tax Administration Forum (ATAF)) presented key drivers of compliance gaps in African countries based on the work of ATAF.

  • High VAT compliance gaps in African countries are explained most of the time by limited availability of tax data (which limit risk assessment activities), shortages on monitoring effectiveness of the audit function, constraints adopting a more automated VAT management, limited audit resourcing, lack of interdepartmental synergies and robust CRM frameworks, and the size of shadow economy.
  • The growth outlook for digitalization in Africa is positive despite the challenges (unstable power supply, inadequate financing, infrastructure, low taxpayer adoption rates). Most tax administrations are adopting electronic filing systems, and some have already made clear progress. Kenya has implemented data matching for input tax credits, Nigerian and Rwanda employ real-time provisioning of data for assurance purposes, and Malawi has implemented electronic fiscal devices.
  • Many African countries (e.g. South Africa, Kenya) are adopting frameworks that will permit the capture of VAT on cross-border transactions in consideration of international good practice and with ATAF support.

Mr. Daniil Egorov (Commissioner, Federal Tax Service of Russia (FTS) shared success factors on increasing digitalization in Russia and the resulting decrease of the VAT gap.

  • When embarking to digitalize tax operations, tax administrations should also take into consideration the digital maturity of stakeholders. Russia followed a phased approach to digitalize VAT operations, first making mandatory electronic filing, then imposing certain information reporting obligations (of invoices issued and received), which in turn allowed the FTS to conduct more robust cross matching of information to detect anomalies in taxpayer declarations, permitting real-time nudging, and risk-based audit referrals. Just until recently, the FTS rolled out electronic invoicing.
  • Going forward, the FTS will explore how it can use data even further such as populating VAT returns and reducing the administrative burden on taxpayers.
  • Big data offers tremendous value to tax administrations, and there are several key considerations. It’s important to understand data needs, as too much data may create distraction and noise. Skills to permit working with data and dashboards are necessary. The development of a strong data culture ensures good communication between data stakeholders. Tax Administration readiness to work with external data sources permits full data integration.

Ms. Margarita Faral, (Tax Commissioner, Dirección General Impositiva (DGI) of Uruguay) on DGII’s experience in lowering the VAT gap.

  • VAT in Uruguay has been around for 50 years. There is a large tax base and a simple rate structure (22 percent, 0 percent on exports). VAT represents about 45 percent of tax collections, and 9.5 percent of GDP, and tax evasion is estimated to be 14 percent.
  • Uruguay’s has used e-filing as a primary tool to support VAT compliance, and also employs an integrated approach to for taxpayer management.
  • Uruguay’s success is premised on having an up-to-date taxpayer registry, rules for businesses to document transactions and having widespread compliance controls on filing and payment obligations.
  • Comprehensive VAT information reporting obligations allows the DGI to conduct systematic large-scale information cross matching efforts to detect reporting inaccuracies.
  • Uruguay decided to adopt a multiple approach when managing VAT refunds, combining a risk-based approach to process VAT claims and use of cash refunds, Treasury notes and offsetting schemes.

The panel discussion was followed by questions from the audience. It covered important issues, with clear messaging:

  • Clear legislation that contains clear refund mechanisms with timelines and interest provisions is paramount.
  • Publication of refund requirements and entitlements builds trust.
  • Blockchain is a tool that should be explored to understand benefits before using it.
  • Careful setting of VAT thresholds is important. Low thresholds bring small businesses into the VAT net, but they may be disproportionately bearing compliance costs that may affect the economy and productivity.

Presentation materials:  

Managing VAT Compliance and Administration (in English)

In Spanish

In French


Opening Remarks Vitor Gaspar Webinar 1