IMF Conference

Summary for IMF/RMTF VAT Webinar on “VAT Refunds”

Keynote presentation (Ms. Debra Adams), “Managing VAT refunds” - provided an overview of the tax policy and tax administration challenges related to the management of VAT refunds:

• Refunds are an inherent component of VAT, but their administration often remains a challenge. Well-functioning VAT refund mechanisms and robust anti-fraud strategies reinforce credibility in the VAT system and encourage compliance, which contributes to lower VAT revenue gaps. The timely recovery of excess credits is important to a well-functioning VAT and an enabling business environment; however, the refund process can also be misused with fraudulent behavior resulting in significant revenue leakage.

• Some countries seek to limit refunds as fraud mitigation through zero-rating B2B supplies, reverse charge rules, deferral of import VAT, and deemed liability schemes. However, these mechanisms tend to add administrative complexity and undermine the multi-stage collection mechanism of the VAT.

• A better solution is to use an integrated approach for the key components of the VAT to build 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, and managing VAT credits and refunds effectively.

• Timely intervention to prevent fraud or tackle it at the earliest opportunity is key to an effective anti-fraud strategy. These interventions include limiting access to the proceeds of crime, increasing financial risk for people who facilitate or participate in fraud, and implementing a comprehensive CRM strategy.

• Public Financial Management is an important consideration for managing VAT refunds, and countries should not use refunds as a source of financing to ease fiscal deficits. Treasury should ensure that approved refunds are paid in a timely manner.

Panel discussions (moderated by Ms. Andrea Lemgruber)

Mr. Marius Van Oordt (University of Pretoria, African Tax institute) on the key policy issues related to VAT refunds in developing economies.

• Timely payment of VAT refunds supports predictability for investors. Particularly in the extractive sector, poor VAT refund practices can be a barrier to foreign direct investment. The payment of interest on refund claims may provide some relief, but foreign exchange fluctuations create additional risk for investors. 2

• Input tax credit eligibility incentivizes businesses to register for VAT. However, delays in payment of refunds adversely impacts cash flow and formal growth prospects of small firms. In practice, small firms often do not apply for VAT refunds simply to avoid audit.

• Many developing countries allow exemptions of certain capital imports resulting in administrative complexities and an incentive to import goods rather than source them domestically. In turn, domestic producers face a competitive disadvantage in these markets.

• While only exports should be zero-rated, some countries respond to pressure from large exporters by also zero-rating domestic supplies to them. As a result, refunds have to be administered for a larger number of suppliers; this also creates additional risk of VAT-free goods being diverted into the domestic market. Less commonly, some countries make it difficult for exporters to register for VAT as they recognize that registration triggers refund eligibility.

Ms. Catherine Lemesle, (CREDAF) on the types of refund fraud and approaches used by CREDAF member countries to address them.

• Some of CREDAF’s 30 member countries report more challenges with VAT refunds than others. Countries facing revenue challenges may not pay refunds in a timely manner, notwithstanding underlying VAT policies requiring them to do so.

• Fraud continues to be a common challenge in CREDAF countries through the use of fictitious invoices, imports, and exports. • Well-organized carousel fraud typically seen in the EU is now also occurring in Africa. There is generally a chain of connected suppliers who invoice VAT; however, they do not remit it, while the connected recipients seek VAT refunds.

• Many CREDAF countries have legislative measures in place to combat fraud – including electronic submission of information and mandated electronic invoices. • Some countries examine all refund requests received very meticulously, while others use more segmented approaches based on the level of risk.

• Effective cooperation and information sharing between tax and customs is an excellent tool to inform risk assessment for refunds, as customs data may be instrumental in detecting VAT fraud.

Mr. Eduardo Medel (Head of the Department of Analysis of Risk of Non-Compliance, Internal Revenue Service (SII), Chile) on VAT refund reforms and broader VAT compliance management strategies.

• VAT represents 40 percent of tax collection in Chile and refunds amount to about one third of gross VAT collections. Recent VAT reforms include the mandating of electronic invoicing for VAT. 3 Monthly VAT refund claims are generally processed within 48 hours to ensure that international trade and cash flow are not impeded.

• The automated validation system uses algorithms to assess risk. Claims that are flagged are sent for a second (manual) review for a more complex risk assessment that may also include broader consideration of the taxpayer. An additional manual review may be completed for more complex cases where the aim is to detect fraud through a review of taxpayer’s behavior patterns that may be evident through their historical filings and other information on hand.

Ms. Virginia Alonso Albarran (Senior Economist, Public Financial Management, Fiscal Affairs Department, IMF) on the PFM aspects of VAT administration.

• In many countries, VAT refunds are used as a source of financing and to help ease fiscal deficits.

• Only net VAT, not gross VAT should be spent. Good international practice includes a sound VAT design, fiscal transparency, and tax administration authority to allocate funds to a VAT subaccount (of the Treasury Single Account) for refund.

• Sound treasury management requires good coordination between the tax administration and the treasury. Sufficient funds should be allocated to the sub-account to pay VAT refunds.

The panel discussion was followed by questions from participants. These revisited key issues and added practical observations:

• The timely payment of refunds is critical to business especially those engaged in capital intensive industries. More information is contained in the IMF’s How to Manage Value-Added Tax Refunds.

• Some refunds require more scrutiny than others, and effective risk assessment and robust anti-fraud strategies are critical components of refund management.

• Sharing of customs and tax data (imports, exports, and special economic zones) and a continuous and integrated compliance management strategy can strengthen tax and customs administration.

Presentation materials: 

VAT Refunds (in English)

In French

In Russian

In Spanish

Summary for IMF Webinar on "VAT and Sectoral Policies"

Keynote presentation (Mr. Mario Mansour)

Panel discussions (moderated by Mr. Ruud De Mooij)

• An ideal VAT system is characterized by a broad base, few exceptions, and a single rate. But in practice, the ideal model is rarely implemented—either for policy or administrative reasons, leading to special treatment for some sectors. This webinar delved into sectoral VAT policies through the example of four sectors that tend to receive VAT concessions or special treatment—agriculture, tourism, real estate and construction, and the public sector. Other industries—such as extractives or the financial and insurance sectors—warrant further in-depth discussions of their own.

• The assessment of sectoral VAT policies should consider practical implementation issues, as well as competitiveness and incidence considerations. The VAT is conceived as a sales tax with a credit/refund mechanism, aimed to be neutral on investment and production decisions. As a revenue source, the VAT is most effective when sector-specific policy concessions—such as exemptions, zero-ratings, reduced rates, etc.—are minimal. In practice, however, sector policies are sometimes needed to address compliance challenges or to ensure the appropriate functioning of the system. On the tax policy side, sectoral VAT policies tend to be introduced in response to concerns about the competitiveness of certain industries or to reduce the tax burden on consumers of merit goods and other necessities. Several countries also have free-zone regimes, which are intended to attract foreign investors by shielding them from dealing with the tax authority, highlighting interactions between tax administration and tax policy motives.

• The taxation of agriculture is challenging, because the sector is large in developing countries, faces peculiar political economy issues, and because small farmers often do not maintain books, making VAT compliance problematic. Policy options include taxing only large farmers, which would require introducing high VAT registration thresholds, different from the standard registration threshold, or exempting the sector. In both cases, farmers would incur VAT on their inputs which could then pass unto food prices paid by consumers. To alleviate this effect, countries that exempt farmers also tend to exempt key farming inputs, such as seeds and fertilizers, and specialized equipment and tools. All this makes the administration of the VAT very complex, with ambiguous outcomes for farmers.

• VAT rates on goods and services in the tourism sector are often subject to a “race-to-the-bottom”. Due to tax competition among countries, many have introduced VAT concessions in this sector, typically on the input side but increasingly on the output side as well (zero-rating of hotel and other tourism services), in particular where their tourism offerings are close substitutes for offers in other destinations (e.g. beaches, ski resorts, gambling). Since tourism is considered a source of export earnings, some countries choose to give refunds to foreign tourists, for purchases of goods not consumed in the tourism destination, even though taxes collected from foreigners should be of less concerns to policymakers than those collected from residents. Digitalization is another contributing factor to the VAT issues in the tourism sector as it enables transactions to take place offshore (typically through use of online platforms) escaping or undermining local taxation. A similar problem arises in countries where transactions are mostly carried out by traditional small businesses which are unregistered (including in the form of peer-to-peer transactions), as is the case in Thailand. Against this backdrop, good policies include simplifying the system to ease compliance for small businesses, involving digital platforms in the VAT collection on transactions made through the platform and removing distortive exemptions. International coordination, analogous to the Pillar Two minimum tax, perhaps on a regional scale, could also help counteract the “race-to-the-bottom”—although this outcome has proven difficult to achieve in practice.

• Real estate and construction sectors are difficult to tax, as evidenced by their large VAT compliance gap across countries. Conceptual inadequacies about the value of consumption and what constitutes a transactional supply are particularly complex in these sectors. The definition of construction activities changes by country. Sometimes it is based on the activity reported by the registered firm, and sometimes it is based on the inputs it uses. Thus, sectoral policies can be exploited by firms operating in other sectors. In real estate, applying VAT to residential real property creates a distortion between new and existing houses when the VAT is introduced, as VAT has not been levied on the latter. Special treatments in construction and real estate generate significant costs in terms of revenue losses and high administration costs (reflecting enforcement difficulties and governance issues). Options to overcome these challenges include taxing the first sale of residential immovable properties (thus leaving subsequent sales exempt), all sales of commercial immoveable property used by businesses, and all purchases of construction inputs (building materials, parts, and maintenance services). The use of registration (stamp) duties on transactions between registered persons should be avoided.

• The case for special treatments for VAT in public services is not convincing and thinking has evolved on this issue since the 1990s, with examples provided New Zealand and Australia. Exempting this sector creates distortions and unfair competition between public and private sector firms or in outsourcing certain services by public entities. Services provided by the government and non-profit organizations should be taxed, and when services are provided for free, their corresponding funding (grant or subsidy) should be treated as taxable supplies, thereby permitting the inputs to be credited. The issue of mixed supplies also comes into play when public services have special treatment because of the requirement to apportion inputs—potentially increasing the administrative burden. In this sector, strengthening administration capacity should have a priority over introducing VAT concessions.

• Sectoral VAT policies are, in general, bad practice. Experience suggests that special VAT treatments generate large revenue losses and increase administration costs. Thus, the case for introducing special VAT treatments at the sectoral level is weak. But if they are necessary, special VAT concessions are less harmful when applied at the end of the supply chain. Exemptions in the middle of the supply chain (i.e., on business-to-business supplies), potentially unravel the whole VAT chain, which may lead to VAT cascading and leakage and sometimes having the opposite effect of what was intended. Against this backdrop, other policies, such as funding subsidies are better poised to support specific sectors while keeping tax administration simple and preserving the integrity of the VAT. Moreover, the incidence of sectoral policies is uncertain: if supply is very elastic, special VAT treatments could benefit producers more than consumers; if demand is very elastic and consumer prices rise, it is generally more effective to seek support for low-income consumers through direct transfers or lower income taxes.

• The registration threshold, which purpose is to minimize unnecessary administrative burden for small businesses, is one form of a sectoral policy that is used by nearly all countries with VAT. In the absence of compelling evidence for a differentiated sectoral treatment, a single threshold for all sectors of economic activity is typically recommended. However, thinking about this has evolved, and there might be a case for, for instance, two thresholds, which could help limit the use of other sector-specific policies.

• Governments need to develop concerted action to improve VAT compliance in all sectors, which ideally means a simple VAT system with minimal sectoral concessions. Cross country experience, including from Africa and Thailand, indicate that political constraints can inhibit initiatives to limit sectoral polices.

Answers to technical questions raised during the panel discussion of Webinar 6: “VAT and Sectoral Policies.” 

Presentation materials: 

VAT and Sectoral Policies (in English)

In French

In Russian

In Spanish

Summary for IMF/RMTF VAT Webinar on “VAT and Digital Economy”:

Keynote presentation (Mr. Alexander Klemm): “Digitalization and challenges for the VAT?” provided an overview of the tax policy and tax administration challenges resulting from the supply of digital goods and services.

Panel discussions (moderated by Ms. Katherine Baer):

Mr. Walter Hellerstein (Professor of Taxation, University of Georgia School of Law) on tax obligations and taxing rights regarding digital products.

Mr. Mark Konza (Former Deputy Commissioner, Australian Taxation Office (ATO)) shared views on administrative ease and challenges of the vendor collection, and financial institution withholding models for taxing digital services and administering tax on low value imported goods.

Mr. Raul Zambrano (Director, Technical Assistance and Technology, Inter-American Center of Tax Administrations (CIAT)) presented regional initiatives and tools to address taxation of digital services.

Mr. Prenesh Ramphal (Value-Added Tax Leader, South African Revenue Service (SARS)) shared the evolution of South Africa’s policy and administrative reform in implementing a digital VAT.

Answers to technical questions raised during the panel discussion of Webinar 5: “VAT and Digital Economy” here

Presentation materials: 

Digitalization and Challenges for the VAT (in English)

In French

In Russian

In Spanish

Summary for IMF/RMTF VAT Webinar on “Managing VAT Compliance and Administration”:

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).

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.

Answers to technical questions raised during the panel discussion of Webinar 4: “Managing VAT Compliance and Administration” here.

Presentation materials:  

Managing VAT Compliance and Administration (in English)

In Spanish

In French

In Russian

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.

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

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: 

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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)

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)