VAT Introduction-- Administrative issues

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VAT Introduction--Administrative issues

• By Paulo dos Santos
• CARTAC

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Who is afraid of the VAT????
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The VAT today

• 120 countries have a VAT
• 4 billion people pay it
• It raises more than US18 billion or 25 of total
  tax revenue

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VAT introductionThe Chronology

• 1948
• 1967
• 1970/80
• 1990

• France, at manufacturing level
• Brazil, at all levels (Brazilian states)
• It spread to 63 countries
• More than 120 countries have VAT

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VAT is efficient in small islands(Under 1
million population)
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The situation in the Caribbean region

• In operation
• Barbados, Dominican Republic, Haiti, Jamaica, and
  Trinidad Tobago
• Repealed
• Belize, Grenada

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Why some countries repeal VAT?

• Political commitment to repeal it
• Poor performance due to poor planning for
  introduction
• Inadequate definition of registration threshold

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The VAT implementation flow
Decide on VAT Introduction
Decide on policy Aspects
Decide on adminis- trative aspects
Operate the VAT
Prepare for VAT introduction
Introduce the VAT
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The most-mentioned constraints to VAT introduction

• Tax administration effectiveness
• Culture of bookkeeping
• Adult literacy level
• Implementation cost

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Tax administration effectiveness

• Weak administration poor VAT performance
• But
• Under a weak administration any tax performance
  will be poor
• Some countries use VAT as part of a strategy to
  strengthen tax administration
• Train staff during VAT introduction

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Culture of bookkeepingWhy bookkeeping?

• Pricing product accurately
• Knowing if business is making or losing money
• Knowing the cash flow (short long run)
• Working with bankers (financing)
• Paying taxes due

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Culture of bookkeepingHow to change it?

• The Peruvian culture regarding invoices
• Enforce bookkeeping requirement
• Establish threshold that filters those unable
  to bookkeeping

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Adult Literacy Rate and VAT Revenue (in selected
countries)
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Decide on the VAT policy aspects

• Tax base
• Tax rate
• 1 positive rate
• Zero rate for exporters
• Registration threshold

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Registration threshold (in selected countries)

• Ivory Coast
• Madagascar
• Chad
• Sri Lanka
• Barbados
• Rwanda
• Trinidad Tobago
• Fiji
• El Salvador

• 50,000
• 45,000
• 40,000
• 33,000
• 30,000
• 28,000
• 25,000
• 7,000
• 5,700

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Decide on VAT administrative aspects

• Which organization is going to administer the
  VAT?
• How frequently should taxpayers file and pay?
• What the invoicing requirements should be?
• How will VAT refund operate?

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Which organization is going to administer the VAT?

• Customs
• Most VAT revenue come from imports
• Inland Revenue Department
• VAT is based on financial records as income tax
• VAT applies to domestic transactions as well
• VAT should apply on services too

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Despite the decision, coordination is a must.

• Customs information on VAT paid on imports
• Customs information on exports
• Joint audit (post release)

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How frequently should taxpayers file and pay?

• Transaction-based tax requires frequent reporting
• But the volume of returns and payment can be
  large
• Different treatment according to taxpayer size
• Possible problems
• Compliance control
• Cross-checking
• Revenue flow

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Invoicing requirements

• Invoices are like checks drafted on the Treasury.
• What should be the invoice contents?
• How final-consumer invoice should be?
• How to enforce compliance with invoicing
  requirements?

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Invoice information

• Seller and purchaser names and TIN
• Sellers address
• Date of issuing
• Invoice number
• Description of goods and services
• Indication of unit and total selling price,
  including VAT paid
• Date of printing
• Range of serial numbers printed on that date

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Final consumption invoice a decision has to be
made

• Invoice or tickets show the VAT paid
• Invoice or tickets do not show the VAT paid

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How to enforce compliance with invoicing
requirements?

• Controlling invoicing printing
• L.A. experience
• Controlling invoicing issuing
• Massive control
• Controlling invoice registration
• Invoicing information cross-checking
• Start with large taxpayers' purchases

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How will VAT refunds operate?

• Why the refunds?
• How to deal with VAT excess credit
• Carry forward
• Refund tax credit
• Computer screening of refund claims
• Information cross-checking
• Audit of claims
• Focus on the period of the claim
• First time claimers
• Usual claimers
• In-depth audit (fraud indications)

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Prepare for VAT introduction
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Establish the VAT introduction team

• The team leader
• The team members
• Legal issue
• Training, taxpayer education and publicity
• Customs controls
• Registration and taxpayer assistance
• Filing and payment procedures
• Audit
• IT

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Prepare the introduction budget

• To be managed by the project leader
• Subject to audit by the Auditor General
• Should cover all the project expenses training,
  travel, office accommodations, consultants,
  publicity, IT, etc.

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Get external assistance

• International expert for 18-24 months
• Short-term experts
• Training
• Legislation drafting
• Design of audit and refund programs
• Etc.

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Prepare VAT legislation

• Draft VAT legislation and regulations
• Consultation with relevant parties
• Review related legislation
• Get legislation passed

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Develop and deliver staff training and taxpayer
education

• Start training with implementation team
• Train all staff to be involved with VAT operation
• Train trainers (updating training)
• Educate VAT payers, accountants and tax preparers

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Prepare and execute publicity programmes

• Publicity expert can be required
• But, implementation team will do most of the work
• Participate in radio and TV shows
• Participate in seminars
• Setting up help telephone line
• Setting up Internet site

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Develop and put in place registration procedures

• Ensure that those with sales above the
  registration threshold are registered
• Try to unify the TIN
• VAT introduction can be an opportunity to clean
  up the old taxpayer register.

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Develop taxpayer assistance procedures

• Prepare the VAT information guide
• (What is VAT? Why is it better than other taxes?
  Which rates will apply? What will be exempted?)
• Prepare the guide to VAT registration
• Registration form, post-registration procedures
• Prepare the guide to completing the VAT return
• Explain VAT legislation and operation

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Develop filing and payment procedures

• Unique form for filing and payment
• Full self-assessment system
• Prompt action on non compliance.

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Develop audit procedures

• VAT audit is different from income tax
• Duration of visits vary
• Trader complexity, size, reliability
• First months, focus on taxpayer education
• Following months, enforce compliance

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Prepare procedure and policy manuals

• Prepare instruction manuals asap
• Manuals should be clear and comprehensive
• Should be available through Intranet
• Should be used for training of new staff or
  retraining of old staff

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Develop and test IT systems

• Taxpayer registration
• Processing monthly returns and payments
• Information validation
• Detection returns with inconsistencies
• Controlling stopfiling and delinquent accounts
• Selecting taxpayers for audit
• Screening of refund applications for audit

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Develop the procedures for the transition from a
consumption tax to a VAT

• Credit should be granted to traders to avoid
  double taxation
• But, require evidence that tax was effectively
  paid to avoid excessive claims

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Implement the VAT

• Set up taxpayer service unit
• Set up unit to monitor compliance with filing and
  payment
• Set up audit unit
• Put in place IT systems
• Deliver VAT return forms to registered taxpayers

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Operate the VAT

• Review VAT operations
• Put in place the systems for enforcement of
  Filing Payment requirements
• Put in place the audit program

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Conclusions

• In administrative terms, VAT is feasible in the
  Caribbean countries
• Strong political commitment
• Well prepared implementation plan
• Resources for implementation
• International/regional assistance