Value-Added Tax: International Practice and Problems

463 Pages·1988·64.06 MB·English

by  Alan A. Tait

VALUE
DDED
TAX
International
Practice
and
Problems
Alan A. Tait
International Monetary Fund
Washington, D.C. • 1988
©International Monetary Fund. Not for Redistribution
© 1988 International Monetary Fund
The quotation on page 304 from "Banana Republics" is
reprinted with permission; composed by Steve Goodman/
Steve Burgh/Jim Rothermel; © 1976 Big Ears Music
(ASCAP)/Red Pajamas Music (ASCAP); administered
by Bug.
Charts and cover: IMF Graphics Section
Library of Congress Cataloging-in-Publication Data
Tait, Alan A.
Value-added tax.
Bibliography: p.
Includes index.
1. Value-added tax. I. Title.
HJ5711.T36 1988 336.2'714 88-13135
ISBN 1-55775-012-2
Reprinted with minor revisions, August 1989; February 1991; November 2001
Price: US$29.50
©International Monetary Fund. Not for Redistribution
contents
Preface xi
Part I: Structure of VAT
1. Why a Value-Added Tax? 3
VAT in Theory 4
Why Adopt the VAT? 9
A VAT—But Not Just Yet 30
Conclusion 37
2. VAT Rates 39
A Single Rate or Multiple Rates? 42
Effective Rates 44
VAT Rates and Excise Duties 45
Geographical Rates 47
Rate Harmonization 48
3. Exemptions and Zero Rating: Equity Arguments 49
Exempt Goods and Services 50
Zero Rating 53
Justifications for Exemptions and Zero Rating 56
Goods and Services Exempt and Zero Rated for
Progressivity 58
4. "Merit" Goods 69
Children's Clothing 70
Medical and Veterinary Services 71
Cultural Activities 73
Government Purchases and Sales 75
Nonprofit Organizations 78
iii
©International Monetary Fund. Not for Redistribution
iv VALUE-ADDED TAX: PRACTICE AND PROBLEMS
5. Difficult-to-Tax Goods and Services 80
The Construction Industry 80
Leasing Goods and Agents 90
Financial Services 92
Services Performed Abroad 100
Auctioneers and Secondhand Goods 102
Craftsmen 705
Betting, Gaming, and Lotteries 106
Racing 107
6. Retailers and Other Small Traders 108
Should the Retail Stage Be Included? 109
The Retail Problem Is the Small Trader Problem 110
The Criteria for Exemptions 111
Problems of Small Businesses 113
Five Ways to Treat the Smallest Businesses 118
Treatment of Small Enterprises in EC Countries 722
The Preferred Solution 752
Records for Small Traders 135
7. Treatment of Agriculture 141
The EC Common Flat Rate for Agriculture 742
Treatment of Agriculture in Other Countries 757
Preferred Solutions 752
8. Federal VAT and Sales Tax Harmonization 155
VAT Used in Federal Systems 755
Customs Unions 755
United States 767
Canada 770
Municipal Sales Taxes 7 77
9. Transitional Problems 172
Publicity 772
Registration 7 75
Educational Visits 7 76
Transitional Problems: Stocks and Inventories 178
Transitional Problems: Capital Goods 182
Other Transitional Problems 185
Changes to VAT Rates and Liability to VAT 187
©International Monetary Fund. Not for Redistribution
CONTENTS V
Part II:Effects of VAT
10. Effects of VAT on Prices 191
Price Change Forecasts 192
Actual Policies 200
Other Empirical Evidence 212
11. Effects of VAT on the Economy 214
Distribution 214
Efficiency and Neutrality 220
Savings and Investment 221
Foreign Trade 222
Size of the Public Sector 226
Management of the Economy 229
Part III: VAT Administration and Compliance
12. Administration and Staffing 233
Who Should Run a VAT? 234
Central Versus Local Administration: Organization
and Functions 239
Staffing 245
Transitional Staff Problems 261
Costs of Administration 268
13. Control 270
Taxpayer Registration 270
Registration and Deregistration 278
Invoices 279
Payments and Refunds 284
Audit 288
14. Evasion, Enforcement, and Penalties 304
Forms of Evasion 306
Enforcement 315
Penalties 318
©International Monetary Fund. Not for Redistribution
vi VALUE-ADDED TAX: PRACTICE AND PROBLEMS
15. Computers and VAT 324
General Considerations 325
Planning 329
Basic Assumptions and Rules 332
System Design and Responsibilities: Assumptions 334
Personnel and Training 336
Quality and Security Assurance 337
Computerized Accounts 338
Annex: A Possible Automated System 340
16. The Trader's Point of View 349
The Trader's Anticipation of VAT 349
Compliance Costs 351
The Invoice 353
Pricing 357
Profit Margins 358
Bookkeeping Requirements 359
Trader Relations with VAT Officials 361
Continuous Review for Potential VAT Ramifications 364
17. Definitions 365
Who Should Pay VAT? 365
A "Business" or "Taxable Activity" for VAT 368
Traders Versus Descriptions of Business 371
Place of Supply 371
Time of Supply 373
Value of Goods and Services Supplied 373
Supply of Goods 386
Supply of Services 387
Imports and Exports 389
18. Concluding Remarks 397
Parti: VAT Structure 397
Part II: Economic Aspects and Consequences 400
Part III: Administration and Compliance 401
Appendices
Appendix I: An Example of a Value-Added Tax Return
Form 407
©International Monetary Fund. Not for Redistribution
CONTENTS VII
Appendix II: Chronological Schedule of Work to Be
Done to Introduce a VAT in About Eighteen
Months 409
Bibliography 417
Index 433
Tables
1 -1. Countries That Do Not Apply a VAT Through the
Retail Sale 7
1-2. Summary Showing Substitution of VAT for Other Taxes
and Proposed Effect on Revenue 10
1-3. Taxes on Goods and Services as Percentage of Total
Taxation in OECD Countries 23
1-4. VAT as Percentage of Total Tax Revenue, 1975-86 26
1-5. VAT as Percentage of GDP, 1975-86 28
1-6. Summary of Some Reasons for Advocating a U.S. Value-
Added Tax 32
2-1. Percentage VAT Rates Throughout the World 40
2-2. Examples of Nonsumptuary Excised Goods for Selected
OECD Countries, 1981 46
3-1. VAT: Summary of Examples of Exemptions and
Zero Rates 52
3-2. EC Countries: Discretion to Continue Exempting
Transactions 57
3-3. EC Countries: Discretion to Continue Taxing
Transactions 58
3-4. VAT: Examples of Treatment of Buildings 63
4-1. EC Exemptions and Special Rates for Selected
Cultural Activities 75
5-1. Application of Article 13C(a) of the EC's Sixth VAT
Directive: Summary Table of the Right of Option for
Taxation of the Leasing of Immovable Property 84
5-2. Summary of VAT Options for Taxing Financial
Services 94
5-3. New Zealand: Position of Resident and Nonresident
Insurer Before and After Introduction of VAT 97
6-1. Korea: VAT Tax Rates by Industry 119
©International Monetary Fund. Not for Redistribution
viii VALUE-ADDED TAX: PRACTICE AND PROBLEMS
6-2. Summary of Treatment of Small Firms Under VAT in
Selected Countries, 1982-87 124
7-1. Summary of Agriculture Under VAT for Selected
Countries, 1982-86 148
8-1. EC Countries: Estimated Revenue Flows Resulting from
Operation of the Clearing Mechanism 161
8-2. Advantages and Disadvantages of Alternative Tax
Coordination Schemes 168
9-1. VAT: Special Transitional Measures in Selected
Countries 184
10-1. Examples of Effects on Prices of Introduction
of VAT 194
10-2. Countries Allocated to Categories for Effect on
Consumer Price Index 211
11-1. Ireland: Proportion of Total Weekly Expenditure on
Food and the Share of Every £Ir 100 Spent on Food in
1980 by Decile Adjusted by Equivalence
Scales 277
11-2. The Government Sector Before and After the
Imposition of VAT 228
12-1. Examples of Combined or Split Administration with
Income Tax 239
12-2. VAT: Ratio of Staff to Taxpayers in Selected
Countries 250
12-3. Implied Inspectorate for Different Frequencies
of Visits 253
12-4. A Comparison of the Percentage Distribution of
Staff in the Example in the Text and in the Proposed
U.S. VAT 259
12-5. United Kingdom: VAT Statistics, 1978/79-1982/83 266
13-1. VAT Taxpayers as a Percentage of Population Ranked
by Size 272
13-2. Argentina: Characteristics of a Sample of Hard-to-Tax
Groups, July 1968 276
13-3. Korea: VAT Nonmatching and Error Data,
1977-79 282
13-4. United Kingdom: VAT Control Visits, Year Ended
March 31 297
14-1. Korea: VAT Penalties Imposed, 1980-81 307
14-2. Ireland: Examples of VAT Offenses Liable to
Penalties 319
15-1. An Example of Resource Costs and Timing of
Implementation of an Automated System 344
©International Monetary Fund. Not for Redistribution
CONTENTS ix
16-1. Sales Tax Compliance Cost Studies 354
16-2. Profit Margins and VAT 358
17-1. New Zealand: 10 Percent VAT—Examples of Supply,
Value, and Consideration 376
Charts
6-1. Decision Chart for Small Traders 133
12-1. Possible Administrative Structure with VAT
Operations as a Separate Organization at District
Level 238
12-2. Possible Administrative Structure with VAT
Integrated with Income Tax at District Level 240
12-3. United Kingdom: Organization Chart Showing
Customs and Excise Headquarters Offices and Local
Offices, and the Main Communication Links
Between These and Traders and the VAT Tribunals,
1977 244
12-4. Ireland: VAT Staff, January 1982 246
12-5. An Example of Recruitment and Placing of
VAT Staff 260
12-6. A Possible Outline Organization for Planning
VAT (I) 263
12-7. A Possible Outline Organization for Planning
VAT (II) 264
15-1. A Proposed Automated VAT Administration 342
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©International Monetary Fund. Not for Redistribution