1.
VAT Introduction--
Administrative issues
By Paulo dos Santos
CARTAC

2.
Who is afraid of the VAT????

3.
The VAT today
• 120 countries have a VAT
• 4 billion people pay it
• It raises more than US$18 billion
or 25% of total tax revenue

4.
VAT introduction—The
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

5.
VAT is efficient in small islands
(Under 1 million population)
38
58
57
64
62
57
83
0
10
20
30
40
50
60
70
80
90
C-Efficiency
Sub-Saharan Africa
Asia and Pacific
Americas
EU (plus NW & CH)
Central Europe
N. Africa Middle East
Small Islands

6.
The situation in the Caribbean
region
• In operation
– Barbados, Dominican Republic, Haiti, Jamaica,
and Trinidad & Tobago
• Repealed
– Belize, Grenada

7.
Why some countries repeal VAT?
• Political commitment to repeal it
• Poor performance due to poor planning for
introduction
• Inadequate definition of registration
threshold

8.
The VAT implementation flow
Decide on VAT
Introduction
Decide on policy
Aspects
Decide on adminis-
trative aspects
Prepare for VAT
introduction
Introduce
the VAT
Operate
the VAT

9.
The most-mentioned constraints
to VAT introduction
• Tax administration effectiveness
• Culture of bookkeeping
• Adult literacy level
• Implementation cost

10.
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

11.
Culture of bookkeeping
Why 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

12.
Culture of bookkeeping
How to change it?
• The Peruvian culture regarding invoices
• Enforce bookkeeping requirement
• Establish threshold that ‘filters’ those
unable to bookkeeping

13.
Country Adult Literacy
Rate
VAT Revenue
(% of total)
Niger 14 27.6
Burkina Faso 19 28.7
Mali 31 27.0
Senegal 33 37.1
Egypt 51 17.9

14.
Decide on the VAT policy aspects
• Tax base
• Tax rate
– 1 positive rate
– Zero rate for exporters
• Registration threshold

15.
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

16.
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?

17.
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

18.
Despite the decision,
coordination is a must.
• Customs information on VAT paid on
imports
• Customs information on exports
• Joint audit (post release)

19.
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

20.
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?

21.
Invoice information
• Seller and purchaser names and TIN
• Seller’s 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

22.
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

23.
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

24.
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)

25.
Prepare for VAT introduction

26.
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

27.
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.

28.
Get external assistance
• International expert for 18-24 months
• Short-term experts
– Training
– Legislation drafting
– Design of audit and refund programs
– Etc.

29.
Prepare VAT legislation
• Draft VAT legislation and regulations
• Consultation with relevant parties
• Review related legislation
• Get legislation passed

30.
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

31.
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

32.
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.

33.
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

34.
Develop filing and payment
procedures
• Unique form for filing and payment
• Full self-assessment system
• Prompt action on non compliance.

35.
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

36.
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

37.
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

38.
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

39.
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

40.
Operate the VAT
• Review VAT operations
• Put in place the systems for enforcement of
Filing & Payment requirements
• Put in place the audit program

41.
Conclusions
• In administrative terms, VAT is feasible in
the Caribbean countries
• Strong political commitment
• Well prepared implementation plan
• Resources for implementation
• International/regional assistance