VAT Introduction-- Administrative issues By Paulo dos Santos CARTAC

Who is afraid of the VAT????

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

VAT introduction—The Chronology / France, at manufacturing level Brazil, at all levels (Brazilian states) It spread to 63 countries More than 120 countries have VAT

VAT is efficient in small islands (Under 1 million population)

The situation in the Caribbean region In operation –Barbados, Dominican Republic, Haiti, Jamaica, and Trinidad & Tobago Repealed –Belize, Grenada

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

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

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

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

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

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

CountryAdult Literacy Rate VAT Revenue (% of total) Niger Burkina Faso Mali Senegal Egypt5117.9

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

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

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?

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

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

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

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?

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

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

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

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)

Prepare for VAT introduction

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

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.

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

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

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

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

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.

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

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

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

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

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

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

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

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

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