Module 5 VAT, the key for tax transition Jean-François Brun Gérard Chambas CERDI 1

Tax transition in a context of trade liberalisation Objectives To mobilise economically neutral revenue, alternative to plummeting tariff revenues. Avoid a drop in tax revenue (Keen, 2005) VAT, tax burden transferred to consumption Consumption large macroeconomic aggregate

Securing revenue and reducing distortion The case of the Democratic Republic of Congo Post-conflict situations: the case of Burundi and Côte d’Ivoire. However, specific support necessary and reform requires administrative capacities

VAT in developing countries Since 1959, pioneer countries (Ivory Coast) then Senegal; 1985 and 1987, Morocco and Tunisia VAT with conventional legislation and administrations: disappointing results Innovation of single-rate VAT, high VAT threshold: Benin (1991) then Pacific zone model Extension of modern single-rate VAT Current risks: resistance leading to multiple rates and broad exemptions

VAT, vector for a modern tax administration Organization around LTU, MSU and CSF Principle of segmentation of taxpayers Selection of VAT collectors: VAT threshold Integrated information system, introduction of on-line procedures.

Outline 1 Why is VAT the key for the tax transition? 2 Assessment of the budgetary efficiency of VAT 3 Assessment of the economic efficiency of VAT 4 Economic neutrality and VAT legislation 5 Objective of economic neutrality and VAT administration 6 Excise taxes: crucial additional instrument

1 Why is VAT the key for tax transition? Lack of alternative (income tax, business earnings- corporate tax, property tax) Focus on property tax in Africa Historical importance (Bird, 1992) Disappointment (mass taxes, major collection costs) Cadastre: above all an instrument for urban development Risks of ignoring major taxes to ensure fiscal transition Need to involve local authorities Sensitivity of the property problem

1 Why is VAT the keystone of tax transition? Reasons related to revenue VAT, tax with a high revenue potential (Ebrill et al, 2001) Potential VAT base = major macroeconomic aggregate VAT, effective tax revenue mobilisation in countries with large unregistered sector (Emran, Stiglitz, 2006 vs Cameroon, Senegal, etc.)

1 Why is VAT the keystone of tax transition? Reasons related to the economic neutrality of VAT Homothetic increase of prices for consumption only Costs unaffected Equal treatment of imports and local production Exports not affected Low collection costs

1 Why is VAT the keystone of tax transition? Reasons related to equity Comment: relative inability of VAT to promote equity Central role of public spending to promote equity VAT, tax on consumption not more unfair than direct taxation on a partial base or tariffs Exempted consumption often consumed by the privileged (Cnossen) (fuel, health products, high food consumption) VAT exemption : negative effective protection of local production

2 Assessment of the revenue efficiency of VAT Ambivalent accounting of VAT revenue VAT on foreign consumers (Nigeria-Benin) VAT credit refunds (expenditure or reduction of VAT revenue) Taxation of foreign financed project Revenue efficiency coefficient; ratio to GDP (international comparison ?)

2 Revenue efficiency coefficient Definition: ratio of VAT revenue as a percentage of GDP (or of consumption) increased by one point of VAT Difficulty : undervaluation of GDP or consumption (and therefore limits in international comparisons); however, useful comparisons

3 VAT economic neutrality: an assessment Fluidity of VAT credit refunds Amount of non-refundable VAT credits VAT collection costs borne by companies and administration Importance of distortion-causing exemptions Importance of VAT fraud Need to monitor neutrality indicators

15 4 VAT economic neutrality: What VAT legislation? Very broad VAT base Drastic elimination of exemptions Elimination of VAT suspension on equipment commodities A VAT refund mechanism for beneficiaries of the Vienna Convention VAT systematically applied to the entire field, including operations financed from abroad

16 4 VAT economic neutrality and VAT legislation (cont’d) Single moderate VAT rate High rate: incentive for fraud, therefore fiscal distortion Single high rate: incentive for exemption or the introduction of a reduced rate The single moderate VAT rate stage is yet to be reached, but it is a condition for an economically neutral VAT

17 4 VAT economic neutrality and VAT legislation (cont’d) End to withholding of VAT Tax threshold Strict framework of VAT credit refund restrictions

18 5 Economic neutrality and VAT administration A) Service administration B) Reduction of collection costs C) Reduction of fraud D) VAT credit refunds as per best practices

6 Excise duties: essential complements to VAT Traditionally, end consumer goods with relatively inelastic demand (tobacco, alcohol, soda, etc.), petroleum products Recently, motorcars, telecommunications (mobile in particular) Mobilisation of additional revenue without exempting single rate VAT, but excise duties not attributable (intermediate consumption to be avoided)

6 Excise duties: essential complements to VAT Excise duties mean a further reduction in the consumer’s actual revenue Risk of raising costs (petroleum products, telecommunications, etc.) Significant social effects (price of petroleum products and price of public transport, cigarettes, increasingly consumption by citizens with low incomes).

Thank you for your attention.