Transcript 1 Why is VAT the key for tax transition?

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 earningscorporate 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
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
15
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
16
4 VAT economic neutrality and VAT
legislation (cont’d)
• End to withholding of VAT
• Tax threshold
• Strict framework of VAT credit refund restrictions
17
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
18
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.