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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). 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