VAT Refunds: A Review of Country Experience

Abstract

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. A key feature of the invoice-credit form of value-added tax (VAT) is that some businessesnotably exporters-will pay more tax on their purchases than is due on their sales, and so can seek refunds of excess credits from government. While refunding is straightforward in principle, serious problems arise in practice, including opportunities for fraud and corruption, and denial of refunds by governments with cash shortages. This makes the refund process the "Achilles heel" of the VAT. This paper examines the refund approaches of tax administrations in 36 developing, transitional, and developed countries. It evaluates the effectiveness of these approaches and suggests a model of best practice that takes into consideration compliance issues faced by countries during different stages of development.

The Costs of VAT: A Review of the Literature

“…Bogus traders, in fact, issue what are in effect deferred "cheques" or payment orders in the form of invoices that may be used as input credits in a future VAT return and may even generate refunds from countries' treasuries; then they simply disappear (see Cnossen, 2009;and Harrison and Krelove, 2005). See Table 3 for information on VAT refund practices from the latter paper.…”

“…Source: Harrison and Krelove (2005). Countries that responded to the survey were Algeria, Azerbajan, Bolivia, Bulgaria, Cambodia, Cameroon, Canada, Chile, Colombia, El Salvador, France, Hungary, Indonesia, Ireland, Italy, Kazakhstan, Kenya, Latvia, Mexico, Mongolia, Morocco, Mozambique, Netherlands, New Zealand, Pakistan, Peru, Poland, Romania, Russia, Singapore, Slovak Republic, South Africa, Sweden, Tanzania, Ukraine, United Kingdom.…”

A basic tool to assess tax administration strength in emerging Europe

“…Similarly, robust checks are needed to detect fraudulent registration and refund claims. Finally, low tax debt levels reflect improvements in operational performance, indicating the use of extensive enforcement powers, well‐staffed debt collection units and investment in information technology (Harrison & Krelove, ; OECD, ). IT/online services. The use of technology facilitates compliance with tax laws, and provides higher service standards to taxpayers.…”

Does the Vat Tax Exports?

“…If these results are in fact driven by imperfections in the VAT refund system, we should expect to see considerable heterogeneity across countries, since VAT refund performance is likely to be substantially worse in developing countries relative to developed countries (e.g., Harrison and Krelove ). In line with these considerations, I find that the negative effect of the VAT is driven by low‐ and middle‐income countries and that there is no significant effect for high‐income countries.…”