Export Apparel And Leather Shoes Manufacturing Projects

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  • 1. Toward a Functioning Anti-Fraud Program in Value Added Taxation
    • Tuan Minh Le
    • The World Bank
  • 2. Basics of VAT
      • Consumption tax levied at each stage of production-distribution.
      • Common VAT type: consumption-based, destination principle.
      • Credit invoice method of collection.
      • Zero rated v. exemptions.
      • Administration costs not trivial.
      • Compliance costs typically high for small businesses.
  • 3. Types of VAT related revenue leakage
      • Under-collection of VAT payable from traders.
      • Over-payment of VAT refunds.
    • VAT revenue leakage risk mapping
    • (Ref.: Keong, 2005)
  • 4. Non-registered Traders VAT registered Traders Under-accounting of output VAT Over-claiming of input VAT Under-collection of VAT Over-payment of VAT refund VAT Revenue Leakage Risk
    • Imports
    • Under-declaration of import VAT
    • Failure to pay import VAT
    • VAT Registration
    • Failure to register
    • Sales
    • unauthorized collection of VAT
    • VAT registration
    • Fraudulent registration
    • Fraudulent de-registration
    • Standard-rated supplies
    • Output VAT collected but not
    • remitted
    • Failure to collect or under-
    • collection of VAT
    • Imports by traders with input VAT restriction
    • Under-declaration of
    • import VAT
    • Failure to pay import
    • VAT
    • Reduced rate/zero-rated supplies
    • Over-declaration of exports/zero-rated supplies
    • Standard-rated supplies treated as reduced
    • rate/zero-rated supplies
    • Avoidance schemes to qualify for reduced
    • rate/zero-rating
    • Input VAT
    • Fictitious purchases
    • Disallowed expenses
    • Purchases attributable
    • to exempt supplies
  • 7. Considerations in designing an anti-fraud program
        • Risk of VAT fraud.
        • Compliance costs.
        • Administrative costs.
  • 8. Principles for VAT productivity
      • Simplicity and transparency.
      • Balancing of effective enforcement and good taxpayer service.
      • Fair treatment of taxpayers to avoid splitting and growth of informal sector.
  • 9. Anti-fraud strategies: VAT design (1)
    • VAT registration and de-registration
      • Level of threshold:
            • Wide range: 0-$700,000.
            • Even in developed countries: Demark: $1500; Japan: $200,000.
            • Uniform v. multiple thresholds.
            • Voluntary registration: allowed for most countries, but not all (e,g., Norway, Spain, Sweden).
            • Introduction of presumptive taxation.
  • 10. Anti-fraud strategies: VAT design (2)
          • Voluntary registration—require firms to:
            • Keep sales and purchases records.
            • Maintain account with a financial institution.
            • Possess fixed place to run business
            • Not fly by night! Setting minimum number of years for VAT traders to remain in VAT if registered voluntarily.
            • Sell almost exclusively to VAT registrants.
  • 11. Anti-fraud strategies: VAT design (3)
          • Set high turnover threshold at introduction of VAT and consider lowering it over time.
          • Provide for claw-back of VAT claimed when traders deregister from VAT.
  • 12. Anti-fraud strategies: VAT design (4)
    • Refund v. carry forwards
      • Reliable major exporters should get immediate refunds.
      • Others get excess credits carried forward within mandatory time limit.
    • Specific approaches to reduce level of refund claims
      • Import relief scheme for major exporters
        • Examples: Singapore’s Major Exporter Scheme.
        • Free trade zones/duty suspension regimes.
      • Deferring accounting of VAT on imported capital goods
      • Zero-rating of supplies to exporters (e.g., Ireland, Italy, Algeria, Morocco, Tunisia, South Korea, Azerbaijan, Albania.)
  • 13. Anti-fraud strategies: VAT design (5)
    • VAT rate structure
      • Multiple rates inherently complex.
      • Ineffective to resolve equity issues.
      • Prone to avoidance and evasion.
  • 14. Anti-fraud strategies: VAT design (6)
    • VAT exemption
        • Cascading or shrinking base.
        • Ineffective in achieving targeted equity.
        • Inefficient.
        • Apportionment of input values required firms producing both exempt and taxable outputs.
  • 15. VAT refund treatments (1)
    • Stakes high:
      • Refund claims up to 50% of gross VAT collection.
      • Major source of tension between taxpayers and administration.
      • Vietnam: 6-month delayed refunds cost 28c/$1 and 5c/$1 investment in PV term for export apparel and leather shoes manufacturing projects, respectively (Le, 2003).
    • Why refund delay common in developing world:
      • Frauds and inefficient refund processing system.
      • Incentives for meeting revenue targets.
      • Insufficient funds to refund.
  • 16. VAT refund treatments (2)
    • Specific approaches to refunds: Harrison and Krelove (2005)
      • Zero-rated supplies to exporters.
      • Large scale cross-checking of invoices.
      • Certification of refund claims by CPAs.
      • Preferential treatment of good compliers.
      • Purchases paid through banking system.
      • VAT bank accounts.
      • Deferment of VAT on capital goods.
  • 17. VAT refund treatments (3)
    • Risk management approach
      • Most appropriate in reducing compliance and administration costs.
      • Most effective: protect VAT revenue base and minimize refund delays.
      • Gold/Silver/others schemes based on history of:
        • tax compliance.
        • exports.
        • account keeping.
        • audit of records.
      • Using 3rd party information, especially information exchange between Customs and tax.
  • 18. Related issue: Required use of cash registers
        • Purpose: Counter non-compliance.
        • Not panacea—not effective without credible enforcement mechanisms.
          • Traders may not use (even in U.S. bars, restaurants, and small establishments).
          • Traders may enter lower sales values.
          • Insufficient information for sales taxation administration (for administration, 4 types of records needed: (1) records of total sales; (2) purchase invoices; (3) annual inventory data; and (4) evidence to support deductions—but cash register does not tell all!)
          • High compliance costs to small businesses.
  • 19. Balancing acts…VAT from administration’s and taxpayers’ perspectives
      • Multiple types of fraud by traders.
      • Multiple types of abuse and corrupt behavior by tax collectors.
        • Arbitrarily raise assessments either to fulfill collection targets or to create opportunities for bribery.
        • Demand bribery for expediting approval of refunds.
        • Perform repeated audits or unduly lengthy audits.
        • Perform repeated or unnecessary queries on traders.
        • Be reluctant to provide clarifications to traders’ inquiries.
  • 20. Protection of taxpayers
    • To provide legal protection for traders, legislation should provide traders with:
      • Rights to appeal.
      • Entitlement to interest due to delayed refunds.
      • Confidentiality of traders’ data.
      • Rights to deny access to tax officers at unreasonable time and at residential premises of traders unless search warrant provided.
    • Tax administration:
      • Establish effective compliance program.
      • Improve quality of taxpayer service.
      • Engage major stakeholders and community participation in tax administration arrangements.
  • 21. FAD suggested model of best practice (Harrison and Krelove. 2005)
      • Keep number of VAT payers at manageable level.
      • Keep proper control of VAT registration.
      • Make sufficient funds available for legitimate refund claims.
      • Process refunds within reasonable statutory period.
      • Pay interest on late refunds.
      • Offset VAT refunds against other tax arrears.
      • Refund promptly to exporters with sound compliance history.
      • Audit VAT refund claims as part of wider audit program.
      • Provide appropriate sanctions against refund claim frauds.
      • Establish transparent and functioning appeal system.
      • Improve taxpayer service.
  • 22. References
    • Brondolo, John, and Carlos Silvani. 1996. Selected Issues in Administering the VAT: Cross-Checking Invoices and Controlling Refunds to Exporters. Mimeo.
    • Harrison, Graham, and Russell Krelove. 2005. VAT Refunds: A Review of Country Experience. IMF Working Paper WP/05/218. November 2005.
    • Keong, Kor Bing. 2005. Anti-Fraud Measures and Issues to be Considered by Governments in the Implementation of a Value Added Tax System. Paper commissioned by the World Bank.
    • Le, Minh Tuan. 2003. Analysis of Tax and Trade Incentives for Foreign Direct Investment: The Case of Vietnam. Ph.D. Thesis. Kennedy School of Government, Harvard University.
    • Le, Minh Tuan. 2003. Value Added Taxation: Mechanism, Design, and Policy Issues. Paper Presented for the World Bank course on Practical Issues of Tax Policy in Developing Countries.