Export Apparel And Leather Shoes Manufacturing Projects

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Export Apparel And Leather Shoes Manufacturing Projects

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

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