Value-Added Taxes: Lessons Learned from Other Countries on Compliance Risks, Administrative Costs, Compliance Burden, and Transition Page: 2 of 67
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Accountability. Integrity. Reliability
Highlights of GAO-08-566, a report to
Why GAO Did This Study
Dissatisfaction with the federal tax
system has led to a debate about
U.S. tax reform, including
proposals for a national
consumption tax. One type of
proposed consumption tax is a
value-added tax (VAT), widely used
around the world. A VAT is levied
on the difference between a
business's sales and its purchases
of goods and services. Typically, a
business calculates the tax due on
its sales, subtracts a credit for
taxes paid on its purchases, and
remits the difference to the
government. While the economic
and distributional effects of a U.S.
VAT type tax have been studied,
GAO was asked to identify the
lessons learned from other
countries' experiences in
administering a VAT. This report
describes (1) how VAT design
choices, such as exemptions and
enforcement mechanisms, have
administrative costs, and
compliance burden; (2) how
countries with federal systems
administer a VAT; and (3) how
countries that recently transitioned
to a VAT implemented the new tax.
GAO selected five countries to
study-Australia, Canada, France,
New Zealand, and the United
Kingdom-that provided a range of
VAT designs from relatively simple
to more complex with multiple
exemptions and tax rates. The
study countries also included some
with federal systems and some that
recently implemented a VAT.
GAO does not make any
recommendations in this report.
To view the full product, including the scope
and methodology, click on GAO-08-566.
For more information, contact Jim White at
(202) 512-5594 or whitej @gao.gov.
Lessons Learned from Other Countries on
Compliance Risks, Administrative Costs, Compliance
Burden, and Transition
What GAO Found
Like other tax systems, even a simple VAT-one that exempts few goods or
services-has compliance risks and, largely as a consequence, generates
administrative costs and compliance burden. For example, all of the study
countries reported that they devoted significant enforcement resources to
addressing compliance. Businesses whose taxable purchases exceed their
taxable sales are entitled to a refund under a VAT, which makes VATs
vulnerable to fraudsters creating phony invoices in order to falsely claim
refunds. Also, similar to other taxes, adding complexity through exemptions
of some goods or services and reduced tax rates generally decreases revenue
and increases compliance risks because of the incentive to misclassify
purchases and sales. Such complexity also increases the record-keeping
burden on businesses and increases the government resources devoted to
Canada's experience administering a national VAT along with a variety of
provincial VATs and sales taxes demonstrates that multiple arrangements in a
federal system are feasible, but increase administrative costs and compliance
challenges for both the governments and businesses. Businesses, particularly
retailers, in provinces with a sales tax face greater compliance burdens than
those in other provinces because they are subject to dual reporting, filing, and
Australia, Canada, and New Zealand, all with relatively new VATs, built on
preexisting consumption tax administrative structures to implement the new
tax. Nevertheless, they devoted considerable resources to educate, assist, and
register businesses and implementation took from 15 to 24 months. Both
Australia and Canada provided monetary assistance to qualifying small
businesses to help meet new bookkeeping and reporting requirements.
Despite their efforts, Australia and Canada had some difficulty getting
businesses to register for the VAT by the implementation date.
How a VAT Works
Table sold to
Raw materials sold to retailer for
furniture maker for $120+$12 VAT
$50+$5 VAT $7 remitted
($12 VAT - $5 credit)
r . .. $5 remitted Total
........... , governm ent ................ --
revenue $3 remitted
($15 VAT - $12 credit)
Product sold to
,United States Government Accountability Office
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United States. Government Accountability Office. Value-Added Taxes: Lessons Learned from Other Countries on Compliance Risks, Administrative Costs, Compliance Burden, and Transition, report, April 4, 2008; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc301986/m1/2/: accessed November 16, 2018), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.