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VAT in and After the Pandemic

Posted on Sep. 28, 2020

This article is part of the series, Post-COVID-19: How Governments Should Respond to Fiscal Challenges to Spur Economic Recovery, coordinated by the International Tax and Investment Center (ITIC) to offer tax policy guidance to developing countries during the post-pandemic recovery phase.

Richard M. Bird is professor emeritus of economics at the Joseph L. Rotman School of Management at the University of Toronto. He thanks Sijbren Cnossen, Pierre-Pascal Gendron, James Robertson, and Daniel Witt for their comments on an earlier draft of this article.

In this installment, the author considers how countries can use VAT during the COVID-19 pandemic recession to increase revenue without raising rates and make the structural and administrative changes to improve VAT from all perspectives.

Copyright 2020 Richard M. Bird and ITIC. All rights reserved.

Introduction

The VAT is an important source of revenue in over 160 countries around the world and the mainstay of the revenue system in many countries, particularly in less-developed countries (see Figure 1).

Figure 1. VAT as a Source of Revenue

Countries have adopted VATs for many reasons. The principal reason is simply because it is a major revenue producer. Moreover, in contrast to such alternatives as income taxes, import duties, or some excise taxes, a broad-based consumption tax like VAT is a relatively efficient way to raise revenue from an economic perspective because it is less distorting and hence less likely to discourage investment and growth. Finally, because consumption is a more stable revenue source than other tax bases, VAT revenues generally grow more or less at the same rate as the economy as whole, unlike other taxes — notably, those on business income, which usually expand more rapidly when the economy grows but tend to vanish equally rapidly when growth slows down.

Coping With the Pandemic and Lockdowns

The pandemic and the resulting lockdowns implemented in varying degrees in many countries in an attempt to reduce its impact did not change any of the factors mentioned above. As in earlier crises, like that of 2008-2009, government revenues from almost all taxes, including VAT, have declined at the same time, as most governments have expanded expenditures in the attempt to offset the impact of the pandemic lockdown. In the earlier crisis, as in this one, VAT revenues were adversely affected.1 But the impact this time is likely to be considerably more severe, for several reasons:

  • First, unlike in the earlier crisis, the real level of consumption has declined (although the share of consumption in GDP may have increased as investment has likely declined even more).

  • Second, because when people reduce consumption they tend to spend relatively more on food and other necessities, which in many countries are more lightly taxed, the impact on VAT revenues may be proportionately greater.2

  • Third, the impact on VAT revenue is especially marked in the many lower-income countries in which a large share of VAT is collected at the border, owing to the sharp fall in trade and especially tourism.3

  • Finally, quite a few countries have deliberately reduced VAT revenues temporarily as part of their attempts to sustain businesses in the face of the drastic decline in demand.

Even before the pandemic, most governments around the world, especially in low- and middle-income countries, had little “fiscal space” — a term that, while complex to define and measure,4 means something like room to expand spending or reduce revenues without running into serious debt problems. They now have even less, owing to the direct effect of the virus and the resulting countermeasures on consumption, production, trade, and in many cases also the indirect effect of the related decline in capital inflows from investors and migrant remittances. Moreover, many countries have exacerbated the impact on revenue by deferring and reducing taxes in an attempt to bolster the level of economic activity. Table 1 indicates the sorts of changes in VAT policy and administration that have been introduced to provide some immediate (cashflow) relief to firms coping with the impact of the pandemic and lockdowns.

Action along some of these lines was viewed favorably by such international organizations as the OECD and the IMF5 as a way to provide some immediate disaster relief to help business — often especially small business — cope with the sharply diminished cashflow resulting from official lockdowns and related restrictions. Regardless of any changes in the timing of returns and payments, however, the sharp decline in the level of economic activity means that even if all VAT due for the current year is finally collected, VAT revenue, like that from most taxes, will clearly be less than expected. Since government spending will almost certainly be more than expected, the fiscal space available to governments everywhere has shrunk. Although the immediate future is difficult to forecast anywhere, a quick recovery seems most unlikely, given both the expected high failure rate of small businesses with meagre cashflow and the likely slow recovery of trade and economic activity in general. Few countries will be able to restore even their (sometimes precarious) pre-pandemic fiscal position in the near future.

Some countries, even well-off and well-run countries like Norway, reacted to the crisis by reducing some VAT rates or creating new categories of exempt (or zero-rated) goods or services. Although understandable in the face of the pandemic, such crisis-induced changes in tax bases or rate structures are seldom a good idea — whether worthy (such as for personal protective equipment)6 or dubious (such as for transportation or tourist-related activities).7 It is usually difficult to reverse such concessions once made. Moreover, each additional exceptional treatment for this or that product, activity, or business type makes VAT administration more difficult and reduces the central economic advantage of this broad-based consumption tax — its relatively small distortionary effect. Finally, in a few cases, countries that had been intending to revise administrative procedures (such as by expanding e-invoicing) or to make policy changes that would have made the VAT more efficient and productive have decided to postpone these changes, some of which had been planned for years. Experience suggests that they may often not find it easy to revive and implement such changes.

Table 1. VAT: Changes to Cope With COVID-19

Administration:

  1. Deferred or delayed returns — usually combined with delayed payment, often automatic, but sometimes must be applied for [Germany, Czech Republic, Hungary, Japan, Croatia, Netherlands, UK]; sometimes only for small business [Chile, Argentina, South Africa] or imports [Chile] or non-resident businesses [Italy], and sometimes only for specific sectors [e.g. transportation in Colombia].

  2. Deferred or delayed payments — often same as for (1) [Indonesia on imports]

  3. Deferred or cancelled interest [New Zealand, Ukraine, Ireland] and penalties [Luxembourg, Finland] — usually part of package with (1) and (2)

  4. Speeding up refunds — less widespread than (1)-(3) but sometimes specifically mentioned [Hungary, Latvia, Mexico, Senegal, Uganda, Romania, Australia]; sometimes done by doubling financing for refunds [Georgia]; sometimes for specific sectors [Indonesia] or for small refunds only [Greece]

  5. Discounts on VAT payments [France]

  6. Loans to cover payments — to small business [Denmark]

  7. Audits suspended [Ecuador, Kazakhstan]

Policy:

  1. Exemption or zero-rating — usually for pandemic-related supplies [China, Austria, EU, UK] but sometimes for other products [e.g. e-books in UK, food in Kazakhstan] or small business [Korea]

  2. Threshold level increased [Austria]

  3. Reduced rates [Jamaica, Kenya] — sometimes for small business, sometimes for specific activities such as catering [Greece, Germany], tourism, hospitality [Iceland, Moldova], electricity [Ukraine] or transportation [domestic air travel in Turkey], sometimes in ‘reduced rate’ only [Norway] and in one case on ‘non-alcoholic beverages’ [Austria]

  4. Tax holiday for specified period [Estonia]; for tourist sector [Egypt, South Africa]

  5. Postponing planned changes — often for administrative changes such as e-invoicing or special cash registers [Czech Republic, Kyrgyzstan, Vietnam], but in other cases delaying proposed rate increase [Italy] or removing special treatment of small business [China]

Note: Most of the examples cited are taken from Richard Asquith, “World Turns to VAT Cuts on Coronavirus COVID-19 Threat,” Avalara VATlive (consulted on May 21), supplemented with information from IMF, Fiscal Monitor 2020, on-line Annex 1.1, Fiscal Measures in Selected Economies in Response to COVID-19 Pandemic (as of April 8) and Cristina Enache, Elke Asen, Daniel Bunn, and Justin DeHart, “Tracking Economic Relief Plans Around the World During the Coronavirus Outbreak,” Tax Foundation (consulted May 13). These sources differ in some respects and countries mentioned in brackets are only examples, and not necessarily a reflection of current situation. Some have changed treatment several times and may not now be adequately characterized here. Moreover, more countries than those mentioned have changed VAT to some extent, primarily by delaying payment dates, with several extending or, less commonly, reversing earlier measures.

Recovering From the Crisis

Most countries are still coping with the initial impact of the pandemic, and in some, such emergency measures as deferred tax payments may have to remain in place for some time. But it is not too soon to begin to think about what future fiscal changes may be needed to recover from the pandemic and the measures taken to control it and to moderate their severe economic impact. In the many low- and middle-income countries in which VAT is a mainstay of the domestic revenue system, a well-functioning VAT is an essential component of both their recovery and their future prospects.

Of course, not many developing countries had such a well-functioning VAT before the crisis, so the immediate question facing such countries is whether they should focus primarily on returning to their pre-crisis VAT or whether they should, following the adage that one should never waste a good crisis, seize the occasion to try to make the VAT a better, fairer, and simpler tax than it now is in the many countries in which it is far from the conceptual ideal of a broad-based uniform tax on all final consumption.8 Many existing VATs are imperfect in two distinct respects: structure and administration.

As a result, in most countries there is a substantial VAT gap in the sense that the revenue from the tax is substantially less than that a uniform tax imposed at the standard rate would yield. This gap has two major components, usually called the policy gap and the compliance gap. The policy gap measures the extent to which VAT revenues are reduced as a result of the design of the tax law, especially by zero-rated exemptions or reduced rates granted to particular activities. The remaining share of the VAT gap — that not explained by explicit policy decisions — is the compliance gap, measuring the extent to which the taxes legally due (under the existing law) are not collected. While neither of these gaps can be measured precisely, substantial evidence suggests that the aggregate gap is considerable in many countries, with the policy gap normally accounting for most of the total in developed countries and the compliance gap being more important in many low- and middle-income countries, although with substantial variation from country to country within both groups.

Table 2. Imperfect VATs: The VAT Gapa

European Union

11% (range from 7% to 35.5%)

Latin America

43% (range from 9% to 67%)

Africa

average 37% (range from 7% to 74%)

aThe VAT gap measures the difference between potential VAT revenue — the amount that would be yielded if the standard tax rate applied to all final consumption by households, governments, and non-profit organizations and actual VAT revenue as a share of the potential revenue. Alternatively, if actual revenue is divided by potential revenue, the result is a measure of “c-efficiency.” Data for EU are for 2017 (Grzegorz Poniatowski et al., “Study and Reports on the VAT Gap in the EU-28 Member States: 2019 Final Report,” CASE Reports No. 500 (2019)); for Latin America for 2015 (CIAT, “Value Added Tax: Revenue, Efficiency, Tax Expenditure and Inefficiencies in Latin America,” Working Paper 5 (Nov. 2017)); and for Africa for 2015 (Sijbren Cnossen, Modernizing VATs in Africa (2019)). The range shown for Africa omits Seychelles, where the calculated yield of the tax slightly exceeds the estimated potential, perhaps because of importance of (nonrefunded) taxes on tourists or simply because of problems with the national accounts data.

Technically, the easiest change to make is always in the tax rate. Politically, however, rates are usually difficult to change. The only thing most people know about a tax is its rate. Determining the initial VAT rate (or rates) was a politically controversial issue in many countries, and though rates have sometimes crept up in response to growing revenue needs, few governments are eager to raise the rate. At most one or two countries may perhaps have reached the revenue-maximizing VAT rate — the level beyond which further increases may discourage economic activity (or encourage evasion) to such an extent that revenues will decline rather than increase.9 In principle, therefore, if a country wants more revenue from a VAT for any reason, it could simply raise the rate. However, few, if any, countries could or should emulate Saudi Arabia, which earlier this year tripled the rate of its new VAT from 5 percent to 15 percent to offset the combined effects of the pandemic and the decline in oil prices on government revenues.10 In practice, the best way in economic terms for most countries to raise more revenue from VAT if they wish to do so is instead to focus on reducing the policy gap, the compliance gap, or both.

Technically, the simplest way to improve the performance of a VAT in any country is to simplify and expand the tax base by removing exemptions and concessions that not only reduce revenues and reduce the economic efficiency of the tax, thus hampering economic growth, but also by making it more difficult and complex to administer the VAT, contributing to the compliance gap.

In the European Union, for example, policy decisions accounted for 44.5 percent of the total VAT gap in 2017, although less than a third of this policy gap (13 percent of the total) was labeled as “actionable” in the sense of being attributable to specific policy decisions about rates and exemptions. About one-third of the EU VAT gap is attributable to the exclusions or standard exemptions set out in the original VAT directive, a bit more than half to compliance issues, and the balance to deliberate policy decisions to provide lower rates or exemptions for particular activities.11

  • The range of the actionable policy gap varies widely from country to country, from a low of less than 1 percent (Bulgaria) to a high of 27 percent (Estonia). The much larger non-actionable share reflects the substantial amount of consumption — such as the imputed rent of owner-occupied residences,12 financial services, and most importantly, the goods and services provided by the public sector — that is explicitly excluded (or exempted) under the standard EU VAT. Unsurprisingly, this non-actionable share is generally larger in the (usually richer) countries with larger public sectors, such as Sweden and the Netherlands.

  • The remaining components of the policy gap are the rate gap (from less than standard rates), which accounts for 9.6 percent of the VAT gap, and the actionable exemption gap, which for the EU as a whole accounts for only 3.4 percent of the gap — though again with very wide variations in different countries (including a few in which, owing to the continuing taxation of some intermediate goods, it is negative).

The broad picture in Latin America is not that different, with one estimate being that about 46 percent of the VAT gap in the region is accounted for by policy choices and 54 percent by compliance problem.13 As usual, variations within countries and in some cases, over time, are large. A study in Costa Rica, for example, found a policy gap of about 40 percent and a compliance gap of 30 percent.14 In contrast, a study of Bolivia found a compliance gap of only 9 percent in 2012 (compared to one close to 50 percent a decade earlier) and a policy gap of only 12 percent.15

Fewer studies have focused on Africa, but again the results clearly vary sharply from country to country. South Africa, for example, where the VAT is likely closer to a model VAT than in any other developing country, had a compliance gap in 2012 of less than 10 percent, compared to the average of over 20 percent in the EU, and a policy gap of only about 30 percent, according to the IMF,16 compared to the European average of over 40 percent. On the other hand, a study of Benin and Burkina Faso reported very different results, with Benin having a total gap of close to 50 percent, with about 80 percent of this total due to compliance issues, while Burkina Faso had a gap of about 60 percent, but with only 70 percent of the total attributable to noncompliance.17 In contrast, in Uganda, one study reported a compliance gap of about 30 percent, or only about twice the size of the policy gap.18 As always, of course, the gaps measured often vary from year to year, as well as from country to country, reflecting both changing conditions and the data and assumptions used to calculate them.

Since most VATs in both Latin America and Africa are modeled to a considerable extent on those in the EU, it seems likely that, as in the EU case, much of the untaxed potential consumption falls in the same categories — imputed rent, financial services, and public sector — as those in Europe, although the smaller public (and financial) sectors in most middle- and lower-income countries suggest that the actionable part — sometimes called “tax expenditures” or “nonstandard” exemptions — may be relatively more important than in the EU case.

Table 3. The Structure of VAT: Room for Improvement
  • Reduce exemptions and reduced or zero rating to as few items as possible e.g. enumerated unprocessed foodstuffs, public transit, a few inputs solely for agricultural use (e.g. fertilizer, pesticide).

  • If health, education, social services exempt, then also refund taxes on inputs (if they can be properly managed). Impose tax on petroleum products, electricity, water services, etc.

  • Tax fee-based financial services (zero-rating B2B services) as well as property and casualty insurance and perhaps also gambling and lotteries.

  • Exempt small businesses (say, under $(US)100,000 in gross sales).

  • If bringing new sectors e.g. financial services into VAT base, eliminate such redundant and often troublesome levies as separate taxes on banks, stamp and transfer taxes on real property (if already subjected to VAT), and presumptive taxes (and license fees) on small businesses.

Note: This table and the next draw in part of the recent work of Sijbren Cnossen, Modernizing VATs in Africa (2019); and “Modernizing the European VAT,” CESifo Working Papers 8279 (May 2020).

Recommendations similar to those in Table 3 have of course been made by many in many countries, for example, by the IMF and other international agencies. So far, however, few have listened to the experts on this issue. The main obstacle to such reforms in most countries is simple: People do not like taxes; they do not like changes that increase (or at least appear to increase) taxes; and most of them do not like taxes like VAT that (arguably) seem likely to increase more the tax burden of the poor rather than the rich. Although most countries have managed, often only after considerable political discussion, to put a VAT in place, the combination of the common perception by many politically aware people that VAT taxes the poor (relatively) more than the rich — though not always true — and the reality that it places a relatively heavier compliance burden on smaller businesses makes structural reform difficult. As in the EU,19 countries everywhere find it difficult to alter the initial tax structure, no matter how imperfect it may have become in the political process leading to its adoption.

This rigidity is unfortunate because, while closing the compliance gap seems to be almost everyone’s preferred way to strengthen any VAT, it is considerably more difficult in terms of resources and time to improve the administration of a VAT than to improve its design. One reason is because what is called the compliance gap (which is sometimes defined simply as a residual — what is left over after the policy gap is measured) is a complex multidimensional concept consisting of a number of different components. Although the popular perception may sometimes be that noncompliance is simply a fancy way to say tax evasion, and evasion is indeed often a significant component of the compliance gap, there is more to reducing the compliance gap than simply catching tax cheats — not that many developing countries have proved very successful at this difficult task.

The IMF, for example, reported that the average compliance gap in the EU in 2012 was about 16 percent of potential revenue, and that in Latin America was 27 percent.20 Studies in four EU countries estimated compliance gaps from less than 10 percent (in Denmark and Finland) to about 20 percent in Poland, with Estonia coming in between with a gap of about 15 percent.21 Finally, a study of Turkey using a different methodology found the policy gap to be twice as large as the compliance gap.22

Some of the studies mentioned, like those by the IMF, attempt to decompose the gap in ways that help one understand the source of the problem. There are many possible explanations:

  • nonregistration — that is, failure to have 100 percent coverage of all businesses that should be charging VAT;

  • nonfiling — that is, the failure of registered firms to file on time or perhaps ever;

  • nonpayment — that is, the failure of firms to pay the taxes they owe;

  • improper returns — that is, the failure to report sales and purchases properly;

  • inadequate monitoring of filing and returns;

  • inadequate auditing and application of penalties and interest; and

  • inability to prevail in appeal and judicial proceedings.

All these matters are often more complicated than they might seem at first glance because there is almost always a margin of arguable doubt about the extent of legal liabilities. Taxpayers may, understandably, tend to interpret provisions in ways favorable to them. If governments do not agree, the resulting appeals and judicial proceedings may often take years to determine whether such actions are legal (avoidance) or illegal (evasion). The scale and nature of the compliance problem may also differ substantially from country to country and time to time. Certain industries — for instance, transportation, construction, agriculture, and professional services — often give rise to much greater problems than others. In many developing countries, half or even more VAT may be collected at the border, and many countries have difficulties in enforcing the rules on cross-border trade. Such problems not only reduce VAT collected at the border but make it more complex to allow VAT credits on imported inputs, such as machinery and equipment.

One form of noncompliance which is peculiar to VAT — improperly claiming refunds for VAT on inputs which has not in fact been paid — has been a particular problem with respect to cross-border trade because exports are zero-rated but many inputs used to produce them are taxed. Improper claims for credits are of course most obviously seen as a problem when they result in actual refunds, but they are equally costly in revenue terms even if they simply reduce the net amount of VAT collected on sales. Owing to the high visibility of VAT refunds, countries in difficult fiscal circumstances have sometimes solved their problems by not paying legal VAT refunds in a timely fashion, in part perhaps because they have difficulty in assessing the validity of the claim and in part simply because they are short of funds.23 Whatever the rationale, the result of such policies is to impose a substantial VAT burden on exports in some countries24 and to complicate the administration of the tax substantially in most.

Everything just mentioned is of course well known to those charged with tax administration in most countries, and, as with the problems with the structure of the VAT, many reports and studies have discussed these problems, often producing recommendations along the lines of those set out in Table 4.

Table 4. VAT Administration: Room for Improvement
  • Clean up VAT register: deregister non-credible firms, unify business identification systems, enable fast and simple registration.

  • Keep on top of changing reality: follow up non-filing quickly, audit and apply penalties properly, pursue appropriate legal action on non-compliers. Establish good training and internal monitoring system.

  • Reverse-charge industrial capital goods at import to reduce cash-flow problems. (The purchasers of the imported good are required to account for VAT paid at border, while simultaneously claiming credit for it so that both transactions show up clearly in the firm’s tax accounts.)

  • Refund VAT promptly on exports, and pay appropriate interest on delayed refunds.

  • Move as fully and quickly to e-invoicing as possible, perhaps beginning with VAT treatment of cross-border trade.

  • Move as fully and completely to on-line (digital) operation as possible.

  • Strengthen data and analytical components of administration including linkages within the administration, with other departments, and with other governments and financial sector and major third-party information sources.

Again, however, few countries seem to have heeded such advice, although there are, as always, some exceptions. Two reasons seem to explain this outcome. The first is a variant of the argument made earlier with respect to structural reform. Since most people neither know nor care how business taxes like VAT are administered, what matters here is less popular perception than the strong and usually adverse reactions of VAT taxpayers (businesses) to any changes in tax procedures. This reaction is especially understandable in the case of small businesses, where the relative cost of compliance is much higher than for large businesses. In many countries, the best way to deal with this problem is probably to leave most smaller businesses outside the scope of the VAT completely or at least to simplify the administration of the tax for them. Relatively small and simple policy changes along these lines can make life much easier for taxpayers and governments alike, with little if any adverse effect on revenue, since often 80 percent or more of revenue comes from the largest 10 percent of taxpaying firms. Administrative resources are scarce in most developing countries, and what little they have is likely to be required simply to get VAT (and other major taxes) functioning properly during what may prove to be the lengthy post-pandemic recovery period. Using scarce resources to police a large number of small VAT registrants who produce a relatively small share of the revenue is seldom sensible. Countries that have not already simplified VAT for small businesses by introducing an appropriately high threshold and simplifying registration and filing requirements should definitely consider doing so.25

One reason to do so is simply because countries must also deal with the second reason that so little has been done to deal with the compliance gap: the lack of resources. Most countries should invest more resources in hiring, training, and retaining highly qualified staff, as well as in recasting — simplifying and strengthening — the business processes of the tax administration as a whole. Of course, no votes and little popular support is to be found in spending the time and resources needed to improve VAT administration significantly. It is much easier for politicians, like others, to complain about taxes and their administration than to deal with the underlying problems. All too often all that results is something highly visible, like sweeping still more small businesses into the VAT net with little if any gain in net revenue, rather than tackling the much more difficult task of policing more carefully the often much more important — though of course less obvious — noncompliant behavior of larger firms. Those whose interests may be hurt by really trying to fix the problem will of course complain while those who may benefit — the population as a whole — are unlikely to notice, let alone support, such efforts. Selling increased investment in tax administration as good, let alone necessary, is seldom any easier than selling increased taxes.

Conclusion

Politics makes it hard for countries to reform either VAT structure or VAT administration even when times are good. When times are bad, it may seem even more difficult to do so. Still, within the next year or two many countries will face the difficult need to secure more revenue without hampering reviving economic activity unduly, so some changes will be needed. The VAT is already a major revenue source in many countries. It is also often the most economically — if not always politically — best way to achieve revenue and growth simultaneously, though to do so will usually require improving the structure and administration of the VAT along some of the lines suggested above. In many countries, strengthening VAT in any way may be acceptable only if accompanied by even stronger and more visible efforts to strengthen and increase more progressive sources of revenue such as taxes on property and incomes. As many have suggested, reforms to wealth and income taxes may indeed be a necessary and important component of rebuilding revenue systems countries in which the pandemic has underlined the devastating effects of basic social and economic inequality. Strengthening VAT is much less likely to be widely supported. Nonetheless, because VAT is both a mainstay of government revenues around the world and one of the economically most sensible taxes available, a better VAT remains an important and necessary component of the fiscal solution for countries that face the complex task of building a stronger and more resilient revenue structure without unduly hampering the task of restoring the level of economic activity.

FOOTNOTES

1 In OECD countries, one study found that the implicit VAT rate on consumption decreased on average in 2008-2009. The real level of consumption was relatively stable, but the decline in investment during the crisis meant the share of consumption in GDP increased. However, because a larger share of consumption consisted of government consumption (taxed only on some inputs) and (often more lightly taxed) necessities, consumption tax revenues declined as a share of GDP. See Michelle Harding and Hannah Simon, “What Drives Consumption Tax Revenues? Disentangling Policy and Macroeconomic Drivers,” OECD Taxation Working Papers No. 47 (2020).

2 Although the effect on net VAT revenues will be offset to some extent because production and exports (and hence input tax credits) have also declined.

3 This impact will likely be most marked in small countries (like those in the Caribbean and South Pacific) that are highly dependent on tourism. Cheap international air travel and cruise ships are unlikely to provide much tax base for some time to come.

4 IMF, “Assessing Fiscal Space: An Update and Stocktaking” (June 2018).

5 See OECD, “Tax and Fiscal Policy in Response to the Coronavirus Crisis: Strengthening Confidence and Resilience” (2020); and IMF Fiscal Affairs, “Tax Issues: An Overview, Special Series on Fiscal Policies to Respond to COVID-19” (2020).

6 The U.K., for example, zero-rated disposable gloves, plastic aprons and fluid-resistant coveralls or gowns, surgical masks, filtering face piece respirators, and eye and face protection. Such concessions may be rationalized as direct contributions to the task of fighting the infection and are no doubt popular. But they are far from ideal and may prove difficult to reverse.

7 Unsurprisingly, however, such changes are not only usually welcomed but often urged by business groups, as indicted by press reports from countries as different as Ireland (hotels — see “Hoteliers Call for Scrapping of Tourism VAT for 12 Months During Pandemic,” Irish Examiner, May 3, 2020) and Vietnam (tourism and construction — “Businesses Seek Tax Reduction to Foster Recovery After Pandemic,” Vietnam Net Global, May 12, 2020).

8 Some might prefer to use the crisis to achieve such broader objectives as strengthening taxes (such as on income and property) that impact more heavily on the richer segment of society or by increasing taxes on such “bads” as fossil fuels and tobacco; these topics are largely beyond the scope of this paper.

9 Richard Bird and Sally Wallace, “Revenue-Maximizing Tax Rates,” in The Encyclopedia of Taxation and Tax Policy 347-349 (2005).

10 Marwa Rashad and Davide Barbuscia, “Saudi Triples VAT Rate in Austerity Push to Counter Oil Slump, Virus,” Reuters, May 10, 2020.

11 Grzegorz Poniatowski et al., “Study and Reports on the VAT Gap in the EU-28 Member States: 2019 Final Report,” CASE Reports No. 500 (2019).

12 Often, newly built residential property is subject to VAT, which may be considered a proxy for VAT on future rentals.

13 CIAT, “Value Added Tax: Revenue, Efficiency, Tax Expenditure and Inefficiencies in Latin America,” Working Paper 5 (Nov. 2017).

14 IMF, “Costa Rica: Technical Assistance Report — Revenue Administration Gap Analysis Program — Tax Gap Analysis for General Sales Tax and Corporate Income Tax,” Country Report No. 18/174 (May 2018).

15 Mattéo Godin, Romain Houssa, and Kelbesa Megersa, “The Performance of VAT in DGD-Partner Countries,” Belgian Policy Research Group on Financing for Development Working Paper 16 (Feb. 2017). This result may be a bit surprising to some, but the quite different analysis in CIAT, “Value Added Tax: Revenue, Efficiency, Tax Expenditure and Inefficiencies in Latin America,” Working Paper 5 (Nov. 2017), also shows that Bolivia’s VAT performance, in terms of both its structure (policy gap) and its administration (compliance gap), is one of the best in Latin America.

16 IMF, “South Africa: Technical Assistance Report — Revenue Administration Gap Analysis Program — The Value-Added Tax Gap,” Country Report No. 15/180 (July 2015).

17 Houssa, Megersa, and Roukiatou Nikiema, “The Sources of VAT Gaps in WAEMU: Case Studies on Benin and Burkina Faso,” Belgian Policy Research Group on Financing for Development Working Paper 22 (Oct. 2017).

18 Corti Paul Lakuma and Brian Sserunjogi, “The Value Added Tax (VAT) Gap Analysis for Uganda,” Economic Policy Research Centre Research Series No. 145 (Oct. 2018).

19 Cnossen, “Modernizing the European VAT,” CESifo Working Papers 8279 (May 2020).

20 IMF, “South Africa. Technical Assistance Report — Revenue Administration Gap Analysis Program — The Value-Added Tax Gap,” IMF Country Report No. 15/180 (July 2015).

21 These results are comparable because all followed the same methodology. See IMF, “Republic of Estonia: Technical Assistance Report — Revenue Administration Gap Analysis Program — The Value-Added Tax Gap,” Country Report No. 14/133 (May 2014); “Denmark: Technical Assistance Report — Revenue Administration Gap Analysis Program — The Value-Added Tax Gap,” Country Report No. 16/59 (Feb. 2016); “ Finland: Technical Assistance Report — Revenue Administration Gap Analysis Program — The Value-Added Tax Gap,” Country Report No. 16/60 (Feb. 2016); and “Poland: Technical Assistance Report — Revenue Administration Gap Analysis Program — The Value-Added Tax Gap,” Country Report No. 18/357 (Dec. 2018).

22 Ebru Canikalp, Ilter Unlukaplan, and Muhammed Celik, “Estimating Value Added Tax Gap in Turkey,” 3(2) Int’l J. Innovation & Econ. Dev. 18 (2016).

23 Such behavior may perhaps be more likely if such refunds are shown as expenditure items in the budget rather than — like other credits — simply netted out when reporting tax revenues.

24 Rishi Sharma, “Does the VAT Tax Exports?” 58 Econ. Inquiry 225 (2020).

25 It may also be desirable to permit qualifying firms below the threshold to register voluntarily, provided there is also an established procedure for keeping the tax register up to date by purging nonactive firms.

END FOOTNOTES

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