VAT is the largest source of consumption tax in OECD countries. VAT compliance is often very complex, yet VAT’s contribution to global revenue keeps rising. Researchers at the IMF consider why VAT has proven so resilient, even in such turbulent times.
To appreciate what makes VAT so effective, you need to understand how VAT functions. (Read our deep dive into how VAT works for more information.) The essential point is that VAT applies across the supply chain, not just at the final point of sale.
A self-correcting tax system
As the IMF authors point out, while the process can seem unwieldy, the system promotes voluntary compliance. That’s because each business has an incentive to collect a VAT invoice to ensure it can reclaim the VAT it pays out.
In other words, the process of paying VAT on business expenses and then later reclaiming that VAT can be a significant administrative burden for each individual business. However, when considered as a system, applying VAT at each point in the supply chain maximises overall revenue collection.
One size does not fit all
The authors also note that, in practice, VAT can look quite different in each country. Countries may have variable VAT rates and exemptions. There may be special VAT incentives. Different thresholds may apply to different sized businesses.
The authors suggest that such measures can have negative consequences for revenue collection. Exemptions, they argue, “undermine the core objective of raising revenue, both directly and indirectly, by increasing the cost of collection and often facilitating fraud.” However, efforts to reform exemptions are often met by resistance.
From a business perspective, it is crucial to note that VAT compliance regulations are not uniform. Each country has its own set of VAT obligations, and different opportunities to optimise VAT compliance. The procedures for recovering VAT are also different in each jurisdiction.
A global VAT compliance and recovery solution
VAT is ubiquitous and complex. At a macro level, we can appreciate why VAT is so administratively intensive. However, this presents challenges for businesses.
Each company needs an effective solution that ensures they are always VAT compliant, everywhere they do business. At the same time, businesses should ensure they maximise VAT recovery and never pay more VAT than they are required to.
VAT IT’s powerful VAT technology makes managing VAT simple, cost-effective and efficient. As the world’s VAT compliance and recovery specialists, we provide an end-to-end VAT solution that meets your business’s specific needs. Get in touch with VAT IT for a customised VAT compliance and recovery solution.
