II.Administering a VAT

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II. Administering a VAT

• A modernized administration
• Organization
• Identification Registration
• Sound procedures to file and pay
• Information Assistance
• Computerization
• Audit
• Customs role in implementing and
• administering a VAT

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A modern administration for a modern tax.

• The VAT is a vector for modernizing the entire
  tax administration.
• Conditions for a successful implementation of a
  VAT in the PICs
• The government needs to spell out a reform
  strategy in the medium term
• The reform strategy must provide for a major
  simplification of the customs tariff and various
  indirect taxes
• The organization and management of the tax
  administration should be established
• Immediate action should be taken to improve the
  tax administration operations and begin
  introducing the basic principles that are
  required to administer a self-assessed,
  account-based tax.

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Which organization is going to administer the VAT?

• Although the inland revenue department is the
  department recommended to administer the VAT, the
  customs department will nevertheless play a
  significant role.
• The use of a common taxpayer identification
  number is the ideal solution for permitting
  electronic data interchange between the two
  departments.

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Organization main issues.

• Lack of a strong management capacity. Most tax
  administrations are not able to implement major
  tax reforms, modernize their procedures, and
  manage ongoing administrative activities without
  a strong headquarters function.
• Need for a well-defined, function-based
  organization. To support the implementation of a
  self-assessment system, the tax administration
  will need to move toward a more modern,
  function-based organization.

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Organization of a headquarters function.(1)
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Organization of a headquarters function.(2)
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Organization of a headquarters function.(3)
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Organization of a headquarters function.(4)
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Organization of a headquarters function.(5)
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Organization. VAT Department- main functions.
VAT FIELD OFFICES
HEADQUARTERS
2. Return Processing 4. Taxpayer
Service
Commissioner and Deputy Commissioner Administrati
on Operations Legal IT/ EDP Policy
1. Cashier 3. Debt Collection Enforcement
of arrears
5. Audit
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Why a special system to monitor large taxpayers
is necessary?

• Large taxpayers (LTPs) account for the largest
  share of revenue.
• LTPs are different from other taxpayers.
• An LTP system can be the way to improve the
  efficiency of the tax administration.
• An LTP system can improve collection.

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Concentration of tax collection.
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The large taxpayers are different because they
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The need for accurate and timely information.

• LTP noncompliance should be detected as soon as
  it occurs.
• Information should be reliable, so follow-up
  action can be taken with confidence.
• LTP information should also be used to audit
  other taxpayers.

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Conclusion The establishment of an LTU is a
sound strategy for improving tax administration.

• Requiring LTPs to file and pay at specific
  locations improves controls.
• An audit function should be included in the Large
  Taxpayer Unit (LTU).
• Pilot implementation of an LTU can demonstrate
  that the change is possible.
• An adequate penalty system, effectively applied,
  is required.
• Electronic filing and payment systems should be
  considered.

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Reliable identification system and registration
procedures.

• A sound and reliable tax identification number
  must be developed and implemented.
• Registration procedures should applied for the
  VAT payers.
• The cross-checking of information between the
  inland revenue department and the customs
  department must be based on this single TIN.

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Filing and payment procedures.

• The return and payment form (unique form) should
  be simple.
• VAT should be administered as a self-assessed
  tax.
• The administration must act promptly against
  noncompliance.

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Filing and payment procedures. (2)

• VAT should be administered as a self-assessed
  tax
• The taxpayer self-assesses and the administration
  focuses on noncompliance.
• The taxpayer must be provided with sufficient
  information.
• Accurate and timely self-assessment is achieved
  only through highly visible and effective audit
  programs.

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Taxpayer service.

• A taxpayer service must be established to prepare
• Explanatory materials to be made available to
  taxpayers,
• The information guide on VAT to the general
  public
• The guide to registration, and
• The guide to completing the VAT return.

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The success of VAT administration depends on an
efficient and computerized VAT Department.

• It is of little value for the administration to
  develop computer systems for the VAT based on
• the procedures now in place in the sales
• or income tax offices.

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The success of VAT administration depends on an
efficient and computerized VAT department able
to(1)

• Record and process the application for
  registration, assign a tax number, and issue
  registration certificate
• Create mailing lists or envelopes for
  distribution of information or forms to
  taxpayers
• Print blank tax returns with bar code
  identification for
  each taxpayer and addressed for mailing
• Record receipt of tax returns (bar code is
  scanned)
  update registration data with
  changes
  check return for completeness
  and
  arithmetic accuracy and
• Maintain ledger accounts for each taxpayer.

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The success of VAT administration is based on an
efficient and computerized VAT department able
to(2)

• Identify stop/non-filers, dispatch demand notice
  to late-filers and taxpayers in arrears
• Apply penalties to outstanding taxes and late
  returns
• Notify collections unit of accounts
  in arrears and persistent
  non-filers
• Record receipt of refund claims,
  perform initial screening of
  refunds against
  established criteria, control
  claims through to the approval
  stage and
• Record refund payments
  in the ledger account
  of the taxpayer.

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The success of VAT administration depends on an
efficient and computerized VAT department able
to(3)

• Select taxpayers for audit and control audit
  workload
• Access other systems or input raw information to
  facilitate coordination and exchange of
  information--this is particularly important for
  the operations
  of the customs administration.
• Provide summary information on
  taxpayers and performance of
  offices on
  diskettes or on-line where possible
  to headquarters for analysis and
• Produce monthly reports and statistics.

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THE FOUR GAPS TO BE CLOSED.
UNREGISTERED TAXPAYERS
STOPFILERS
DELINQUENTS
EVADERS
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Compliance

• The VAT return is submitted promptly.
• The tax is paid on time.
• The correct net tax is declared.

Audit and Investigation
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AUDIT is critical.

• Why so critical?
• What is an effective audit program?
• Technical issues
• Coverage
• Selection
• Methods
• Staffing and training
• Monitoring

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The success of VAT administration depends on an
efficient audit program

• Tax on sales must be stated on invoices to
  provide documentary evidence for the credit
  claimed by registered buyers. The VAT is an
  accounts-controlled tax, which has to be enforced
  through audits. Most countries have integrated
  the audit and enforcement of their VATs with
  similar functions performed by the income tax
  department. VAT inspectors should be accountants
  at home with balance sheets and profit and loss
  statements.
• VAT audits should be frequent, short, and
  targeted.

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An effective audit program consists of 5
important components
Audit selection system
Audit plan
Audit organization
Audit methods
Legal framework
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An audit plan is the key to preventing
noncompliance, and must

• Provide for broad coverage (20-25 of the
  taxpayers),
• Include coverage of different economic sectors,
• Include taxpayers with different volume of sales,
  and
• Include different procedures to fight each form
  of noncompliance.

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Audit selection.

• Selection systems should be computerized.
• Several countries also support audit selection by
  using intelligence information.
• The role of external information should include
  special programs to exchange information with
  foreign tax administrations.

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Audit methods.

• Registration checks.
• Desk verifications.
• VAT refund audits.
• Issue-oriented audits, based on short and
  targeted checks, as a major component of the VAT
  audit program.
• Comprehensive VAT audit only VAT but up to the
  limit of time provided by the law.
• Comprehensive audits of all tax liabilities. days
• Tax fraud investigations.

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Audit organization.

• The organization of audits should take into
  account the type of audit to be conducted and the
  taxpayer to be audited.
• VAT audits should be conducted in the audit
  division of the local offices.
• Most modern tax administrations have assigned the
  audit of large taxpayers to a special branch.
• Special intelligence and investigation branches
  has also dealt with tax fraud.

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Sufficient powers should be provided to auditors
to assure access to

• Business premises,
• Accounting and financial records,
• Information from other administrations,
• Business and private bank accounts, and
• The seizure of documents proving fraudulent
  actions.

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But, we also have to preserve taxpayers rights, by

• Setting time limitations to audits,
• Limiting the duration of an audit,
• Adhering to the burden of proof,
• Establishing an appeal system (minimum deposit),
  and
• Following tax secrecy rules.

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Case study The VAT audit program developed by
New Zealand encompasses

• Registration check
• VAT refund check
• VAT audit
• Extended VAT audit
• VAT investigation

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Customs role in implementing and administering a
VAT.

• Basic functions of the customs department. A
  modern customs administration has three basic
  functions
• revenue collection
• administration of trade policy and
• protection of the economic and social well being
  of the country.
• Countries that implement a value-added tax also
  rely on the customs department to play a
  significant role in the administration of the VAT.

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Customs role in implementing and administering a
VAT. (2)

• Collection of VAT on imports.
• Verification of exports.
• Provision of information to tax officials.
• Prevention and investigation of fraud.
• Preparations for VAT implementation.

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Customs role in implementing and administering a
VAT. (3)

• Collection of VAT on imports
• The customs declaration form needs to include
  VAT.
• The customs tariff needs to be amended to
  reflect the rate of duty and the rate of VAT for
  each tariff heading.
• The customs systems must be able to calculate
  the VAT on imports and produce a customs entry
  (or receipt) showing the duty and VAT paid.
• The customs tariff needs to be reformed and
  simplified.

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Customs role in implementing and administering a
VAT. (4)

• Verification of exports
• Close cooperation ensures an effective export
  control program.
• Customs must also provide information to the tax
  administration on export transactions to verify
  refund claims. This of course is easier in an
  automated environment.

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Customs role in implementing and administering a
VAT. (5)

• Provision of information to tax officials.
• It is essential that the tax and customs
  administrations be capable of communicating
  freely and that the same taxpayer identifier be
  used by both.
• Tax officers should have direct access to the
  customs systems records of registered taxpayers.
• The prevention and investigation of fraud.
• Customs and tax auditors and investigators must
  establish a sound working relationship in order
  to share information and coordinate efforts.

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Customs role in implementing and administering a
VAT. (6)

• Preparations for VAT implementation.
• Customs involvement in the VAT program must begin
  well before implementation.
• Customs legislation, procedures, and systems must
  be revised to accommodate the requirements of the
  VAT operations.
• Throughout the planning and implementation phases
  of the preparations for the VAT, effective
  communication and co-ordination must occur
  between the two administrations.

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Conclusion 2 The best VAT.

• VAT administered as a national tax by the
  internal tax department
• Full self-assessment system
• Registration mechanism and follow up
• Large taxpayers unit
• Sufficient audit coverage and adequate audit
  methods