VAT Fraud and Evasion: What Do We Know and What Can Be Done?

Abstract

Like any tax, the VAT is vulnerable to evasion and fraud. But its credit and refund mechanism offers unique opportunities for abuse, and this has recently become an urgent concern in the European Union (EU). This paper describes the main forms of noncompliance distinctive to a VAT, considers how they can be addressed, and assesses evidence on their extent in high-income countries. While the practical signifi cance of current diffi culties in the EU should not be overstated, administrative measures alone may prove insuffi cient to deal with them, and a fundamental redesign of the VAT treatment of intra-community trade may be required. The current diffi culties in the EU largely refl ect circumstances that would not apply in the U.S.

Misreporting in the Value-Added Tax and the Optimal Enforcement

“…The present study has only investigated one dimension of VAT fraud and tax authorities must think about other potential evasions while implementing their policies. Keen and Smith (2006) outline a list of VAT frauds and some practical solution. As mentioned above, a notable fraud in developing countries is failure to register which is studied in Hoseini (2014) in detail.…”

“…In the high-income countries, the loss in VAT revenue due to misreporting is much larger than failure to register. For instance, in 2001-02, non-compliance by registered traders in UK resulted in loss of £6.7-9.75 billion compared to £400-500 million loss from traders not registering for the VAT (Keen and Smith, 2006). However, in developing countries both frauds seems to be extensive, where according to Schneider et al (2011) the informal sector comprises around 40% of GDP on average (ranging up to 70%).…”

Tax Reform and Noncompliance in Indonesia

“…Empirical studies (see Barbone et al (2013); Keen and Smith (2006); Reckon (2009), for examples) found that many countries face the problem of VAT noncompliance. Hence, to get the most optimal gains from VAT, knowing the potential tax base and the level of noncompliance for the aggregate economy may be a good starting point.…”

Optimal taxes on wealth and consumption in the presence of tax evasion

“…As indirect taxes may be 1 The existence of tax havens represents a particular opportunity for this, as is revealed by the recent debate on information transmission from foreign banks to the tax authorities in their customers' home countries. 2 For a recent overview on evasion of the VAT see Keen and Smith (2006). more dicult to evade than direct taxes and as the incentive to evade may increase with tax rates, they argue that indirect taxes can be a useful supplement in an optimal tax system.…”