GAO's VAT Study Warns of Compliance Risks

GAO has released Value-Added Taxes: Lessons Learned from Other Countries on Compliance Risks, Administrative Costs, Compliance Burden, and Transition (pdf). From the summary:

The experiences of our five study countries show that all VAT designs have compliance risks that generate considerable administrative costs and compliance burden and that, similar to the U.S. tax system, adding complexity to the tax’s design increases these risks, costs, and burdens. While our study countries had VATs of varied designs and complexity, they all devoted significant enforcement resources to addressing compliance that would be found in even a simple VAT—one with a broad base that exempts few goods or services. These risks include refund fraud and missing trader fraud. VATs are vulnerable to refund fraud because businesses with taxable sales less than taxable purchases are entitled to refunds. All of our study countries were concerned about illegitimate businesses or fraudsters submitting fraudulent refund claims based on false paperwork that result in the theft of funds from the government. Missing traders set up businesses for the sole purpose of collecting VAT on sales and then disappear with the proceeds. Because of such compliance risks, even simple VATs require enforcement activities, such as audits, and record-keeping by businesses that create administrative costs for the government and compliance burden for businesses. Of course, compliance risks and the associated administrative costs and compliance burdens are not peculiar to VATs. While the specifics may vary, other types of taxes also carry compliance risks.

[JH]