Conferencia Mundial Iva

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First Global ITD Conference on VAT
15-16 March 2005 Rome, Italy

Implementing VAT: Problems and Experiences
Juan Toro Commissioner Internal Revenue Service of Chile (Servicio de Impuestos Internos de Chile, SII)

Agenda
1. 2. 3. 4. 5. 6. 7. 8. 9. What is the VAT to administer? What organization is needed to administer VAT? What does VAT compliance mean? Is there any self-assessmentsystem to administer VAT compliance? What are the critical VAT liabilities in a selfassessment system? What are the critical areas of non-compliance? What are the strategies to control VAT compliance? How to measure the effectiveness of VAT compliance? …Some final comments

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…OF WHAT?…OF PROBLEMS OF COURSE, SO MANY WHAT…

1. What is the VAT to administer?
VAT design implies several policyoptions to be taken • • • Type of VAT: consumption – product - or income - type? Origin or destination principle? VAT tax base: – Definition of activities or agents liable for VAT – Exempt activities – Stages to be taxed: manufacture - retail – multistage? Thresholds to be liable for VAT or simplified (presumptive) regimes for small taxpayers? Rate differentiation: single rate or multiple rates?Method to determine VAT liability: invoice- or subtraction- or addition method? Cash or accrual basis? Treatment of excess VAT credits (input VAT) – Refunds - carry forward - offsetting? – Exporters - capital goods - exempt activities?

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• • • •

VAT in Chile

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• In 1975 a consumption-type (destination principle) VAT was introduced. • Multistage tax on imports, sales of goods andservices, VAT on input credited against VAT on output. • Exemptions: professional services, financial interests, life insurance, house rental without furniture, sale of used cars (partial), tickets for cultural and sport events, providers of public transportation, education and health services (partial). • No threshold for VAT; small taxpayers could apply to a special regime: output VAT is fixed bythe SII and real input VAT could be credited; for temporary activities the SII assesses VAT liability. • 19% general rate; additional consumption taxes (VAT-type) for some products; house building has a special credit, in addition to real VAT on input also credited against VAT debit. • Invoice method on accrual basis to determine VAT liability • Exporters (g. and s.) are zero-rated, carry forwardfor excess VAT credits with refunds after 6 months for purchases of capital goods.

VAT in Chile,…some problems
• Since 1975, VAT has changed mainly because of compliance problems:
– – – – –

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1976: unification of sales and services, tax on basic and primary products. 1984: refunds after six months of carry forward (VAT credit) was eliminated. 1985: introduction of refunds for capitalgoods after 6 months of carry forward. 1987: VAT on construction sector (first sale of building). 2001: VAT on used capital goods.

• Tax base design and exemptions for service sector make it difficult to control VAT compliance, especially on export of services. • Method of taxing construction sector induces re-organization of enterprises sale operations to reduce VAT liability. • Partialexemptions induce mistakes (or evasion) by “wrong” treatment of exempt and taxed sales to recover VAT credits. • Most public transportation providers have presumptive regime for Income Tax (ITax) purposes - no incentive to use invoices. • Invoice method implies control of VAT documents is crucial (false invoices); self-enforcing feature is not always effective. • Refunds are a strong incentive to commitfraud (false exports, or purchases of capital goods, or invoices to increase VAT credits).

2. What organization is needed to administer VAT 6
• VAT could be a broad-based and high-yielding tax to administer, so what is the best organization? • Some alternatives: by taxes/ by taxpayer segments/ function-based. • Chile has a function-based organization with some tax-segment features. • At...