The difference between  the VAT collected on sales and the credit for VAT paid on input  purchases is remitted to the government. Like Other Taxes, VATs Have Compliance Risks, Administrative Costs, and Compliance Burden That Increase with the Complexity of the Design

Our study countries’ experiences with noncompliance suggest that even a  conceptually simple VAT—one that applies a single tax rate to all goods  and services—would have compliance risks and would generate  significant administrative costs and compliance burden. While our study countries had VATs of varied  designs and complexity at the time of our original review in 2008, they all  devoted significant enforcement resources to addressing compliance  issues that would be found in even a simple VAT. Compliance Risks

As shown in table 1, compliance risks for a VAT can stem from either  underpayment of taxes owed on sales, or overstating taxes paid on  purchases. Tax preferences  can also exist in other tax systems, such as income taxes or retail sales  taxes. An exempt good or service is not taxed when  sold, and businesses that sell exempt goods or services cannot claim  input tax credits for inputs used in producing the exempt output. As a consequence, no net VAT  revenue is actually collected by the government from the sale of zero- rated goods and services. Canada  administers its federal VAT and provincial consumption tax systems  differently in different provinces. Canada’s experience administering a national VAT along with a variety of  provincial VATs and sales taxes demonstrates that multiple arrangements  in a federal system are feasible, but results in increased administrative  costs and compliance challenges for both government and business. In contrast, businesses,  particularly retailers, in provinces with a sales tax face greater compliance  burdens than those in other provinces because they are subject to dual  reporting, filing, and remittance requirements. VAT Implementation Involved Considerable Resources to Educate, Assist, and Register Businesses

Australia, Canada, and New Zealand, the study countries that most  recently implemented a VAT, all built on preexisting administrative  structures. All had national consumption taxes that were paid by  businesses prior to transitioning to a VAT. Both Canada and Australia also provided  direct monetary assistance to qualifying small businesses to defray the  costs of acquiring the necessary supplies needed to meet new  bookkeeping and reporting requirements. Potential Lessons for the United States

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 burden. Enforcement  activities, such as audits, and record keeping by businesses create  administrative costs for the government and compliance burden for  businesses.
Why GAO Did This Study

Dissatisfaction with the federal tax system has led to a debate about U.S. tax reform, including proposals for a national consumption tax. One type of proposed consumption tax is a value-added tax (VAT), widely used around the world. A VAT is levied on the difference between a business's sales and its purchases of goods and services. Typically, a business calculates the tax due on its sales, subtracts a credit for taxes paid on its purchases, and remits the difference to the government. While the economic and distributional effects of a U.S. VAT type tax have been studied, GAO issued a report in 2008 that looked at lessons learned from VAT administration in Australia, Canada, France, New Zealand, and the United Kingdom. These countries provided a range of VAT designs from relatively simple to more complex. This statement, which is based on the 2008 report, focuses on (1) the effect VAT design choices, such as exemptions and enforcement mechanisms, have on compliance, administrative costs, and compliance burden; (2) Canada's experience with administering a VAT in conjunction with several different subnational consumption tax arrangements; and (3) the experience that some countries had transitioning to a VAT.

What GAO Found

VATs have grown in popularity over the past five decades with recent estimates showing more than 130 countries worldwide using a VAT. Nonetheless, like other tax systems, even a simple VAT--one that exempts no goods or services--has compliance risks and, largely as a consequence, generates administrative costs and compliance burden. For example, all of the study countries reported devoting significant enforcement resources to compliance issues. Like an income tax, VATs can be vulnerable to compliance schemes that either result in undercollection of taxes due or overclaiming of credits for taxes paid. Also, as with other taxes, adding tax preferences--such as exempting certain goods or services from tax--generally decreases revenue, increases complexity, and increases compliance risks. Increased complexity also increases the record-keeping burden on businesses and government resources needed for enforcement. Canada's experience administering a national VAT along with a variety of provincial VATs and sales taxes demonstrates that multiple arrangements in a federal system are feasible, but increase administrative costs and compliance challenges for both governments and businesses. Businesses, particularly retailers, in provinces with a sales tax face greater compliance burdens than those in other provinces because they are subject to dual reporting, filing, and remittance requirements. When implementing their VAT, Australia, Canada, and New Zealand all devoted considerable resources to educate and assist businesses subject to the new tax. Both Australia and Canada provided direct monetary assistance to qualifying small businesses to help meet new bookkeeping and reporting requirements. Both had trouble getting businesses to register for the VAT by the implementation date.