Digital Vat and Development: D-Vat and D-Velopment

Abstract

This article suggests that the time is right for developing countries to consider adopting a comprehensive, fully digital VAT, (complete with certified software and trusted third party intermediaries who could assume all of the taxpayer's VAT responsibilities) within the limited group of enterprises encompassed by the large taxpayer group.

Since the e-commerce revolution began in the 1990's, tax policy discussions in developed economies have enlisted "e-solutions" to streamline consumption tax administration, as well as to resolve technical problems.

Inspiration came from the marketplace. Policy-makers observed widespread, business-initiated e-solutions to consumption tax compliance problems in a wide spectrum of jurisdiction. There are two aspects to these developments: horizontal - the availability of a single e-solution to the same consumption tax issue across many jurisdictions; and vertical - the availability of a comprehensive e-solution to multiple consumption tax issues within a single jurisdiction.

This paper addresses the question of how developing economies should participate in this discussion. Should policymakers simply support incremental advances? Should the plan be to roll out vertical e-solutions at a pace roughly parallel to local technological development, or should comprehensive (horizontal and vertical) e-solutions be proposed for a dedicated segment of the economy? Which way would better stimulate development, encourage foreign direct investment, and more broadly integrate local businesses within world markets?

The second approach (vertical and horizontal) is the way this paper answers these questions. The answer is based on three factors: (a) revenue concentration - the great bulk of VAT revenue is derived from a small number of large, frequently foreign business enterprises; (b) existing software - most, if not all, major multinational firms currently determine VAT obligations through global software applications integrated into their ERP system; and (c) corporate governance reform - the C.E.O. and C.F.O. of global companies are under increased regulatory pressures, often with direct personal liability, to document controls over cash flow in a manner that effectively mandates comprehensive automated consumption tax systems. These factors constitute context, opportunity and leverage for developing countries.

The D-VAT proposed here is a technologically intensive, fully automated VAT that is made available or mandated for the large taxpayers. All invoices, statements, reports, returns, and notices are electronic. All payments, refunds and most audit functions will be digital. The Digital VAT requires uniform digital identification of each good or service transaction in the economy. Nationally defined, internationally harmonized product and service codes will be used. The D-VAT will certify service providers (CSPs) whose automated invoicing, tax calculation, collection and return preparation and funds payment systems will conform to the highest international standards as set out by the O.E.C.D. The D-VAT will allow outsourcing of all VAT compliance obligations to trusted third parties, thereby improving accuracy and efficiency. As under the SSUTA use of a CSP will be at no cost to the taxpayer, and except for misrepresentation or fraud, will immunize users from liability for calculation or reporting errors. The D-VAT will also certify third-party software systems (CAS), and proprietary systems (CPS).

Keywords: VAT, Tax, Developing Countries, Consumption Tax Reform, Foreign Direct Investment, Sarbanes-Oxley, Tax automation, Certified tax software, Streamlined Sales Tax, Digital VAT, D-VAT

JEL Classification: E60, E61, E63, H25, H71, K00, K34, O23, O33