How VAT could help developing countries’ tax collection problems

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How VAT could help developing countries’ tax collection problems

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Efforts to replace aid to poor countries with tax as a more stable source of revenue have almost entirely focussed on the corporate sector. But a UK International Development Committee meeting in Parliament saw an interesting debate emerge on the role of VAT.

Mick Moore, professorial fellow at the Institute of Development Studies, pointed to research that suggests aid is the most unstable source of public revenue for developing countries, while tax is the most stable. Few in the tax justice movement are in disagreement with this stance, however his ideas on how best to collect this revenue proved more controversial.

“Don’t be sidetracked by the allegedly regressive nature of VAT,” said Moore, arguing that because a large number of products are zero-rated, it is not clear that the tax is as regressive as some suggest.

Moore pointed out that almost all developing countries have adopted VAT because it is an efficient way of raising revenue.

“I would not remove such an effective mechanism,” said Moore.

Tim Besley, school professor of Economics and Political Science at the London School of Economics, argued that VAT has considerable benefits in administration.

Because companies deduct VAT, acting as tax collectors for the authorities, it means they formalise their accounts with the government.

“It has the benefit of building a broad-based tax,” said Besley.

Besley’s argument is compelling where there may be many smaller companies that have not registered as corporate taxpayers in developing countries and, as a long-term revenue raiser, it may be effective in bringing more companies into the tax system.

Speaking to International Tax Review after the meeting, however, Savior Mwambwa, executive director of the Centre for Trade Policy and Development, argued that poor countries need to look at the most effective short-term ways of raising revenue.

“Governments have to focus their energy on big multinational companies,” said Mwambwa. “This is easier to do because they’re already registered and licensed.”

Mwambwa argued that because the multinationals are already on the system, even if they are shifting their profits to tax havens, governments can chase them for the taxes they owe and use the money to build the capacity of tax administrations.

More than 70% of African countries have now adopted a VAT, and it increasingly seems to be the tax of choice for states across the continent looking to generate extra revenue, because it is a hard tax to avoid.

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