Value-Added Taxes: Lessons Learned from Other Countries on	 
Compliance Risks, Administrative Costs, Compliance Burden, and	 
Transition (04-APR-08, GAO-08-566).				 
                                                                 
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 was asked to identify the lessons learned 
from other countries' experiences in administering a VAT. This	 
report describes (1) how VAT design choices, such as exemptions  
and enforcement mechanisms, have affected compliance,		 
administrative costs, and compliance burden; (2) how countries	 
with federal systems administer a VAT; and (3) how countries that
recently transitioned to a VAT implemented the new tax. GAO	 
selected five countries to study--Australia, Canada, France, New 
Zealand, and the United Kingdom--that provided a range of VAT	 
designs from relatively simple to more complex with multiple	 
exemptions and tax rates. The study countries also included some 
with federal systems and some that recently implemented a VAT.	 
GAO does not make any recommendations in this report.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-566 					        
    ACCNO:   A81573						        
  TITLE:     Value-Added Taxes: Lessons Learned from Other Countries  
on Compliance Risks, Administrative Costs, Compliance Burden, and
Transition							 
     DATE:   04/04/2008 
  SUBJECT:   Consumption taxes					 
	     Policy evaluation					 
	     Program evaluation 				 
	     Program management 				 
	     Records management 				 
	     Reporting requirements				 
	     Risk assessment					 
	     Sales taxes					 
	     Standards						 
	     Strategic planning 				 
	     Tax administration 				 
	     Tax administration systems 			 
	     Tax law						 
	     Tax refunds					 
	     Tax violations					 
	     Value-added taxes					 
	     Voluntary compliance				 
	     Program goals or objectives			 
	     Program implementation				 

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GAO-08-566

   

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
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material separately. 

Report to Congressional Requesters: 

United States Government Accountability Office: 
GAO: 

April 2008: 

Value-Added Taxes: 

Lessons Learned from Other Countries on Compliance Risks, 
Administrative Costs, Compliance Burden, and Transition: 

GAO-08-566: 

GAO Highlights: 

Highlights of GAO-08-566, a report to congressional requesters. 

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 
businessï¿½s 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 was asked to identify the lessons 
learned from other countriesï¿½ experiences in administering a VAT. This 
report describes (1) how VAT design choices, such as exemptions and 
enforcement mechanisms, have affected compliance, administrative costs, 
and compliance burden; (2) how countries with federal systems 
administer a VAT; and (3) how countries that recently transitioned to a 
VAT implemented the new tax. 

GAO selected five countries to studyï¿½Australia, Canada, France, New 
Zealand, and the United Kingdomï¿½that provided a range of VAT designs 
from relatively simple to more complex with multiple exemptions and tax 
rates. The study countries also included some with federal systems and 
some that recently implemented a VAT. 

GAO does not make any recommendations in this report. 

What GAO Found: 

Like other tax systems, even a simple VATï¿½one that exempts few goods or 
servicesï¿½has compliance risks and, largely as a consequence, generates 
administrative costs and compliance burden. For example, all of the 
study countries reported that they devoted significant enforcement 
resources to addressing compliance. Businesses whose taxable purchases 
exceed their taxable sales are entitled to a refund under a VAT, which 
makes VATs vulnerable to fraudsters creating phony invoices in order to 
falsely claim refunds. Also, similar to other taxes, adding complexity 
through exemptions of some goods or services and reduced tax rates 
generally decreases revenue and increases compliance risks because of 
the incentive to misclassify purchases and sales. Such complexity also 
increases the record-keeping burden on businesses and increases the 
government resources devoted to enforcement. 

Canadaï¿½s 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 the 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. 

Australia, Canada, and New Zealand, all with relatively new VATs, built 
on preexisting consumption tax administrative structures to implement 
the new tax. Nevertheless, they devoted considerable resources to 
educate, assist, and register businesses and implementation took from 
15 to 24 months. Both Australia and Canada provided monetary assistance 
to qualifying small businesses to help meet new bookkeeping and 
reporting requirements. Despite their efforts, Australia and Canada had 
some difficulty getting businesses to register for the VAT by the 
implementation date. 

Figure: How a VAT Works: 

[See PDF for image] 

This figure is an illustration of how a VAT works. The following 
information is illustrated: 

Lumber Company: 
Raw materials sold to furniture maker for $50 plus $5 VAT; 
$5 remitted to government. 

Furniture maker: 
Table sold to retailer for $120 plus $12 VAT; 
$7 remitted to government ($12 VAT minus $5 credit). 

Retailer: 
Product sold to consumer for $150 plus $15 VAT; 
$3 remitted to government ($15 VAT minus $12 credit). 

Final consumer: 
Receives product. 

Total government revenue: 
$5 from lumber company; 
$7 from Furniture maker; 
$3 from Retailer. 

Source: GAO. 

{End of figure] 

To view the full product, including the scope and methodology, 
click on [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-566]. 
For more information, contact Jim White at (202) 512-5594 or 
[email protected]. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Like Other Taxes, VATs Have Compliance Risks, Administrative Costs, and 
Compliance Burden That Increase with the Complexity of the Design: 

In Canada--One of Several Federal Countries with a VAT--Tax System 
Complexity and Compliance Burden Vary among Provinces Depending on 
Level of Coordination with a Federal VAT: 

VAT Implementation in Australia, Canada, and New Zealand Built on 
Preexisting Administrative Structures and Involved Considerable 
Resources to Educate, Assist, and Register Businesses: 

Concluding Observations: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Goods and Services in Study Countries Subject to 
Exemptions, Zero Rating, or Reduced Rating: 

Appendix III: Specific VAT Treatment of Public Sector Entities and 
Nonprofit Organizations in Australia and Canada: 

Appendix IV: Applying the VAT to Hard-to-Tax Sectors: 

Appendix V: Carousel Fraud in the European Union: 

Appendix VI: Distribution of Economic Activity by Industry Sector in 
Several Study Countries: 

Appendix VII: GAO Contact and Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: Elements of a Conceptually Simple VAT System: 

Table 2: Major Types of Compliance Risks in a Conceptually Simple VAT 
System: 

Table 3: VAT Refund Timing and Performance for Three OECD Countries: 

Table 4: VAT Design Choices and Their Use in Study Countries: 

Table 5: VAT Treatment of Select Consumer Essentials--Food and Health 
Care: 

Table 6: VAT Treatment of Public Sector, Nonprofit, and Charitable 
Entities for Selected Countries: 

Table 7: VAT Treatment of Financial Services and Insurance: 

Table 8: VAT Treatment of Real Estate: 

Table 9: VAT Treatment of Select Socially Desirable Goods and Services: 

Table 10: VAT-registered Businesses with Sales below the Threshold: 

Table 11: Average VAT Refund Level as a Percentage of Gross VAT 
Collection (1998-2001): 

Table 12: VAT Accounting Options in New Zealand: 

Table 13: VAT Accounting Options in Canada: 

Table 14: National and Subnational VATs in Federal Countries: 

Table 15: Summary of Federal/Provincial Consumption Tax Arrangements: 

Table 16: Strategies Used in Australia to Educate and Assist 
Businesses: 

Table 17: Summary of Education and Outreach Activities for VAT 
Implementation in Canada: 

Table 18: Exempt, Zero Rated, and Reduced Rated Goods and Services in 
Study Countries: 

Figures: 

Figure 1: Example of How a VAT Works: 

Figure 2: Example of How a RST Works: 

Figure 3: Revenues by Tax Type in Selected OECD Countries (2005) and 
Year of VAT Introduction: 

Figure 4: C-Efficiency Ratios of Five Study Countries and the Average 
for OECD Countries: 

Figure 5: Tax Administration Costs in New Brunswick Before and After 
Harmonization: 

Figure 6: Carousel Fraud: 

Figure 7: Value-added by Economic Sector in Select OECD Countries: 

[End of section] 

United States Government Accountability Office: Washington, DC 20548: 

April 4, 2008: 

The Honorable Jim McCrery: 
Ranking Member: 
Committee on Ways and Means: 
House of Representatives: 

The Honorable Jim Ramstad: 
Ranking Member: 
Subcommittee on Oversight: 
Committee on Ways and Means: 
House of Representatives: 

Concerns about our current income tax system have fueled a debate about 
fundamental tax reform in the United States. The debate is partly about 
whether to reform the current income tax, for example by broadening its 
base and lowering rates, or to switch to some form of a consumption 
tax. The concerns about our tax system include its economic 
inefficiency, unfairness, and complexity. In addition, issues have been 
raised about whether its design provides fertile ground for 
noncompliance, with an estimated annual gross tax gap of approximately 
$345 billion for tax year 2001, or 17 percent of federal revenue that 
year. 

In recent years, a variety of tax reforms have been proposed for the 
United States. Some proposals involve switching to a consumption tax or 
combining a consumption tax with an income tax. One consumption tax 
that some have proposed is a value-added tax (VAT). Others have 
proposed consumption taxes with features similar to a VAT. For example 
the Department of the Treasury (Treasury) recently outlined a VAT-like 
tax, called a business activity tax, in a report that discussed 
alternatives to reform U.S. business taxation.[Footnote 1] 

A VAT is applied to the difference between a business's sales of goods 
and services and its purchases of goods and services (excluding wages), 
therefore taxing the value added by each business. Unlike retail sales 
taxes (RST), VATs are collected at all stages of production and 
distribution. VATs have grown in popularity over the past five decades. 
Today, the United States is the only member of the Organization for 
Economic Cooperation and Development (OECD) without a VAT.[Footnote 2] 
On average, VATs raise over 18 percent of government revenue in OECD 
countries that have a VAT. Worldwide, by one estimate, more than 130 
countries have a VAT. 

A VAT is a broad-based consumption tax. As such, it avoids some of the 
complications of an income tax, such as the need to define and compute 
depreciation and capital gains. Because VAT is remitted by businesses, 
it also avoids issues related to collecting taxes from individuals. 

As a consumption tax, a VAT has different economic and distributional 
impacts than an income tax. Treasury, the Congressional Budget Office, 
and others have studied those impacts.[Footnote 3] In addition, we 
reported in 1993 on the estimated cost that the Internal Revenue 
Service (IRS) and other federal agencies could be expected to incur if 
a simple VAT were added as a federal revenue source in the United 
States.[Footnote 4] However, less has been reported in the United 
States on how other countries have designed their VATs, including tax 
rates, exemptions, filing requirements, and enforcement mechanisms, and 
how those design choices have affected businesses and tax 
administrators.[Footnote 5] 

You requested that we report on the important lessons learned from 
selected other countries' experiences administering a VAT. Our specific 
objectives were to describe for the selected countries (1) how VAT 
design choices have affected compliance, administrative costs, and 
compliance burden; (2) how countries with federal systems administer a 
VAT in conjunction with subnational consumption tax systems; and (3) 
how countries that recently transitioned to a VAT implemented the new 
tax. 

We selected five countries--Australia, Canada, France, New Zealand, and 
the United Kingdom--to study based on several criteria, including the 
complexity of VAT design, the age of the VAT system, and whether the 
country had a federal system.[Footnote 6] We used expert 
recommendations to help ensure a range of VAT designs in our five study 
countries. For all of the countries we studied, we performed an in- 
depth literature review, including government documents, OECD studies, 
and academic papers. We collected and analyzed data on the countries 
and their VAT systems, including VAT revenue trends, administrative and 
compliance activities and costs, and the size and distribution of 
economic activity within the study countries. To provide assurance that 
the data used in our report were sufficiently reliable, we used data 
from commonly used and cited sources of statistical data, such as the 
OECD, and from publicly available reports from international government 
agencies. We also discussed these data with OECD officials, government 
agency officials, and noted VAT experts in several professional 
services and research organizations. We interviewed knowledgeable 
government officials from the study countries, including officials from 
their tax administration agencies and the national audit institutions. 
We also interviewed VAT experts, including academic and private-sector 
tax experts and researchers at the OECD and the International Monetary 
Fund. In addition, we interviewed members of a number of professional 
services organizations that represent and serve businesses subject to 
VAT requirements. We provided the national audit institutions and the 
tax administration agencies of our study countries a copy of our report 
to verify data and specific factual and legal statements about the VAT 
in those countries. We made technical corrections to our report based 
on these reviews. A more detailed discussion of our methodology is in 
appendix I. 

We do not make any recommendations in this report. We conducted this 
performance audit from December 2006 through April 2008 in accordance 
with generally accepted government auditing standards. Those standards 
require that we plan and perform the audit to obtain sufficient, 
appropriate evidence to provide a reasonable basis for our findings and 
conclusions based on our audit objectives. We believe that the evidence 
obtained provides a reasonable basis for our findings and conclusions 
based on our audit objectives. 

Results in Brief: 

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. 

Some available data indicate a VAT may be less expensive to administer 
than an income tax. The tax administration agency in the United Kingdom 
measured administrative costs for the VAT to be 0.55 percent of revenue 
collected compared to 1.27 percent for income tax. Officials at the New 
Zealand Inland Revenue Department also told us that administering their 
VAT was easier than administering some of their other taxes. Adding 
complexity through exemptions, exclusions, and reduced rates, which can 
exist in other tax systems, generally decreases revenues and increases 
compliance risks, administrative costs, and compliance burden. All of 
our study countries do not fully include certain goods and services, 
such as food, health care, commercial property, and sales of religious 
and cultural services in the tax base for social, political, or 
administrative reasons. Two of our study countries, France and the 
United Kingdom, collected less than half of the revenue potentially 
collectible, due in part to preferential treatment of certain sectors 
and noncompliance. Adding complexity also increases the risk of 
noncompliance because of the incentive to avoid tax by misclassifying 
goods or services as exempt or excluded. For example, in Australia and 
Canada, where certain food items are not taxed, businesses need to 
accurately categorize their sales as taxable or nontaxable. 

Canada's experience demonstrates that, while multiple consumption tax 
arrangements in a federal system are possible, such arrangements create 
additional administrative costs and compliance burden for governments 
and businesses. Canada is the only one of our study countries with 
multiple consumption tax systems across the provinces that include: 

* separate federal and provincial VATs administered by a province 
(Quï¿½bec), 

* joint federal and provincial VATs administered by the federal 
government, 

* separate federal VAT and provincial RSTs administered separately, 
and: 

* a federal VAT only. 

Tax system complexity and compliance burden in Canada vary among 
provinces depending on the level of coordination between the provinces 
and the federal VAT. Businesses in provinces where the provincial and 
federal VATs tax the same goods and services and are administered by 
the federal government have less compliance burden since they only have 
to comply with one set of requirements. 

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. Despite the preexisting structure, implementation of the 
new tax in these countries involved multiple agencies, the development 
of new policies and processes, and the hiring of additional staff. The 
countries took 15 to 24 months to implement the VAT with a great deal 
of time and effort devoted to education activities. For example, 
Australian officials said a key part of their education and outreach 
strategy was to target key players in various industry sectors, such as 
local chambers of commerce. 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. Despite significant efforts to 
encourage businesses to submit materials early for VAT registration, 
both Australia and Canada still had difficulty getting businesses to 
register prior to the VAT implementation date. In both countries, this 
resulted in significant spikes in registration and education-related 
workload just prior to implementation. In Canada, for example, only 
500,000 or 31 percent of the 1.6 million total registrants had 
voluntarily registered 3 months prior to VAT implementation. 

Background: 

VATs are taxes levied on the difference between a business's sales of 
goods and services to consumers or other businesses and its purchases 
of goods and services. Thus, businesses pay tax on the value they add 
to the goods and services they purchase from other businesses. All 
types of businesses, not just retail businesses, are subject to the 
tax, and sales to both consumers and other businesses are taxable. 

VAT liability is typically calculated in industrialized countries using 
the credit-invoice method.[Footnote 7] Businesses apply the VAT rate to 
their sales but claim a credit for VAT paid on purchases of inputs from 
other businesses (shown on purchase invoices). The difference between 
the VAT collected on sales and the credit for VAT paid on input 
purchases is remitted to the government. 

Figure 1 illustrates a VAT with a 10 percent rate. A lumber company 
cuts and mills trees and has sales of $50 to a furniture maker. 
Assuming no input purchases from other businesses to keep the 
illustration simple, the company adds the tax to the price of the goods 
sold and remits $5 in tax to the government. The purchase invoice 
received by the furniture maker would list $50 in purchases plus $5 in 
VAT paid. 

Figure 1: Example of How a VAT Works: 

[See PDF for image] 

This figure is an illustration of how a VAT works. The following 
information is illustrated: 

Lumber Company: 
Raw materials sold to furniture maker for $50 plus $5 VAT; 
$5 remitted to government. 

Furniture maker: 
Table sold to retailer for $120 plus $12 VAT; 
$7 remitted to government ($12 VAT minus $5 credit). 

Retailer: 
Product sold to consumer for $150 plus $15 VAT; 
$3 remitted to government ($15 VAT minus $12 credit). 

Final consumer: 
Receives product. 

Total government revenue: 
$5 from lumber company; 
$7 from Furniture maker; 
$3 from Retailer. 

Source: GAO. 

[End of figure] 

If the furniture maker has sales of $120 to a retail store, $12 of VAT 
would be added to the sales price but the furniture maker could 
subtract a credit for the $5 VAT paid on purchases and remit $7 to the 
government. The retailer would receive an invoice showing purchases of 
$120 and $12 of VAT. 

Similarly, if the retailer then has sales of $150, $15 of VAT would be 
added but the retailer could subtract a credit for the $12 paid on 
purchases and remit $3 to the government. 

In total, the government would receive VAT equal to 10 percent of the 
final sales price to consumers. Thus, a 10 percent VAT is equivalent to 
a 10 percent RST in terms of revenue. Figure 2 illustrates a RST. Under 
both taxes, the final consumer ultimately bears the economic burden of 
the tax ($15). 

Figure 2: Example of How a RST Works: 

[See PDF for image] 

This figure is an illustration of how a RST works. The following 
information is illustrated: 

Lumber Company: 
Raw materials sold to furniture maker for $50. 

Furniture maker: 
Table sold to retailer for $120. 

Retailer: 
Product sold to consumer for $150; 
$15 remitted to government. 

Final consumer: 
Receives product. 

Total government revenue: 
$15 from Retailer. 

Source: GAO. 

[End of figure] 

A major distinction between these two types of consumption taxes is the 
number of businesses responsible for collecting and remitting tax. A 
VAT widens the number of businesses collecting and remitting the tax. 
However, unlike a RST, businesses do not have to verify the status of 
the customer as either a business or a final consumer. 

Consumption taxes can be administered in a number of different ways--as 
the previous examples of a VAT and RST demonstrate--but are intended to 
tax expenditures on goods and services rather than total 
income.[Footnote 8] The part of a final consumer's income that is saved 
is not subject to current taxation under a consumption tax. 

Spread of VAT around the World: 

A VAT was developed and first introduced in France in 1954.[Footnote 9] 
According to an estimate by the OECD, a VAT is now imposed in 
approximately 136 countries, including every OECD country except the 
United States. Every OECD country that imposes a VAT also has income 
taxes. 

VATs provide a significant amount of revenue. For example, in 2003, VAT 
revenues accounted for approximately 18 percent of total tax revenues 
collected in OECD countries with a VAT. As figure 3 shows, 2005 tax 
revenues from a VAT range from just over 10 percent in Canada to more 
than 23 percent in New Zealand. However, personal and corporate income 
taxes account for a larger percentage of total revenues than a VAT in 
all of the study countries. 

Figure 3: Revenues by Tax Type in Selected OECD Countries (2005) and 
Year of VAT Introduction: 

[See PDF for image] 

This figure is a stacked vertical bar graph depicting the following 
data: 

Country: Australia (2000); 
Value-added taxes: 13.03%; 
Personal and corporate income tax: 59.05%; 
Social funds: 0%; 
Other taxes: 27.92%; 
Total: 100%. 

Country: Canada (1991); 
Value-added taxes: 10.02%; 
Personal and corporate income tax: 47.47%; 
Social funds: 14.83%; 
Other taxes: 27.68%; 
Total: 100%. 

Country: France (1968);	
Value-added taxes: 16.57%; 
Personal and corporate income tax: 23.52%; 
Social funds: 37%; 
Other taxes: 22.91%; 
Total: 100%. 

Country: New Zealand (1986); 
Value-added taxes: 23.81%; 
Personal and corporate income tax: 62.97%; 
Social funds: 0%; 
Other taxes: 13.22%; 
Total: 100%. 

Country: United Kingdom (1973);	
Value-added taxes: 18.63%; 
Personal and corporate income tax: 38.46%; 
Social funds: 18.84%; 
Other taxes: 24.07%; 
Total: 100%. 

Country: United States (NA); 
Value-added taxes: 0%; 
Personal and corporate income tax: 46.58%; 
Social funds: 24.67%; 
Other taxes: 28.85%; 
Total: 100%. 

Source: OECD. 	 

Note: The "other taxes" category is comprised of various federal, 
state, and local government taxes that vary in nature and relevant 
magnitude from country to country. For example, in the case of the 
United States, this includes excise taxes, property taxes, use taxes, 
and state and local sales taxes. 

[End of figure] 

The Current U.S. Tax System: 

The current federal tax system in the United States consists primarily 
of five types of taxes: (1) personal income taxes; (2) corporate income 
taxes; (3) social insurance taxes (employee and employer contributions 
for Social Security, Medicare, and unemployment compensation); (4) 
estate and gift taxes; and (5) other taxes such as excise taxes on 
selected goods and services including fuel, tobacco, alcohol, and 
firearms. At the state and local levels, the important taxes are 
income, retail sales, and property. 

Estimates of the total burden placed on businesses to comply with these 
taxes are uncertain because neither the government nor businesses 
maintain regular accounts of these costs and many important elements of 
the costs are difficult to measure because, among other things, federal 
tax requirements often overlap with recordkeeping and reporting that 
businesses do for other purposes. However, based on a review of studies 
by others, we reported that individual and corporate compliance costs 
are approximately 1 percent of gross domestic product (GDP) when using 
the lowest available and incomplete estimates. Other studies estimate 
the costs to be as high as 1.5 percent of GDP.[Footnote 10] 

IRS estimates the gross tax gap--the difference between what taxpayers 
actually paid and what they should have paid on a timely basis--to be 
$345 billion for tax year 2001. IRS also estimates that it will collect 
$55 billion, leaving a net tax gap of $290 billion. 

IRS's budget for fiscal year 2008 is $10.9 billion. In administering 
the tax laws, IRS's two main functions are to provide (1) service to 
individual and business taxpayers--including responding to telephone 
queries and providing Web services, and (2) enforcement activities-- 
including examinations and collections. Major examination efforts 
include computerized matching of third-party information with tax 
returns as well as audits. 

Criteria for Evaluating Tax Systems: 

In a 2005 report, we describe the criteria typically used for 
evaluating tax systems as (1) equity; (2) economic efficiency; and (3) 
simplicity, transparency, and administrability. [Footnote 11] A tax 
system is generally considered better than alternatives that raise the 
same amount of revenue if it is more equitable, more economically 
efficient, simpler for taxpayers to comply with, and easier and less 
costly to administer. Designing a tax system that is superior on each 
of these criteria is difficult because the criteria frequently conflict 
with one another and trade-offs often must be made. For example, a tax 
system that provides credits to low-income individuals may be judged by 
some to be more equitable than a system without this feature. However, 
if including credits makes it necessary for more individuals to 
calculate their income and file tax returns, the tax system could 
become more complex, thus decreasing its transparency to taxpayers and 
increasing the costs of administration. As noted earlier, in this 
report we focus on the third of the above criteria. 

Like Other Taxes, VATs Have Compliance Risks, Administrative Costs, and 
Compliance Burden That Increase with the Complexity of the Design: 

VAT design choices include whether to exempt specific goods and 
services such as real estate and health care and specific entities such 
as small businesses, nonprofits, and governments from tax. Such design 
choices generally result in decreased tax revenue and increased 
compliance risks. 

A Conceptually Simple VAT Design Has Compliance Risks and Generates 
Significant Administrative Costs and Compliance Burden: 

Our study countries' experiences with noncompliance suggest that even a 
conceptually simple VAT would have compliance risks and would generate 
significant administrative costs and compliance burden. A conceptually 
simple VAT would have a single rate that applies to all goods and 
services and is outlined in table 1.[Footnote 12] 

Table 1: Elements of a Conceptually Simple VAT System: 

Element: Single tax rate; 
Definition: One rate applies to the tax base. 

Element: Broad, nonexclusionary tax base; 
Definition: All goods and services are subject to the VAT, including 
financial transactions and real estate. 

Element: All business, government, and nonprofit entities are taxed; 
Definition: All entities are subject to paying VAT on purchases and 
required to charge VAT on qualifying sales of goods and services. 

Element: Destination principle; 
Definition: Goods and services are subject to taxation in the 
jurisdiction in which they are consumed. Therefore, imports are subject 
to VAT in the importing country, and exports are excluded from the 
domestic tax base. 

Element: Credit-invoice mechanism; 
Definition: Tax calculations are based on valid invoices and sales 
receipts for each transaction by subtracting the taxes paid on all 
input purchases from taxes collected on all output sales. 

Source: GAO analysis. 

[End of table] 

Compliance Risks: 

All of the countries we studied faced compliance risks that are 
associated with the elements of a conceptually simple VAT. Compliance 
risks for a VAT can stem from either underpayment of taxes owed on 
sales, or overstating taxes paid on purchases.[Footnote 13] Table 2 
shows major types of VAT compliance risks for a conceptually simple 
VAT. Although the countries we studied had VATs that varied in 
complexity and consequently faced a range of additional compliance 
risks, they all reported that addressing risks outlined in table 2 is 
an important part of their overall compliance efforts. 

Table 2: Major Types of Compliance Risks in a Conceptually Simple VAT 
System: 

Compliance risks: Undercollection of tax due on sales: Missing trader 
fraud: 
A business is created for purposes of collecting VAT on sales and 
disappears without remitting VAT to the government. 

Compliance risks: Overclaiming of tax paid on inputs: Fraudulent 
refunds; 
A business or fraudster submits false returns requesting VAT refunds 
from the government. 

Compliance risks: Undercollection of tax due on sales: Failed 
businesses: 
A business fails or goes bankrupt before remitting VAT collected to the 
government. 

Compliance risks: Overclaiming of tax paid on inputs: Misclassifying 
purchases: 
A business falsely claims input tax credits by misclassifying personal 
consumption expenses as business expenses. 

Compliance risks: Undercollection of tax due on sales: Underreporting 
cash transactions: 
A business either charges a lower, VAT-free price for cash transactions 
or underreports cash sales and retains VAT collected. 

Compliance risks: Overclaiming of tax paid on inputs: Fictitious or 
altered invoices: 
A business creates or alters invoices to inflate the amount of input 
tax credits they can claim. 

Compliance risks: Undercollection of tax due on sales: Import fraud: 
A business or individual imports items for personal consumption and 
under values them for VAT purposes. 

Compliance risks: Overclaiming of tax paid on inputs: Export fraud: 
A business creates fraudulent export invoices for goods that are not 
exported to claim input tax credits. 

Source: GAO analysis. 

[End of table] 

The VAT compliance risks in table 2 are shared to varying extents with 
an income tax or RST. For example, underreporting cash transactions is 
a compliance issue for the income tax and RST in the United States. 
Similarly, failed businesses can be a problem if income tax payroll 
withholdings or RST collected on sales are used to finance business 
operations rather than being remitted to the government before the 
business fails. 

A VAT's reliance on credits and refunds makes the tax more susceptible 
than an income tax or RST to the compliance risks of fraudulent refund 
claims. Fraudulent refund claims could exist under a conceptually 
simple VAT and are a particular concern for all of our study countries. 
Businesses in the position of paying more VAT on purchases than they 
receive through sales are entitled to a refund. Businesses in a 
legitimate refund position tend to be start-up companies or exporters, 
neither of whom may have taxable sales. All of our study countries were 
concerned that illegitimate businesses or fraudsters submitting 
fraudulent refund claims could result in theft of funds from the 
treasury through false paperwork. Because of the significance of this 
threat, our study countries reported that auditing refund claims is an 
important enforcement activity. 

Missing trader fraud would be another problem under a conceptually 
simple VAT and was another common compliance issue for our study 
countries. Missing trader fraud is a challenge in a VAT because 
fraudsters may set up a business for the sole purpose of collecting VAT 
on sales and then disappear with the proceeds. When a missing trader 
walks away with the proceeds, the buyer still has an input tax invoice 
showing VAT paid and is entitled to an input credit. In some countries, 
imports are particularly susceptible to missing trader fraud, which is 
discussed in more detail in appendix V in the context of challenges of 
carousel fraud in the European Union.[Footnote 14] 

VATs avoid some of the compliance risks of other tax systems. For 
example, under a RST, sellers must determine whether the buyer is a 
taxable consumer or has a valid exemption certificate. Improper or 
fraudulent use of these certificates reduces RST revenue. Under an 
income tax, businesses must comply with complex depreciation rules, 
which can result in misclassification of assets and tax calculation 
errors. 

Administrative Costs: 

The drivers of administrative costs in many tax systems include the 
number of taxpayers (businesses, individuals, or both) subject to the 
tax, how often they file returns, and the percentage of taxpayers 
audited. In the case of a VAT, administration requires the government 
to process tax returns and provide certain services to businesses. Even 
a simple VAT warrants education and assistance services, in part, to 
address compliance risks. Tax administrators also need to spend 
significant resources on audit and enforcement activities. We estimated 
in a 1993 report that over 70 percent of annual administrative costs 
for a VAT would be compliance-related.[Footnote 15] 

Additionally, even in the case of a conceptually simple VAT, a 
mechanism is needed to assess VAT on imports as they enter the country. 
In the case of New Zealand, 62 percent of total customs revenue in 2006-
2007 was expected to come from VAT on imports. In all of our study 
countries, the agency responsible for monitoring trade border activity 
was also responsible for collecting VAT on imports. With the exception 
of the United Kingdom, this agency was not part of the tax 
administration agency. 

Some data indicate that a VAT may be less expensive to administer than 
an income tax. HM Revenue & Customs (HMRC) in the United Kingdom 
estimated in 2006 that collection costs for the VAT were approximately 
0.55 percent of revenue collected, compared to 1.27 percent for income 
tax collection costs. According to European Commission officials, VATs 
in Europe cost between 0.5 percent and 1 percent of VAT revenue 
collected to administer. In addition, officials at the New Zealand 
Inland Revenue Department (IRD) told us that administering their VAT 
has been easier than administering some of their other taxes, including 
their income tax. For example, only 3 percent of VAT returns are 
submitted to IRD with errors that require IRD intervention, compared to 
approximately 25 percent for income tax returns. 

Compliance Burden: 

Under a VAT, as with other taxes, compliance burden is mostly driven by 
record-keeping requirements, filing frequency requirements, and time 
and resources to deal with audits. Three studies conducted between 1986 
and 1992, the most comparable studies we identified, estimated that 
compliance burden as a percentage of annual sales by size of business 
in Canada, New Zealand, and the United Kingdom ranged from 
approximately 2 percent for businesses with less than $50,000 in sales 
to as low as 0.04 percent for businesses with over $1,000,000 in sales. 
The 'fixed cost' nature of many compliance costs associated with a VAT 
and ensuing economies of scale--whereby average costs fall as business 
size increases--means that smaller businesses often face a 
proportionally higher burden than larger businesses in complying with 
the VAT. Private accounting and tax professionals we spoke with also 
agreed that as the size of the business grows, the VAT compliance 
burden decreases per dollar of sales. 

Businesses that operate in multiple countries face additional burden, 
as they would need to understand the rules and rates in each of the 
countries where they operate. Even if multiple countries had 
conceptually simple VATs, they would likely have different VAT rates, 
forms, and rules for remitting VAT to tax authorities. For example, 
businesses in the European Union may operate in multiple member 
countries, and therefore would need to register with each relevant tax 
authority to collect and remit the VAT, increasing compliance burden. 

Preventing fraudulent VAT refunds presents a trade-off between 
minimizing compliance burden and minimizing the risk of issuing a 
fraudulent refund. Although the risk of fraudulent refunds can be 
reduced by allowing tax inspectors more time to verify the validity of 
VAT refunds, legitimate businesses suffer financially if their VAT 
refunds are delayed. Businesses can face a competitive disadvantage and 
cash flow difficulties if valid VAT refunds are not paid promptly. In 
the countries we studied, tax administrators had a service standard for 
a specified number of days to process and pay VAT refunds before they 
were required to pay the business interest on the refund request. Some 
examples are shown in table 3. 

Table 3: VAT Refund Timing and Performance for Three OECD Countries: 

Days allowed for returns and refund processing: 
Australia[A]: 14; 
Canada[B]: 21; 
New Zealand[B]: 15. 

Percent of refunds processed on time: 
Australia[A]: 93.6; 
Canada[B]: 98; 
New Zealand[B]: 96.2. 

Sources: Australian Taxation Office; Canada Revenue Agency; New Zealand 
Inland Revenue Department. 

[A] Data are from tax years 2006-2007. 

[B] Data are from tax years 2005-2006. 

[End of table] 

The compliance burden on businesses may be partially offset by certain 
features of a VAT. Businesses that usually operate in a net debit 
position, meaning they remit VAT to the government at each reporting 
period, have cash flow benefits for the period of time between VAT 
collection and remittance. A 1994 study by the National Audit Office in 
the United Kingdom estimated that the cash flow benefit of the VAT 
reduced the overall gross compliance burden by almost 40 percent. Some 
VAT experts have also suggested that VAT requirements can have a 
positive effect on small businesses by forcing the businesses to 
improve their internal accounting and record-keeping. 

Adding Complexity through VAT Preferences, Including Exemptions, 
Exclusions, and Reduced Rates for Goods and Services, Decreases Revenue 
and Generally Increases Compliance Risks, Administrative Costs, and 
Compliance Burden: 

All of the countries we studied have added complexity to their VAT 
designs, mainly through the use of tax preferences. Tax preferences-- 
also called tax expenditures--result in foregone tax revenue due to 
preferential provisions that generally shrink the tax base. Such 
preferences can also exist in other tax systems, such as income taxes 
or RSTs. Countries' use of preferences--such as exemptions and reduced 
rates--generally results in reduced revenue and greater compliance 
risks, administrative costs, and compliance burden.[Footnote 16] 
However, some preferences, such as thresholds for businesses, may not 
increase administrative costs and compliance burden because they reduce 
the number of entities subject to VAT requirements. Additionally, in 
most study countries, certain financial services and real estate 
transactions are exempt for administrative purposes. Table 4 describes 
some VAT design choices and their application in our five study 
countries. 

Table 4: VAT Design Choices and Their Use in Study Countries: 

Design choice: Tax base: 
Exempt: good or service; (input taxed); 
Definition: Exempt goods and services are not charged VAT when sold. 
Businesses that sell exempt goods or services neither collect VAT on 
the sale nor recover VAT paid on inputs. 
Study country use of design choices[A]: Australia: 5 categories; 
Example: Residential rent; 
Study country use of design choices[A]: Canada: 16; Example: Legal aid; 
Study country use of design choices[A]: France: 18; Example: Hospital 
and medical care; 
Study country use of design choices[A]: New Zealand: 4; Example: 
Donated goods and services sold by a nonprofit organization; 
Study country use of design choices[A]: United Kingdom: 21; Example: 
Education. 

Design choice: Tax base: 
Exclude: good or service (zero-rate or tax free); 
Definition: Zero-rated goods are wholly excluded from the tax base. 
Businesses apply a zero rate to the sale of the good or service and 
reclaim VAT paid on inputs; 
Study country use of design choices[A]: Australia: 13 categories; 
Example: Child care; 
Study country use of design choices[A]: Canada: 7; Example: Basic 
groceries; 
Study country use of design choices[A]: France: 0; 
Study country use of design choices[A]: New Zealand: 4; Example: 
Certain sales of gold, silver, or platinum; 
Study country use of design choices[A]: United Kingdom: 13; Example: 
Children's clothing. 

Design choice: Tax base: 
Exempt: businesses (thresholds); 
Definition: Thresholds are a minimum level of sales activity a business 
can generate before being required to collect and remit the VAT. In 
practice, thresholds exempt smaller businesses from the VAT system; 
Study country use of design choices[A]: Australia: Australia: A$75,000 
[B]; $53,426; USD[C]; 
Study country use of design choices[A]: Canada: Can$30,000; $24,406; 
Study country use of design choices[A]: France: ï¿½76,300; $85,995; 
Study country use of design choices[A]: New Zealand: NZ$40,000; 
$27,038; 
Study country use of design choices[A]: United Kingdom: ï¿½64,000; 
$103,243. 

Design choice: Tax rate: Multiple tax rates; 
Definition: Multiple tax rates include a standard rate and one or more 
other non-zero rates that are applied to specific goods or services. 
Typically higher rates are typically applied to luxuries and reduced 
rates are often applied to necessities; 
Study country use of design choices[A]: Australia: 10%; standard rate; 
N/A reduced rates; 
Study country use of design choices[A]: Canada: 5%; N/A reduced rates; 
Study country use of design choices[A]: France: 19.6%; 5.5%; 2%; 
Study country use of design choices[A]: New Zealand: 12.5%; 7.5%[D]; 
Study country use of design choices[A]: United Kingdom: 17.5%; 5%. 

Sources: OECD, GAO analysis. 

[A] For a list of which goods and services are subject to exemption, 
zero rating or reduced rating, see appendix II. 

[B] The thresholds listed are the standard threshold for each country 
as of January 1, 2008 and are expressed in each country's domestic 
currency. Some countries have other thresholds that apply to specific 
types of organizations, such as nonprofit organizations. 

[C] Thresholds shown in 2008 U.S. dollars were calculated using 
purchasing power parity conversion rates. 

[D] Long-term stays in a commercial dwelling, such as a hotel or 
nursing home, are taxed at the standard rate on 60 percent of the total 
sale, making an effective reduced rate of 7.5 percent. 

[End of table] 

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. By exempting a good or service, 
the government still collects tax revenue throughout the other stages 
of production because only the exempt sale is not taxed. Tax is paid 
and collected on inputs. On the other hand, excluding a good or 
service, more commonly referred to as zero rating, removes it from the 
tax base by charging an effective tax rate of zero on the final sale to 
the consumer. For goods and services that are zero-rated, VAT that was 
paid in the production of a good or service that is not subject to VAT 
when sold to the final consumer can be fully recovered through input 
tax credits. As a consequence, no net VAT revenue is actually collected 
by the government from the sale of zero-rated goods and services. 

A threshold is a type of exemption that excludes certain businesses 
from collecting and remitting the VAT and from being able to claim 
input tax credits. Businesses with sales below the threshold do not 
charge VAT on their sales and do not claim input tax credits for VAT 
paid on purchases. Businesses with annual sales above the threshold 
level are required to register with the tax agency, and collect and 
remit the VAT. 

Countries Vary in the Application of VAT to Specific Sectors, Including 
Food, Health Care, the Public Sector, Financial Services, and Real 
Estate: 

In our study countries, some economic sectors, such as certain consumer 
essentials like food and health care and public sector organizations 
are often provided VAT preferences because of social or political 
considerations. Other sectors, such as financial services, insurance, 
and real estate, are provided exemptions or exclusions because they are 
inherently hard to tax under a VAT system. Tables 5 through 9 show how 
each of our study countries has applied a VAT to various economic 
sectors. 

Table 5: VAT Treatment of Select Consumer Essentials--Food and Health 
Care: 

Food: 
Australia: Basic and unprocessed food is zero-rated; 
Canada: Basic groceries are zero-rated; 
France: Most food and nonalcoholic beverages are taxed at the reduced 
rate of 5.5%; 
New Zealand: Food is taxed at the standard rate of 12.5%; 
United Kingdom: Food is zero-rated. 

Health Care: 
Australia: Most health care is zero-rated; 
Canada: Medicines and medical devices are zero-rated. Medical and 
hospital care are exempt; 
France: Medicines are subject to a reduced rate of either 5.5% or 2.1%. 
Medical and hospital care are exempt; 
New Zealand: Health care is taxed at the standard rate of 12.5%; 
United Kingdom: Prescription drugs and medicines are zero-rated. 
Medical and hospital care are exempt. 

Sources: OECD, GAO Analysis. 

[End of table] 

According to some VAT experts we spoke with, consumer essentials, such 
as food and health care, are often provided VAT preferences for social 
policy reasons. Study country data indicate that zero-rating basic 
groceries and food reduced VAT revenues by approximately 11 percent in 
Canada and 12 percent in the United Kingdom in 2004. Another way Canada 
offsets the burden of the VAT on low-income households is through 
rebates that are administered through the income tax system, whereby 
individuals or families with income that falls within certain limits 
receive quarterly payments aimed at relieving their overall VAT burden. 

Table 6: VAT Treatment of Public Sector, Nonprofit, and Charitable 
Entities for Selected Countries: 

Public sector entities (including subnational governments): 

Australia: 
VAT treatment of goods and services is the same as the private sector. 

Canada: 
Partial exemptions applied depending on goods and services supplied; 
Subnational governments are granted a full to partial rebate of input 
taxes paid on exempt sales depending on the type of organization.[A] 

France: 
Complex rules apply when determining whether certain goods or services 
are taxable or exempt when provided by the public sector.[B] VAT rules 
in EU countries must follow the VAT 6th Council Directive [C]. Partial 
rebates of input taxes paid on certain exempt activities. 

New Zealand: 
VAT treatment of goods and services is the same as private sector. 

United Kingdom: 
Complex rules apply when determining whether certain goods or services 
are taxable or exempt when provided by the public sector.[B] VAT rules 
in EU countries must follow the VAT 6th Council Directive[C]. Local 
authorities eligible for rebates on certain exempt activities. 

Nonprofit and charitable organizations: 

Australia: 
VAT treatment of goods and services is the same as the private sector. 
Subject to a special registration threshold of A$150,000 (US$106,853). 
Certain activities, such as sale of donated or undervalued goods and 
services, are zero-rated. 

Canada: 
Partial exemptions applied depending on goods and services supplied. 
Subject to a special registration threshold of Can$50,000 (US$40,676). 
Qualifying organizations are entitled to a 50 percent rebate for input 
VAT for exempt activities.[A] 

France: 
Exemptions granted for certain goods and services such as health care 
and education. 

New Zealand: 
VAT treatment of goods and services is the same as the private sector. 
Certain activities, such as sale of donated or undervalued goods and 
services, are exempt. 

United Kingdom: 
Exemptions granted for certain goods and services such as health care 
and education. 

Source: GAO analysis of information from selected countries and 
academic research. 

[A] Canada's treatment of the public sector and nonprofits is similar 
to that of Australia and New Zealand; however, unlike those countries 
Canada exempts large sectors of the economy, such as health care and 
education. It provides rebates to certain subnational and nonprofit 
entities to offset some of the VAT paid on goods and services purchased 
to provide these exempt activities. 

[B] Public bodies are required to charge VAT on business sales, which 
are sales that are determined to be competing with the private sector. 
According to Schenk, Oldman, Value Added Tax: A Comparative Approach, 
2007, and Note from the National Audit Office of the United Kingdom: 
Value-added Tax in the Public Sector much of the complexity in applying 
VAT to the public sector in EU countries occurs when differentiating 
between business and nonbusiness activities of public sector entities. 

[C] State, regional and local government authorities in EU countries do 
not charge VAT on their supplies of goods and services, except where it 
would lead to significant distortions of competition, or when the 
government carries out certain specified activities such as the supply 
of telecommunication services. 

[End of table] 

In many cases, the goods and services supplied by public sector, 
nonprofit, and charitable organizations are treated as final 
consumption by the organization itself rather than consumption by 
consumers. Consequently, these entities often charge no VAT on outputs 
but pay VAT on purchases. As described below, the treatment is 
sometimes due to the lack of a transaction and sometimes because of 
choices to exclude socially desirable goods or services from tax. The 
activities of all these entities can, typically, be placed in one of 
the three following categories: 

Transfer payments redistribute income and wealth: Such transfers do not 
involve a sales transaction, and therefore, do not constitute a taxable 
supply of a good or service. However, public sector or nonprofit 
organizations that manage these transfer mechanisms would, absent a VAT 
preference, pay VAT on their acquisition of taxed goods and services. 

Provision of goods and services that is not transaction-based: often 
occurs when it is difficult or impossible to measure consumption by the 
individual. Examples of these types of goods and services include 
national defense, street lighting, and environmental protection. Like 
transfer payments, the purchases made to produce these goods and 
services are measurable and would be subject to VAT, absent VAT 
preferences. 

Provision of goods and services that is transaction-based: includes 
toll roads, libraries, museums (when entrance fees are charged), 
electric and water utilities, postal services, and health care and 
education services. In some cases, such goods and services may not be 
taxed because they are seen as socially desirable. In other cases, they 
may be taxed in order to avoid unfair competition with other entities. 

The study countries differ in how they treat the public sector under 
the VAT. For example, France and the United Kingdom exempt governments, 
taxing only those activities that are in direct competition with 
commercial businesses. They apply the basic rule that if the activity 
is taxable when it is provided by private firms, it should similarly be 
taxable when provided by governmental units. New Zealand and Australia, 
on the other hand, tax the purchase and sale of all goods and services 
by governments, unless explicitly exempted or zero-rated. 

There are some differences in how the study countries treat the 
nonprofit sector under the VAT. Unlike Australia and New Zealand, 
Canada, France, and the United Kingdom exempt certain goods and 
services that nonprofit organizations often provide such as education 
and health care. Therefore, these organizations must pay VAT on 
purchases but are unable to charge VAT on sales. A rebate mechanism is 
used in Canada, through which qualifying organizations recoup fifty 
percent of the VAT paid on purchases used to produce exempt goods ands 
services. For additional specific examples of Australia and Canada's 
treatment of government entities and nonprofit organizations, see 
appendix III. 

Table 7: VAT Treatment of Financial Services and Insurance: 

Financial services: 

Australia: 
Financial services are exempt. Australia has apportionment guidance for 
banks. 

Canada: 
Financial services are exempt. Canada has proposed apportionment 
guidance for banks. Quï¿½bec's provincial VAT zero rates financial 
services. 

France: 
Financial services are exempt. 

New Zealand: 
Certain business-to-business financial transactions are zero-rated. 
Other financial services are exempt. New Zealand has apportionment 
guidance for banks. 

United Kingdom: 
Financial services are exempt. 

Insurance and reinsurance: 

Australia: 
Insurance and reinsurance are taxed at the standard rate of 10%, except 
health and life insurance which are zero-rated. 

Canada: 
Insurance and reinsurance are exempt. 

France: 
Insurance and reinsurance are exempt. 

New Zealand: 
Life insurance and reinsurance are exempt. All other insurance policies 
are taxed at the standard rate of 12.5%. 

United Kingdom: 
Insurance and reinsurance are exempt. 

Source: OECD, and GAO analysis. 

[A] Apportionment guidance for banks and other financial services firms 
by tax authorities are usually approved methodologies for calculating 
the portion of the bank's or financial services firm's total input 
taxes paid that they can claim as credits. 

[End of table] 

Financial services and insurance are generally considered hard to tax 
because it is difficult to distinguish between the provision of a 
service (consumption) and return on investment. For example, deposits 
represent deferred consumption and interest earned on a deposit account 
is generally considered return on investment, not consumption.[Footnote 
17] The intermediary services of a bank are consumed and should be 
subject to VAT; however, there is often no explicit charge for the 
financial intermediation services that are provided. Instead, banks 
often pay depositors less interest than they charge borrowers and the 
difference covers the cost of the intermediation service. Some of the 
countries studied exempt financial services and have apportionment 
method guidelines for banks to recover some of the VAT paid on inputs. 
New Zealand allows zero rating of business-to-business financial 
services. The United Kingdom estimated the exemption of financial 
services and insurance reduced net VAT revenues collected by 
approximately 5 percent in 2006. For additional information about 
financial services and insurance, see appendix IV. 

Table 8: VAT Treatment of Real Estate: 

Commercial property: 

Australia: 
Sales and leases of commercial property are taxed at the standard rate 
of 10%. 

Canada: 
Sales and leases of commercial property are taxed at the standard rate 
of 5%. 

France: 
Leases of commercial property are taxed at the standard rate of 19.6%. 
Sales of commercial property are exempt. 

New Zealand: 
Sales and leases of commercial property are taxed at the standard rate 
of 12.5%. 

United Kingdom: 
Newly constructed commercial property is taxed at the standard rate of 
17.5% for the first 3 years from completion date. Sales and leases of 
existing commercial property are exempt, but the supplier retains the 
option to tax. 

Residential property: 

Australia: 
Newly constructed residential property is taxed at the standard rate of 
10%. Sales and leases of existing residential property are exempt. 

Canada: 
Newly constructed or substantially renovated residential property is 
taxed at the standard rate of 5%. Sales and leases of existing 
residential property are exempt. 

France: 
Sales of existing residential property are exempt. Sales of newly 
constructed (in past 5 years) or substantially renovated residential 
property are taxed at the standard rate of 19.6%. Leases of residential 
property are mostly exempt. 

New Zealand: 
Leases of residential property are exempt. Sales of residential 
property by registered entities are taxed at the standard rate of 
12.5%. 

United Kingdom: 
Sales of residential property are zero-rated. Leases of residential 
property are exempt. 

Source: OECD, and GAO analysis. 

[End of table] 

Real estate, like other long-lived assets, is considered hard to tax 
under a VAT. Long-lived assets, such as residential housing, are a mix 
of consumption, as the residence is currently lived in, and savings, as 
the residence provides future housing consumption. Since consumption 
occurs over many years, taxing the full price of a new house would 
amount to taxing the present value of the stream of future housing 
services the house will provide. Consequently, taxing the full price of 

future sales of existing residential houses without providing input tax 
credits to homeowners would result in double taxation on the house. In 
such a situation, exempting the sale of existing residential property 
would not be a tax preference under a VAT. 

Tax administrators and tax professionals we spoke with in Australia and 
New Zealand told us that they face compliance challenges with real 
estate transactions because the rules are complex and some businesses 
are unfamiliar with them, as real estate transactions are not a part of 
their normal business operations. A particular challenge arises with 
dual use properties, such as a building with both commercial and 
residential space, that are subject to different sets of VAT rules. 
According to IRD officials in New Zealand, one quarter of all tax and 
VAT discrepancies involving small and medium businesses in 2007 arose 
from property transactions. For additional information on real estate, 
see appendix IV. 

Table 9: VAT Treatment of Select Socially Desirable Goods and Services: 

Books: 

Australia: 
Books are taxed at the standard rate of 10%. 

Canada: 
Books are taxed at the standard rate of 5%. (The Quï¿½bec provincial VAT 
effectively zero rates books.) 

France: 
Books are subject to a reduced rate of 5.5%. 

New Zealand: 
Books are taxed at the standard rate of 12.5%. 

United Kingdom: 
Books are zero-rated. 

Fee-for-service cultural and religious services: 

Australia: 
Cultural services are taxed at the standard rate of 10%, with the 
exception of religious services which are zero-rated. 

Canada: 
Cultural and religious services are exempt. 

France: 
Cultural and religious services are exempt. 

New Zealand: 
Cultural and religious services are taxed at the standard rate of 
12.5%. 

United Kingdom: 
Cultural and religious services provided by public and nonprofit 
organizations are generally exempt. 

Source: OECD, and GAO analysis. 

[End of table] 

Similar to preferences in an income tax that are intended to promote 
certain activities, countries can exempt, exclude, or subject to a 
reduced rate goods and services that are deemed socially desirable. New 
Zealand does not exempt or zero rate cultural services, including 
religious services, but often these services do not involve sales and, 
therefore, no VAT would be charged. 

Tax Preferences Decrease VAT Revenue in the Study Countries: 

One measure of VAT performance being developed by the OECD is the C- 
efficiency ratio (CER). The CER is expressed as a percentage and is 
calculated by dividing total VAT revenues by national consumption times 
the standard rate for each country. The CER provides an indication of 
how much of potential VAT revenue is actually collected, so it reflects 
the extent to which both tax preferences and noncompliance reduce the 
efficiency. A high CER is usually indicative of a VAT with few 
preferences and high compliance, while a low CER usually suggests an 
erosion of the tax base through some combination of preferences and low 
rates of compliance. Figure 4 shows the CERs for our five study 
countries and the average among OECD countries. 

Figure 4: C-Efficiency Ratios of Five Study Countries and the Average 
for OECD Countries: 

[See PDF for image] 

This figure is a vertical bar graph depicting the following data: 

Country: Australia; 
C-Efficiency Ratio: 53%. 

Country: Canada; 
C-Efficiency Ratio: 67%. 

Country: France; 
C-Efficiency Ratio: 45%. 

Country: New Zealand; 
C-Efficiency Ratio: 96%. 

Country: United Kingdom; 
C-Efficiency Ratio: 46%. 

OECD Average: 
C-Efficiency Ratio: 53%. 

Source: OECD. 

[End of figure] 

Of all of Canada's and the United Kingdom's tax preferences, zero 
rating basic groceries and food have had the largest impacts on VAT 
revenues, and therefore the CER. For example, in 2004-2005, zero rating 
food in the United Kingdom cost approximately ï¿½10.2 billion, 
representing a reduction of 12 percent in total VAT revenue collected 
that year. In Canada, zero rating basic groceries in 2004 was estimated 
to cost approximately Can$3.7 billion, reducing VAT revenues by 
approximately 11.3 percent that year. New Zealand's CER is higher than 
average likely due to the VAT's broad base and few tax preferences. 
Although tax preferences are a large contributing factor to the CER, 
the CER should be viewed with caution as other factors contribute to 
the overall calculation, primarily revenue loss from noncompliance. 
Furthermore, not all VAT preferences negatively impact the CER. For 
example, although exemptions generally decrease the CER by decreasing 
the tax base, the CER may increase due to tax cascading from 
exemptions, which increases overall VAT revenue collection. 

VAT Preferences for Goods and Services Generally Increase Compliance 
Risks, Administrative Costs, and Compliance Burden: 

Although we were not able to find any direct quantitative evidence of 
how VAT complexity impacts administrative costs, tax officials and VAT 
experts said that complexity increases administrative costs and 
compliance burden and creates opportunities for noncompliance. VAT 
preferences introduce rules that apply only to a specific set of goods 
or services. Such preferences create the need to define the boundaries 
between goods and services getting different tax treatments, and may 
result in businesses misclassifying certain goods or services purchased 
or sold and reducing VAT revenue. Preferences that add complexity to 
the tax code also increase the time and resources needed for audits and 
education activities. Exemptions, reduced rates, and zero-rating also 
add to compliance burden by increasing the time and resources 
businesses must spend on accounting and record-keeping activities, in 
order to categorize their sales and purchases as fully taxable, reduced 
rated, zero-rated, or exempt. In the case of a business making both 
taxable and exempt sales, the business must also apportion its use of 
inputs and claim input tax credits only for inputs in taxable sales. 

In Canada, basic groceries are zero-rated. Basic groceries include 
unflavored milk, bread, and other nonprepared foods, but do not include 
items such as snacks. These distinctions between goods are not always 
intuitive. Changes in ingredients, packaging, and temperatures can lead 
to different VAT treatment. In Canada salted peanuts are taxable and 
plain peanuts are zero-rated. The sale of five or fewer donuts in a 
single transaction is taxable, but the sale of six or more is zero- 
rated. In Australia takeout food is taxable if it is served as a single 
item for consumption away from the place of purchase. However, hot 
fresh bread is not subject to VAT unless it has a sweet filling or 
coating, or is sold in combination, such as sausage and onion on a 
slice of bread. Businesses that sell groceries have the additional 
burden of correctly categorizing their sales and face the compliance 
risk of charging the wrong VAT rate on their sales. The Australian 
Taxation Office and Canada Revenue Agency spend administrative 
resources on maintaining the list of groceries that fit into the 
definition of zero-rated sales, and on enforcement efforts to ensure 
grocers and other businesses are properly charging the VAT on 
appropriate sales. Like the VAT, a RST also has similar classification 
problems when certain goods and services are exempted. 

For another example, in France catered food is subject to a reduced 
rate while restaurant food is taxed at the standard rate. Restaurants 
have the additional burden of categorizing their sales. According to 
French tax administrators, some restaurants overstate the catering 
portion of their business to fraudulently reduce their VAT liability. 
French tax administrators address this compliance risk through 
increased scrutiny of VAT returns filed by restaurants. 

Thresholds: 

Businesses below a threshold that do not register with tax authorities 
pay VAT on inputs but do not collect VAT on sales. A threshold exempts 
certain categories of businesses from the VAT and creates compliance 
risks by making distinctions between businesses. Businesses with sales 
slightly above the threshold may have an incentive to underreport sales 
activities to avoid being required to collect and remit VAT. But unlike 
other VAT preferences, a threshold can decrease administrative costs 
and compliance burden. Since thresholds reduce the number of businesses 
in the system, they reduce the number of returns the tax agency 
processes, the number of businesses seeking services, and the number of 
businesses that are subject to audit. A high threshold can eliminate a 
large amount of VAT administrative costs while retaining much of the 
VAT revenue. Small businesses, by their nature, would generate a 
relatively small portion of revenue in the countries we studied, but 
account for a large portion of VAT returns filed. Smaller businesses 
often face a proportionally higher burden than larger businesses in 
complying with the VAT. Exempting them from VAT collection and filing 
requirements reduces the net burden a VAT imposes. 

Although thresholds are intended to keep small businesses outside the 
VAT system, all of the countries we studied allow businesses with sales 
below the threshold to voluntarily register to collect and remit the 
VAT. Table 10 shows the percentage of registered businesses in 
Australia and Canada that are below the threshold but voluntarily 
register for the VAT. Tax administrators in Australia and New Zealand 
told us that businesses volunteer for a number of reasons, including 
wanting to claim input tax credits or misunderstanding the threshold 
requirements. In Australia, approximately one third of all VAT- 
registered businesses are below the stated threshold. They voluntarily 
register so that they can do business with larger companies. Tax 
officials told us that many larger companies will only conduct business 
with other VAT-registered businesses to make record-keeping easier. By 
purchasing goods or services only from businesses that charge VAT, 
these larger businesses can calculate input tax credits simply as a 
fixed percentage of all input costs. If they were to also purchase from 
a business that does not charge VAT, they must maintain more detailed 
records to calculate which inputs carry input tax credits and which do 
not. 

Table 10: VAT-registered Businesses with Sales below the Threshold: 

Threshold (in domestic currency): 
Australia[A]: A$75,000; 
Canada[B]: Can$30,000. 

Total VAT registered businesses: 
Australia[A]: 1,963,907; 
Canada[B]: 2,834,360. 

Percentage of registered businesses with sales below the threshold: 
Australia[A]: 31.7%; 
Canada[B]: 34.5%. 

Sources: Australian Bureau of Statistics; Canada Revenue Agency. 

[A] Data as of June 2006. 

[B] Data as of 2004. 

[End of table] 

Risk-based Audit Selection: 

All of the countries we studied devote a significant amount of 
resources to audit activities and all used a risk-based audit selection 
approach in the administration of their VAT. Risk-based audit selection 
is intended to assist tax authorities with targeting administrative 
resources on noncompliant businesses and minimizes compliance burden on 
compliant businesses by reducing their chances of facing an audit. 
Generally, risk is assessed based on automated processes that compare 
the values on the VAT return to a series of thresholds, supplemented by 
information provided by business's interactions with tax 
administrators. For example, many of our study countries told us that 
refunds above a certain threshold amount are automatically flagged as 
risky. The automated process is adjusted periodically to account for 
changes in compliance trends or VAT filing behavior. Several of our 
study countries calculate normal VAT activity averages and limits by 
industry to further strengthen risk assessment tools. For example, if 
most restaurants remit taxes each time they file a VAT return, a 
restaurant that requests a VAT refund will receive extra scrutiny. 
French officials told us that approximately 88 percent of the returns 
identified as risky and audited are ultimately reassessed. 

Because one of the major risks in VAT administration is issuing 
undeserved refunds, tax administrators pay particular attention to 
refund requests. Canadian tax administrators told us that if a 
fraudulent refund is paid, the refund recovery rate is close to zero if 
the error is later identified. When a refund request triggers an audit, 
the refund payment is delayed. This payment delay imposes additional 
burden on compliant businesses, but allows tax administrators more time 
to prevent fraudulent refunds from being issued. 

Tax administration officials in Australia and Canada told us that 
preventing fraudulent refunds is their primary enforcement focus. 
Australia anticipated performing over 84,000 audits, including desk and 
field audits, on the approximately 2.1 million requests for VAT refunds 
in 2004-2005. Table 11 shows the average percentage of gross VAT 
collections that is paid back to businesses in the form of refunds in 
some of our study countries from 1998 to 2001. 

Table 11: Average VAT Refund Level as a Percentage of Gross VAT 
Collection (1998-2001)[A]: 

Canada: 
VAT refunds as a percentage of gross VAT collection: 50.3%. 

France: 
VAT refunds as a percentage of gross VAT collection: 21.2. 

New Zealand: 
VAT refunds as a percentage of gross VAT collection: 35.5. 

United Kingdom: 
VAT refunds as a percentage of gross VAT collection: 40.9. 

Sources: International Monetary Fund: 

[A] Australia is not included in the table because it did not introduce 
a VAT until July 1, 2000. 

[End of table] 

Accounting and Filing Requirements: 

Tax administrators and VAT experts in several of our study countries 
told us that making the filing of forms and accounting for VAT easier 
on businesses can improve compliance. All of our study countries offer 
small businesses options in how often they file their VAT returns or 
how they calculate their VAT liability to address the differing 
administrative needs of businesses of various sizes. Large businesses 
are often required to file and remit VAT monthly, but small businesses 
often have the option to file and remit less frequently, such as 
quarterly or annually. Longer filing periods often reduce the burden on 
small businesses, while shorter filing periods for larger businesses 
maintain a steady monthly VAT revenue flow. By allowing small 
businesses to file VAT returns less frequently than larger businesses, 
tax administrators can save processing costs by reducing the number of 
returns they receive each month. 

Tax administrators in all of our study countries also allow small 
businesses to use modified accounting methods to calculate their VAT 
liabilities as a way to further reduce compliance burden. Australia, 
Canada, and New Zealand offer three accounting options to address the 
diverse needs of businesses of different sizes, while the United 
Kingdom and France also offer more than one accounting option to small 
businesses. Based upon the amount of annual sales, businesses may 
select the accounting option that creates the least amount of 
bookkeeping and compliance burden. By allowing certain businesses to 
use methods that approximate their tax liabilities instead of 
calculating it for every transaction, they may be able to decrease 
their compliance burden. Tables 12 and 13 show the accounting options 
available to businesses in New Zealand and Canada. 

Table 12: VAT Accounting Options in New Zealand: 

New Zealand: Eligible businesses: 

Accounting options and description: Invoice basis: GST is accounted for 
when an invoice is issued or payment is made, whichever comes first: 
All. 

Accounting options and description: Payments basis: GST is accounted 
for in the taxable period in which a payment is made or received: 

Businesses with annual sales of NZ$1.3 million (US$878,728) or less. 

Accounting options and description: Hybrid basis: GST is accounted for 
by using the invoice basis for sales and payments basis on purchases: 
All. 

Source: New Zealand Inland Revenue Department. 

[End of table] 

Table 13: VAT Accounting Options in Canada: 

Canada: Eligible businesses: 

Accounting options and description: Regular method: Businesses collect 
5% VAT on eligible sales and pay 5% VAT on eligible purchases. At the 
end of the reporting period, the businesses net total VAT collected 
with total input tax credits and remit the difference to the 
government, or request a refund if they are so entitled: All. 

Accounting options and description: Simplified method: Businesses 
collect 5% VAT on eligible sales and pay 5% VAT on eligible purchases. 
At the end of the reporting period, the businesses multiply eligible 
expenses by (5/105). This figure is then subtracted from total VAT 
collected to calculate total VAT liabilities: Businesses with less than 
Can$500,000 (US$406,762) or less in sales in the latest fiscal year. 

Accounting options and description: Quick method: 
Businesses collect 5% on eligible sales and pay 5% VAT on eligible 
purchases. At the end of the reporting period, businesses total their 
sales and multiply by a sector-specific rate that is below the standard 
5% rate. Businesses are not allowed to claim input tax credits, but the 
sector-specific rate incorporates the approximate value of input tax 
credits they would otherwise claim: Businesses with less than 
Can$200,000 (US$162,705) or less in annual sales. 

Source: Canada Revenue Agency. 

[End of table] 

Import Deferral Program: 

Australia and New Zealand have programs that allow some importers to 
defer VAT payment on imports, reducing compliance burden. In both 
Australia and New Zealand, the customs agency is responsible for 
collecting VAT on imports. With a deferral program, importers can 
establish a relationship with the customs and revenue agencies and pay 
their VAT liabilities to the revenue agency during normal filing 
intervals instead of paying customs on a per shipment basis. Deferral 
programs decrease some administrative costs and compliance burden by 
reducing the number of individual payments made by the business to the 
customs agency. Businesses must apply for this program, and use of the 
deferral scheme is limited to businesses with an established history of 
compliance with the tax administration agency. 

Reverse Charge on Intangible Imported Goods and Services: 

Many countries, including all of our study countries, use a reverse 
charge mechanism to tax certain imported goods or services that are 
otherwise difficult to tax. For example, imported intangible services, 
such as marketing or accounting, do not physically cross borders where 
a customs agency would normally assess VAT. A reverse charge requires 
the importing business to self-assess the VAT on these imported goods 
or services. The self-assessed VAT generally is offset by an input tax 
credit claim if the good or service was used in the production of other 
taxable sales. Our study countries use the reverse charge mechanism for 
several goods and services, including intangible property, or 
advertising, consulting, accounting, and telecommunication services. 
The United Kingdom uses a specific reverse charge mechanism for 
cellular phones and computer chips to address the risk of carousel 
fraud, which is discussed further in appendix V. 

Integrated Tax System: 

Logically, integrating tax administration and compliance activities 
across taxes, such as joint administration of a VAT and an income tax, 
would be beneficial both to tax administrators and businesses. 
Integrated tax administration would seem to reduce both administrative 
costs and compliance burden by decreasing the number of interactions 
between the business and the tax administrators and improve compliance 
by increasing the amount of information available to tax auditors for 
review. In an integrated system, a business would face a single audit 
for all taxes, whereas in a nonintegrated system a business could face 
a separate audit for each tax for a given tax year. 

The countries we studied faced specific challenges that have prevented 
them from either fully integrating their tax administration or from 
systematically sharing information across tax programs. Until recently, 
Canada could not share information automatically across tax programs 
due to the limitations of its legacy computer systems. Generally, skill 
sets required by VAT auditors and income tax auditors are different, 
making separate audits sometimes a more practical approach. Canadian 
and French tax auditors are now starting to perform joint audits on a 
limited basis. For example, in Canada corporations and proprietorships 
reporting less than Can$4 million (US$3.3 million) in revenue are 
subject to a joint income tax and VAT audit.[Footnote 18] New Zealand 
has been undertaking integrated audits of VAT and other taxes since 
1990. 

VAT Compliance Estimates: 

All of our study countries dedicate significant administrative 
resources to addressing VAT compliance risks, but actual or estimated 
compliance rates generally are not well documented. Of the countries we 
studied, only the United Kingdom annually estimates a tax gap and VAT 
revenue losses due to noncompliance. The United Kingdom estimates a VAT 
Theoretical Tax Liability (VTTL) using national consumption data, and 
compares it to actual VAT receipts. The difference is considered to be 
the VAT tax gap. From 2002 to 2007, the VAT tax gap ranged from 12.4 
percent to 16.1 percent of the VTTL.[Footnote 19] Other European 
countries have made less rigorous estimates of VAT losses which 
indicate that VAT losses from fraud are about 10 percent of total VAT 
gaps. For comparison, the 2001 gross tax gap in the United States was 
estimated as 17 percent of federal revenues. 

Of the total VAT tax gap in the United Kingdom for 2006-2007, up to 16 
percent is estimated to be attributed to Missing Trader Intra-Community 
(MTIC) fraud, which includes acquisition fraud and carousel fraud. 
Acquisition fraud occurs when a business imports a good and goes 
missing without paying the required VAT. Carousel fraud, a problem that 
is mostly contained to the European Union, is an extension of 
acquisition fraud whereby the original imported good is sold multiple 
times in the importing country before being exported again. The same 
goods can go through the carousel multiple times. Carousel fraud is 
difficult to detect because of the number of transactions involved and 
the frequent use of small, high value goods, such as cellular phones or 
computer chips. See appendix V for additional discussion of carousel 
fraud. 

Tax officials in our other study countries told us they do not estimate 
VAT gaps the way the United Kingdom does, but Canadian tax 
administrators do have some VAT compliance measures. Some measures of 
VAT compliance in Canada, defined as registering as required, filing 
all forms on time, paying all VAT amounts when due, and reporting full 
and accurate information, are over 90 percent. New Zealand tax 
officials stated that while they do not measure a VAT gap, they 
estimate their VAT compliance problems are no worse than those of 
Australia, Canada, or the United Kingdom. 

In Canada--One of Several Federal Countries with a VAT--Tax System 
Complexity and Compliance Burden Vary among Provinces Depending on 
Level of Coordination with a Federal VAT: 

Of the eight federal countries we identified with national VATs, Canada 
is the only one with multiple arrangements for administering the 
federal and subnational consumption taxes. Table 14 describes the VAT 
administrative arrangements for several countries with national VATs 
and subnational governments. 

Table 14: National and Subnational VATs in Federal Countries: 

Country: Argentina; 
National VAT: Yes; 
Subnational consumption tax: Yes; 
Administrative arrangement: VAT administered at the national level 
alongside state sales taxes with states receiving a share of the 
national VAT revenue. 

Country: Australia; 
National VAT: Yes; 
Subnational consumption tax: No; 
Administrative arrangement: VAT administered at the national level with 
all revenue going to the states. 

Country: Austria; 
National VAT: Yes; 
Subnational consumption tax: No; 
Administrative arrangement: VAT administered at the national level with 
revenue shared by the national and state governments. 

Country: Belgium; 
National VAT: Yes; 
Subnational consumption tax: No; 
Administrative arrangement: VAT administered at the national level. 

Country: Brazil; 
National VAT: Yes; 
Subnational consumption tax: Yes; 
Administrative arrangement: VAT administered at the national level 
alongside state sales taxes. 

Country: Canada; 
National VAT: Yes; 
Subnational consumption tax: Yes; 
Administrative arrangement: Four administrative arrangements that 
include a VAT administered at the national level alongside provincial 
VATs or RSTs. 

Country: Germany; 
National VAT: Yes; 
Subnational consumption tax: No; 
Administrative arrangement: VAT administered at the national level with 
revenue shared by the national and state governments. 

Country: Switzerland; 
National VAT: Yes; 
Subnational consumption tax: No; 
Administrative arrangement: VAT administered at the national level. 

Source: Bird and Gendron, University of Toronto. 

[End of table] 

As the table shows, some countries administer a federal VAT and then 
distribute all or a portion of the tax revenues collected to 
subnational jurisdictions, such as states and territories. For example, 
Australia has a federal VAT, but almost all revenues from that tax are 
distributed to the Australian states and territories. The VAT in 
Australia replaced a series of inefficient state taxes that were 
thought to be impeding economic activity. The federal and subfederal 
governments agreed that the federal government would administer the VAT 
on behalf of the states and territories. In exchange for federal VAT 
administration, the states and territories reimburse the federal 
government for the costs incurred for administration, but otherwise 
receive almost all of the revenues collected. Changes in the base and 
rate or amendments to the original agreement require unanimous support 
of the states, a federal government endorsement, and agreement by both 
houses of Parliament. 

Canada is the only country that we studied that has both a federal VAT 
and subnational consumption taxes. Tax system complexity and compliance 
burden vary among the provinces in Canada, depending on the level of 
coordination between the federal VAT and subnational consumption taxes. 
Canada has four different arrangements with the provinces for 
administering the federal VAT and provincial consumption tax systems: 

* separate federal and provincial VATs administered by a province 
(Quï¿½bec), 

* joint federal and provincial VATs administered by the federal 
government, 

* separate federal VAT and provincial RSTs administered separately, or: 

* federal VAT only. 

Table 15 shows the main features of Canada's four arrangements for VAT 
administration. 

Table 15: Summary of Federal/Provincial Consumption Tax Arrangements: 

Consumption tax arrangement: Quï¿½bec sales tax; 
Jurisdiction & rate: 
* Quï¿½bec - 7.5%; (Applied to VAT inclusive price); 
Type of taxes: Separate federal VAT and provincial VAT; 
Administration: Provincial. 

Consumption tax arrangement: Harmonized federal VAT and provincial 
VATs; 
Jurisdiction & rate: 
* Newfoundland & Labrador - 8%; 
* New Brunswick - 8%; 
* Nova Scotia - 8%; (Combined VAT/HST - 13%); 
Type of taxes: Joint federal and provincial VATs; 
Administration: Federal. 

Consumption tax arrangement: Federal VAT alongside provincial sales 
taxes; 
Jurisdiction & rate: 
* British Columbia - 7.5%; 
* Manitoba - 7%; 
* Ontario - 8%; 
* Prince Edward Island - 10%; 
* Saskatchewan - 7%; 
Type of taxes: Separate federal VAT and provincial RST; 
Administration: VAT: Federal; RST: Provincial. 

Consumption tax arrangement: Federal VAT only; 
Jurisdiction & rate: Provinces; 
* Alberta - N/A; Territories; 
* Northwest Territories - N/A; 
* Yukon Territory - N/A; 
* Nunavut - N/A; 
Type of taxes: Federal VAT; 
Administration: Federal. 

Source: GAO analysis. 

[End of table] 

Quï¿½bec Sales Tax Arrangement (QST): 

In 1992, the government of Quï¿½bec agreed to administer the federal VAT 
on behalf of the federal government alongside a provincial VAT, called 
the QST. The federal government and Quï¿½bec split the cost of joint 
administration. Although allowed some flexibility, Quï¿½bec must follow 
the same basic rules that the federal government follows when selecting 
businesses for audit; conducting enforcement activities; and applying 
registration, payment, and dispute resolution procedures. This ensures 
consistent treatment of businesses regardless of geographic location in 
Canada. 

The QST and VAT have almost the same tax base. However, there are a few 
key differences which create some additional administrative costs and 
compliance burden because affected entities have to comply with two 
sets of requirements when determining tax liabilities. For example, 
certain financial services that are exempt from the federal VAT are 
zero-rated under the QST. Quï¿½bec also requires businesses to obtain 
both a provincial registration number and federal registration number. 

Harmonized Sales Tax Arrangement (HST): 

Beginning in April 1997, three Canadian Atlantic provinces--New 
Brunswick, Nova Scotia, and Newfoundland & Labrador--abolished their 
provincial RST systems and created the HST. The HST was the same as the 
federal VAT, except a tax rate of 8 percent was added to the federal 
VAT rate. Currently, the combined tax rate is 13 percent. The federal 
government agreed to administer the HST at no charge to the three 
provinces and distribute HST revenues back to the provinces. When the 
three Atlantic provinces chose to replace their provincial RSTs with 
the HST, they were able to reduce their tax administration costs. 
Figure 5 shows the administrative cost reductions achieved in New 
Brunswick just prior to harmonization. Tax administration costs dropped 
nearly 43 percent from about Can$11.6 million to just over Can$6.6 
million. 

Figure 5: Tax Administration Costs in New Brunswick Before and After 
Harmonization: 

[See PDF for image] 

This figure is a line graph depicting the following data: 

Fiscal Year: 1991/1992; 
Millions of dollars: $9. 

Fiscal Year: 1992/1993; 
Millions of dollars: $10. 

Fiscal Year: 1993/1994; 
Millions of dollars: $11. 

Fiscal Year: 1994/1995; 
Millions of dollars: $12. 

Fiscal Year: 1995/1996; 
Millions of dollars: $7. 

Fiscal Year: 1996/1997; 
Millions of dollars: $7. 

Fiscal Year: 1997/1998; 
Millions of dollars: $7. 

Fiscal Year: 1998/1999; 
Millions of dollars: $7. 

Fiscal Year: 1999/2000: 
Millions of dollars: $6. 

Source: New Brunswick cost data gathered by Robertson of Fasken 
Martineau DeMoulin LLP. 

[End of figure] 

However, the three provinces also anticipated a revenue loss because 
the HST rate of 8 percent was less than the RST rate that had been 
levied previously. For example, Newfoundland & Labrador had an 
effective RST rate higher than 12 percent prior to HST implementation. 
The federal government agreed to pay the provinces a total of Can$961 
million over 4 years--Can$349 million in each of the first 2 years, 
Can$175 million in the third year and Can$88 million in the fourth 
year--to offset part of the losses in provincial revenues. 

Separate VAT and Provincial Sales Tax Arrangement: 

Five provinces levy RSTs alongside, yet independent of, the federal 
VAT. Retail businesses that operate within provinces with a RST are 
required to register for both systems, file returns in both systems, 
and are subject to separate audits within both systems. There are 
several notable effects of administering both taxes. Unlike the VAT, 
very few services are subject to the provincial sales tax. There are 
also a number of exemptions within the RST system. For example, some 
provinces do not tax children's clothing, some unprepared foods, or 
energy resources, such as natural gas. These goods are either fully 
taxed or defined differently under the federal VAT. Further, the 
federal VAT zero rates certain goods or services whereas the RST uses 
exemptions. This is an important distinction and has administrative and 
bookkeeping implications. For example, a grocery store would be 
required to determine which goods are zero-rated under a VAT system, 
but are exempted under a RST. Under this scenario, the business will 
have to keep track of purchases and sales and determine separately how 
they are treated under each tax system. 

Some businesses in RST provinces are disadvantaged compared to their 
counterparts in the HST and QST provinces because they must comply with 
two consumption tax systems. For example, businesses that operate 
retail operations in these provinces are required to file both a 
federal VAT and provincial RST return. 

VAT-only Arrangement: 

Alberta and all three of the Canadian territories do not have a 
consumption tax at the subnational level. Therefore, purchases in these 
provinces are only subject to the federal VAT. Businesses that operate 
in these areas have a smaller compliance burden than those in provinces 
where a RST is also administered. Tax administration officials told us 
that one issue that arises from these areas is interprovincial sales, 
because some Canadians who live in one province will travel to Alberta 
or the territories to make purchases in order to avoid paying the 
provincial RST or VAT in their home province. This results in lost tax 
revenue. 

VAT Implementation in Australia, Canada, and New Zealand Built on 
Preexisting Administrative Structures and Involved Considerable 
Resources to Educate, Assist, and Register Businesses: 

Multiple agencies in Australia, Canada, and New Zealand were involved 
in VAT implementation. Each of these countries also developed multiple 
strategies for educating and assisting businesses, but getting some to 
register for VAT in advance of implementation was still a challenge. 

Developing the VAT Administration in Several Study Countries Involved 
Multiagency Coordination, Development of New Policies and Processes, 
and Additional Staff: 

VAT implementation in Australia, Canada, and New Zealand involved 
multiple agencies, the development of new policies and processes, and 
hiring of additional staff. All three countries built on preexisting 
administrative structures to initially implement a VAT. Since the 1930s 
all had a national consumption tax before the VAT was adopted. For 
example, the Manufacturer's Sales Tax (MST) in Canada was a single- 
stage sales tax generally applied to the manufacturer's sales price of 
goods produced in Canada and to the customs value of goods imported 
into Canada. Wholesalers and retailers would pay the tax when they 
purchased certain goods. 

Building up the administrative structure for the VAT in Australia, 
Canada, and New Zealand involved coordination among several government 
agencies. In all three countries this also involved the establishment 
of interagency committees to facilitate and coordinate implementation 
efforts. In Canada the former Customs and Excise division was 
responsible for administering the Excise Tax Act and the Department of 
Finance was responsible for sales tax policy and legislation. New 
Zealand's implementation involved coordination among five government 
agencies. The Ministry of Finance in New Zealand held public meetings 
and managed correspondence from constituents. The New Zealand 
Treasury's primary responsibility was the development of VAT policy, 
while the Inland Revenue Department was responsible for VAT 
registration and compliance. The Ministry of Social Welfare was 
responsible for managing the benefit increases associated with VAT 
implementation and the overall tax reform efforts. The Customs Service 
was responsible for terminating the wholesale sales tax and collecting 
VAT on imports. Also during implementation, all three countries gave 
agencies specific responsibility for monitoring the transition and its 
impact on consumer pricing. These offices worked to ensure businesses 
did not artificially inflate prices to take advantage of uncertainty 
during implementation. 

Introduction of the VAT also involved efforts to develop and test forms 
and returns. According to International Monetary Fund guidance on VAT 
implementation, development of forms early in the implementation 
process is important because they are a key part of the education 
effort. Australia's implementation showed that if VAT implementation 
also involves an overhaul of business tax payment and filing 
procedures, new legislation would be necessary and more time would 
likely be needed for forms development. Australia coupled VAT 
implementation with new business accounting and reporting requirements 
that had to be detailed on a Business Activity Statement (BAS). The BAS 
was intended to capture information on multiple business taxes in the 
country. Government officials in Australia told us that the BAS was 
responsible for the majority of VAT-related compliance burden at 
implementation due to the increased filing requirements and information 
reporting. Forms development took about 2 to 3 months in New Zealand, 
where both the VAT and VAT forms are relatively simple. Canada 
allocated 12 months to develop, test, print, and distribute its forms. 

All three countries had some staff in place for administering the VAT; 
however, all also hired and trained large numbers of additional staff. 
For example, Canada hired over 3,900 additional personnel at the time 
of transition. This more than tripled the total staff previously 
responsible for administering the MST. Of the staff Canada initially 
hired, about 1,500 were to perform various educational functions, which 
included providing walk-in services, seminars, written correspondence, 
business information sessions, advisory visits, and extensive 
distribution of printed material. Advisory visits--in which 
administration officials would travel to specific businesses to educate 
its employees on the VAT--were continued only through the first quarter 
after VAT implementation. 

Time Taken to Implement VATs Ranged from 15 to 24 Months: 

The amount of time tax administrations in Australia, Canada, and New 
Zealand had to implement a VAT ranged from 15 to 24 months due to the 
varying circumstances leading up to initial implementation in each of 
these countries. Australia and its states and territories reached 
agreement on a VAT in April 1999, 15 months prior to the effective 
implementation date of July 1, 2000. In Canada, much of the planning 
and early efforts to prepare for VAT implementation occurred before 
legislation was actually passed. According one Canadian official 
involved in implementation, planning began nearly 2 years in advance, 
but Canadian tax authorities had only 2 weeks between final passage of 
legislation and implementation. New Zealand originally allowed for 18 
months between the publication of a policy paper on the VAT and actual 
implementation. However, because of delays in education activities, 
implementation was delayed an additional 6 months. 

Government Agencies Used a Variety of Methods to Educate and Assist 
Entities Subject to VAT Requirements: 

Before entities subject to VAT requirements can be expected to comply, 
they must know what those requirements are and what they mean to 
specific economic and industry sectors. For Australia, Canada, and New 
Zealand, this resulted in the development and administration of 
extensive education and outreach efforts through a variety of direct 
and indirect assistance. Although all three countries implemented 
education and outreach efforts, Australia's approach is the most recent 
and provides the most detail on the strategies and programs that were 
in place. 

According to officials involved in the initial implementation of the 
VAT in Australia, a major part of the education and outreach strategy 
was to target specific players in the various industry sectors and get 
them involved in educating others. The Australian government spent 
approximately A$500 million (US$464 million) on education efforts at 
transition. Australia established a Start-up Assistance Office within 
the Department of Treasury to assist small and medium-sized businesses 
and the community sector in preparing for and implementing VAT 
requirements. This office established and administered the programs 
described in table 16. 

Table 16: Strategies Used in Australia to Educate and Assist 
Businesses: 

Grants to community groups and organizations: 
Program issued over 220 grants to a variety of community organizations, 
industry groups, and other organizations that worked with or on behalf 
of specific economic sectors. For example, grants were given to state 
chambers of commerce to develop and administer education programs to 
member businesses. 

Advisor education: 
Program provided a series of tax education classes and seminars to a 
large network of informal advisors, such as accountants and tax 
preparers, who could then pass on their knowledge to the businesses or 
community and educational institutions with which they were affiliated. 

Business skills education: 
Program developed and distributed a range of products and services to 
interested businesses that would be subject to VAT requirements. This 
included a telephone helpline, two VAT-specific Web sites, over 16 
publications covering many topics of interest to VAT businesses, and 
specialized assistance to non-English speaking businesses. 

Direct assistance to small businesses: 
Program delivered a A$200 (US$186) certificate to qualifying small 
business and community groups. The certificate could be redeemed with a 
registered supplier for goods or services that would assist the 
registrant in preparing for the VAT. The certificate could be redeemed 
to provide computer hardware, computer software, stationary, training 
courses, and financial advice. Over 1.9 million certificates were 
issued and could be redeemed at over 14,000 suppliers. 

Source: GAO analysis of Australian Taxation Office documents. 

[End of table] 

Industry partnerships were important to the education strategy 
implemented by the Australian Taxation Office and Treasury. According 
to Australian officials and others with knowledge of implementation, 
education materials produced by industries were well-received by 
businesses. In addition, industry partnerships established lines of 
communication that allowed the government to understand industry 
concerns about the VAT. For example, one concern was about the costs 
businesses needed to incur to come into initial compliance with the 
VAT. VAT experts in several of Australia's professional services and 
accounting organizations told us that corporations with large and 
diverse inventory items incurred significant transition costs. 
According to tax administration officials, one benefit of the industry 
partnership strategy is that many of the partnerships formed during VAT 
implementation still exist. 

Canada also made informing the public about the VAT and registering 
businesses subject to the tax an important part of the implementation 
effort. The Canadian Revenue Agency launched an extensive program to 
provide information to the business community on the VAT through 
seminars, publications, and telephone support. Tax administration 
officials also conducted widespread consultation programs to seek input 
from businesses, trade associations, and professionals on how to 
disseminate information and develop administrative procedures. A 
publication committee was also formed to steer the development of 
guides, information pamphlets, and technical memoranda. Consultants 
were retained to conduct focus testing to review some of the 
publications and make them more understandable. 

The budget for education and outreach activities during the 
implementation of the VAT in Canada was substantial. According to one 
study, the Canadian government spent more than Can$85 million (US$98.5 
million). To put this in context, this exceeded the amount spent by the 
nation's largest private-sector advertiser at the time by nearly Can$30 
million (US$34.8 million). The VAT education and outreach campaign in 
Canada drew on the resources of several government agencies, which were 
coordinated by a cabinet-level committee on communications. Table 17 
provides additional details on the agencies that were involved, the 
activities they conducted, and their associated costs. 

Table 17: Summary of Education and Outreach Activities for VAT 
Implementation in Canada: 

Agency: Department of Finance; 
Activity: Print, radio, and television advertising; 
Cost (Can$ millions) 1989-92: 11.6. 

Agency: Department of Finance; 
Activity: Direct mailings to 10 million households and over 500,000 
industry group members; Production and broadcasting of video on the 
VAT; 
Cost (Can$ millions) 1989-92: 5. 

Agency: Department of Finance; 
Activity: Operating costs for a Communications Working Group, including 
a toll-free hotline which, at peak, handled 6,000 calls a day; 
Cost (Can$ millions) 1989-92: 5. 

Agency: Canada Revenue Agency; 
Activity: General advertising; 
Cost (Can$ millions) 1989-92: 10.6. 

Agency: Canada Revenue Agency; 
Activity: Agency: Direct mailings to businesses and consumers; 
Cost (Can$ millions) 1989-92: 9.2. 

Agency: Canada Revenue Agency; 
Activity: Efforts to educate households on the VAT credit that would be 
administered through the income tax system; 
Cost (Can$ millions) 1989-92: 2.8. 

Agency: Consumer Information Office; 
Activity: Operating and advertising costs for a special office that was 
established to "limit confusion among consumers" about the GST. The 
office planned to spend $7.4 million on advertising in 1990-1991, 
another $6.9 million on the production of material, and $19.6 million 
for its costs of operation. The budget for these activities in 1991-
1992 amounted to $8.4 million; 
Cost (Can$ millions) 1989-92: 42.3. 

Approximate total: 
Cost (Can$ millions) 1989-92: 86.5. 

Source: Alasdair Roberts and Jonathan Rose, Queen's University. 

[End of table] 

Canada, like Australia, also provided assistance to small businesses 
during the implementation. For example, qualifying small businesses 
received one-time credits of up to Can$1,000 (US$1,159) to help them 
adapt to the VAT. The Canadian government also helped certain 
businesses offset the burden of double taxation created by 
transitioning from one type of consumption tax to another. 
Specifically, certain wholesalers' and retailers' inventories consisted 
of some goods on which the old MST had already been paid. The Canadian 
government provided refunds to offset payments made under the old tax. 
Determining the exact amount of tax that each individual business paid 
was difficult because the MST was a hidden tax and not identifiable for 
specific items in a business's inventory. Therefore, to approximate the 
amount of MST paid on goods in inventory, the Canada Revenue Agency 
established a series of refund percentages based on the type of 
business activity. 

Australia and Canada Had Difficulty Getting Businesses to Register 
Early for VAT Prior to Implementation: 

Despite efforts to educate and reach out to businesses, both Australia 
and Canada still had difficulty in getting all businesses to register 
to collect and remit VAT prior to implementation. In Canada, the tax 
administration assumed it would have 12 months from the time the 
proposed VAT legislation was enacted to the date the tax would take 
effect. However, the legislation for the proposed VAT was enacted only 
2 weeks before the effective date of January 1, 1991. Until the 
legislation was enacted, the requirement to register was neither 
mandatory nor enforceable. According to tax administration officials, 
the delay in passage of the legislation may have led potential 
registrants to question whether the VAT would indeed come into effect. 
Others may have refused to register voluntarily before the legislation 
became effective. 

Despite having little authority to enforce registration until the VAT 
was passed, tax administration officials recognized they needed to 
identify and register businesses anyway if they were to be effective in 
administering the tax. The first step in the registration process was 
to identify and contact potential registrants. Because the VAT had an 
expansive reach, the Canada Revenue Agency was tasked with contacting 
every business and organization in Canada to determine whether or not 
they were required to register. To do this the agency prepared a master 
list for an initial mailing from information contained in four income 
tax system databases: (1) corporate, (2) individual, (3) payroll 
deduction, and (4) charitable organization. Second, it mailed 
approximately 1.9 million registration kits to potential registrants, 
followed by two sets of reminder notices. An additional 180,000 
registration kits were sent to newly identified potential registrants 
identified using updated information in the income tax database. Third, 
a final registration kit was sent to potential registrants who had not 
yet responded. 

Three months prior to implementation there were 500,000 registrants-- 
one-third less than the administration's goal. To increase 
registrations, the Canada Revenue Agency began contacting potential 
registrants by telephone. Upon passage of the legislation, registration 
requests increased and continued to increase in January 1991. Four 
months after the VAT went into effect, the targeted goal of 1.6 million 
registrants was achieved. 

Though the circumstances were different, the Australian Taxation Office 
also had difficulty getting businesses to register in advance of VAT 
implementation. Officials said that ensuring timely business 
registration was an important aspect of VAT implementation. Following 
an examination of registration times in other countries, tax officials 
tried to register as many businesses as possible prior to July 1, 2000. 
The tax administration was successful in getting most businesses to 
register before the VAT was implemented. However, according to 
officials involved in implementation, many registrations were filed 
close to the deadline, creating significant workload just before the 
VAT was to go into effect. Tax administration officials also said they 
experienced some challenges registering nonprofit and charity 
organizations because these organizations were not included in other 
tax systems. 

Concluding Observations: 

Administering a VAT presents the same fundamental challenges as other 
tax systems, including the current U.S. income tax. They all have 
compliance risks, administrative costs, and compliance burden. While 
these challenges may differ in some specifics, they exist for all tax 
systems, including even simple VATs. 

One overriding lesson about VAT design is that, like our income tax 
system, adding tax preferences to the system may satisfy economic, 
distributional, or other policy goals but at a cost. Tax preferences-- 
in the form of exemptions, zero rates, or reduced rates--often reduce 
revenue, add complexity, and increase compliance risks. To mitigate the 
increased risk, countries have imposed additional record-keeping and 
reporting requirements on businesses, delayed refunds, and done more 
auditing of businesses. The end result is an increase in compliance 
burden for businesses and administrative costs for the government. 

The choice of tax type is typically heavily influenced by criteria 
other than administrability. Revenue needs, impact on economic 
performance, and distributional consequences are prominent 
considerations and have been at the forefront of the debate in the 
United States about tax reform. Administrability and the details of how 
a new tax would be implemented often get less attention. However, 
administrability and design details do matter. The benefits of a new or 
reformed tax system, in terms of revenue, economic performance, or 
equity, would be at least partially offset by poor design that 
unnecessarily increased compliance risks, administrative costs, and 
compliance burden. 

As agreed with your staff, unless you publicly announce the contents of 
this report earlier, we plan no further distribution of it until 30 
days from the date of this letter. At that time, we will provide copies 
of this report to interested congressional committees and other 
interested parties. Copies of this report will also be made available 
to others upon request. In addition, the report will also be available 
at no charge on GAO's Web site at [hyperlink, http://www.gao.gov]. 

If you or your staff has any questions about this report, please 
contact me at (202) 512-5594 or [email protected]. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. Key contributors to this report are 
listed in appendix VI. 

Signed by: 

James R. White: 
Director, Tax Issues: 
Strategic Issues Team: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

The objectives of this report were to describe for selected countries 
important lessons learned from experiences on (1) how value-added tax 
(VAT) design choices have affected compliance, the cost of 
administration, and compliance burden; (2) how countries with federal 
systems administer a VAT in conjunction with subnational consumption 
tax systems; and (3) how countries that recently transitioned to a VAT 
implemented the new tax. 

In choosing the countries to study, we interviewed a number of VAT 
experts, including academics, private practice tax practitioners, 
researchers at the Organization for Economic Cooperation and 
Development (OECD), and government officials. We reviewed academic 
articles, books, and government publications on VAT compliance risks, 
administrative costs, compliance burden; federal and subnational tax 
coordination issues; and the topic of VAT implementation to identify 
these VAT experts. We contacted those experts who had a broad 
understanding of VAT issues related to our research objectives, who 
were recommended by other experts, and who were available to speak with 
us. 

Based on our research and expert recommendations, we selected Australia 
because it implemented a VAT more recently; Canada because it has a 
federal system with a number of subnational consumption taxes; France 
because it is has the oldest VAT system; New Zealand because it has a 
simple system with a broad tax base; and the United Kingdom because of 
its work on VAT noncompliance and fraud. Like the United States, all of 
the countries we selected are members of OECD and are modern industrial 
nations for which a broad set of comparative economic and tax data were 
available. 

We performed an in-depth literature review of government and academic 
literature related to each selected country's VAT. We visited 
Australia, Canada, France, and New Zealand and interviewed government 
officials and private practice tax professionals. In each country we 
visited we interviewed officials with the tax administration agency and 
the national audit institution; and VAT professionals from global 
taxation and audit firms. In Australia, Canada, and New Zealand, we 
also interviewed officials in their treasury departments and customs 
agencies, and academics. In Australia and Canada we also interviewed 
officials at relevant provincial and state agencies. For the United 
Kingdom, we communicated with appropriate officials in the National 
Audit Office and reviewed government documents on VAT administration 
and compliance. To obtain further information on our study countries, 
we met with VAT experts from the OECD, the European Commission, and the 
International Monetary Fund. 

We conducted an extensive number of interviews for this report and 
corroborated as much testimonial evidence as possible with official 
government reports and documents, or published academic articles. We 
indicated in the report when evidence was based solely on the testimony 
of government officials or experts. 

We collected and analyzed data on the countries and their VAT systems, 
including VAT revenue trends, administrative and compliance activities 
and costs, and the size and distribution of economic activity within 
the study countries. We gathered these data mostly from the OECD and 
government agencies in our study countries, including the national 
statistics agencies and national revenue agencies, but also from 
academic articles. In most cases the data used in this report come from 
the OECD or international government agencies. We determined the data 
were sufficiently reliable for the purposes of our report. We 
considered the OECD information we reviewed to be a reliable source of 
comparable statistical, economic, and social data and confirmed the 
data with government officials in our study countries. Most of the data 
used from international government agencies, including tax 
administrations, were publicly reported by these agencies. To provide 
additional assurance that these and all other data reported in our 
report were sufficiently reliable we discussed this information with 
the appropriate government officials, tax experts, and OECD officials. 
Additionally we provided the national audit institutions and the tax 
administration agencies of our study countries a copy of our report to 
verify data and specific factual and legal statements about the VAT in 
those countries. We made technical corrections to our report based on 
these reviews. 

We conducted this performance audit from December 2006 through April 
2008 in Atlanta, Ga.; Boston, Mass.; San Francisco, Calif.; and 
Washington, D.C.; Canberra and Sydney, Australia; Brussels, Belgium; 
Montreal, Ottawa, Quï¿½bec, and Toronto, Canada; Paris, France; and 
Wellington, New Zealand, in accordance with generally accepted 
government auditing standards. Those standards require that we plan and 
perform the audit to obtain sufficient, appropriate evidence to provide 
a reasonable basis for our findings and conclusions based on our audit 
objectives. We believe that the evidence obtained provides a reasonable 
basis for our findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Goods and Services in Study Countries Subject to 
Exemptions, Zero Rating, or Reduced Rating: 

Table 18 lists the broad categories of goods and services that are 
subject to exemptions, zero-rating, or reduced rating in our study 
countries. Exports are not included in the list of zero-rated goods or 
services because this is included in the definition of the destination 
principle. 

Table 18: Exempt, Zero Rated, and Reduced Rated Goods and Services in 
Study Countries: 

Australia: 
Exempt: financial services; residential rent and premises; certain 
supplies of precious metals; school canteens operated by nonprofit 
bodies; fund raising events conducted by charitable institutions; 
Zero rate: most food and beverages; health care (including health 
insurance); education; child care; religious services; activities of 
charitable institutions; water sewage and drainage; going concerns; 
precious metals; international travel; international mail; farm land; 
cars for use by disabled people; 
Reduced rate: N/A. 

Canada: 
Exempt: transport of sick or injured persons; hospital and medical 
care; human blood, tissues, and organs; dental care; charitable work; 
education; noncommercial activities of nonprofit making organizations; 
sporting services; cultural services; insurance and reinsurance; 
letting of immovable property; financial services; certain fund-raising 
events; legal aid; ferry; road and bridge tolls; 
Zero rate: medicine; basic groceries; certain financial services; 
certain agricultural and fishing products; medical devices; precious 
metals; international organizations and officials; 
Reduced rate: N/A. 

France: 
Exempt: postal services; hospital and medical care; human blood, 
tissues and organs; dental care; charitable work; education; 
noncommercial activities of nonprofit making organizations; sporting 
services; cultural services; insurance and reinsurance; financial 
services; betting, lotteries, and gambling; supply of land and 
buildings; certain fund-raising events; construction, improvement, 
repair and maintenance work on monuments; cemeteries and graves 
commemorating war victims undertaken for public authorities and 
nonprofit bodies, new industrial waste and recyclable material; 
commodity futures transactions carried out on a regulated market; 
services rendered by resource consortia to their members composed of 
natural or legal persons that are VAT exempt or not subject to VAT; 
Zero rate: N/A; 
Reduced rate: most food, nonalcoholic beverages; medicine; equipment 
for disabled; books; hotels; entertainment; author's rights; museums; 
transport; accommodation; agriculture; catering; newspapers; water; 
work on dwellings over 2 years old. 

New Zealand: 
Exempt: financial services (including life insurance policies); supply 
of residential accommodation in a dwelling; fine metal; supply by a 
nonprofit body of donated goods and services; 
Zero rate: businesses as a going concern; fine metal; specific supplies 
by local authorities; supply of financial services to registered GST 
businesses; 
Reduced rate: long term accommodation in a commercial dwelling (taxed 
at 60% of the value of the sale for an effective reduced rate). 

United Kingdom: 
Exempt: postal services; transport of sick or injured persons; hospital 
and medical care; human blood, tissues and organs; dental care; 
charitable work; education; noncommercial activities of nonprofit 
making organizations; sporting services; cultural services; insurance 
and reinsurance; letting of immovable property; financial services; 
supply of land and buildings; certain fund-raising events; burials and 
cremations; investment gold; sports competitions; certain luxury 
hospital care; works of art; some gambling activities; 
Zero rate: children's clothing; food, passenger transport, books; 
newspapers; sewerage and water; prescribed drugs; medicine; certain 
aids and services for disabled people; new housing; residential and 
some charity buildings; alterations to listed buildings; certain 
services and goods supplied to charities; 
Reduced rate: fuel and power for domestic and charity use; installation 
of certain energy saving materials; certain installations of heating 
equipment or security items; women's sanitary products; children's car 
seats; residential renovations; contraceptives; welfare advice; 
installation of mobility aids for elderly; smoking cessation products. 

Source: OECD. 

[End of table] 

[End of section] 

Appendix III: Specific VAT Treatment of Public Sector Entities and 
Nonprofit Organizations in Australia and Canada: 

In Australia, public sector entities must pay VAT on taxable supplies 
just as a business would. However, they are also able to fully recover 
VAT paid for creditable purchases. Public sector entities are required 
to be registered for the VAT and file VAT returns just like private 
entities in order to remit VAT and claim credits. 

Similar to Australia, Canadian federal government agencies also pay VAT 
on purchases from external suppliers. These agencies account for VAT 
paid on purchases throughout the year and, in March, present the 
account to the federal tax administration. The government is 
responsible for collecting VAT and, therefore, must file a tax return 
and remit funds on a monthly basis to meet this obligation. 

Canada uses a rebate mechanism, rather than zero-rating, to refund VAT 
paid on inputs to tax-exempt sales by subnational and government-funded 
entities such as municipalities, universities, schools and hospitals. 
These organizations often provide tax-exempt services, and therefore, 
are unable to claim input tax credits for VAT paid on purchases used to 
provide those services. However, they are entitled to full to partial 
rebates on VAT paid on purchases. The percentage of recoverable tax 
paid varies by type of organization. For example, hospitals receive 83 
percent of the total VAT paid to provide exempt goods and services 
while universities receive 67 percent. The rebate ratios were 
established to ensure that the sales tax burden of these entities did 
not increase as a result of moving to the VAT system from the previous 
consumption tax system. 

Canada also provides VAT rebates of 50 percent to certain charities and 
nonprofits. Registered charities are eligible to claim a 50 percent 
rebate of VAT paid on purchases that are not used to produce taxable 
goods and services. Other nonprofit organizations may also claim the 
rebate, provided they receive at least 40 percent of their funding from 
the government. 

[End of section] 

Appendix IV: Applying the VAT to Hard-to-Tax Sectors: 

Some sectors of the economy, specifically financial services, 
insurance, real estate, and second hand goods, are inherently difficult 
to tax under conventional value-added tax (VAT) rules. For financial 
services and insurance, there is often no clear distinction between the 
provision of a service and a return on investment. For some real estate 
transactions and the sale of secondhand goods, it is difficult to 
calculate the implied input taxes. 

Financial Services: 

Applying a VAT to financial services has proved challenging to many of 
the countries that implement a VAT. Determining the value added for 
each financial service is not a clear calculation. While some financial 
services, such as renting a safety deposit box, are fee based and 
therefore have a price that can be considered taxable consumption, 
others such as financial intermediation in the form of accepting 
deposits and making loans, do not. Rather than charging a fee for a 
specific service, the institution pays lower interest rates on deposits 
and charges higher rates on loans than they otherwise would. To tax 
these services, the value of the services would have to be imputed. The 
interest on deposits or loans is considered a return on investment and 
not the price for goods or services sold, and is therefore not subject 
to VAT. Taxing interest earned on deposit accounts results in a tax on 
savings rather than a tax on consumption. 

Exempting: 

As a condition of membership, European Union (EU) member states are 
required to employ a partially harmonized VAT that follows the rules 
set forth in the Sixth Council Directive. As outlined in the Sixth 
Council Directive, EU member states are required to exempt from their 
VATs a series of specific financial services that include services 
related to credit, deposits, transfers, payments, debts, checks, and 
other negotiable instruments; transactions involving legal currency; 
transactions in shares, interests, debts, or other securities; and 
management of special investment funds. Many countries around the world 
have taken the EU approach and have opted to exempt financial services 
from their VAT base, but exemptions have created further complexities 
in how the VAT is ultimately applied. Of our study countries, only New 
Zealand has changed from exempting to zero rating some business-to- 
business financial services. 

Input Tax Apportionment: 

Exempting financial services requires businesses to accurately 
calculate the amount of their overall inputs that are used for 
providing exempt financial services. In the case of inputs that are 
used for making both exempt and taxable services, such as computers, 
businesses must apportion what percentage of the input taxes of the 
dual-use input are associated with taxable sales to be able to claim 
proper input tax credits. Some countries have specific apportionment 
guidelines for banks and financial services firms. These apportionment 
guidelines set methodologies for calculating VAT paid on business 
inputs that can be claimed as input tax credits. 

Impacts on Outsourcing Decisions: 

By exempting financial services, as is done in most countries with a 
VAT, businesses have an incentive to vertically integrate as much as 
possible to reduce their noncreditable VAT paid on supplies. For 
example, a financial services firm that purchases pamphlets from an 
outside printer pays VAT for the printing services but does not claim 
input tax credits to reclaim the VAT paid. The firm would benefit 
financially if it could produce the pamphlets in house for less than 
the VAT inclusive price charged by the printer. To address this issue, 
countries use apportionment agreements or other VAT specific rules. 

Tax Cascading: 

Exempting financial services also can create tax cascading. Tax 
cascading occurs when an exempt good or service is later used in the 
production of a taxable good or service, leading to a tax being levied 
on a tax. When a financial service is exempt, the supplier cannot 
recover the VAT paid on inputs, and therefore passes the VAT paid on 
inputs onto the consumer in the final price of the financial service. 
If the exempt financial service is then used in the production of a 
taxable service, the VAT is levied on the final price of the taxable 
service, which includes the input taxes passed on by the exempt 
financial service, resulting in a tax on a tax. 

Zero Rating: 

While most VAT systems exempt financial services, some have more 
recently opted to zero rate them. New Zealand began applying a zero 
rate to business-to-business financial services in 2005. Zero rating 
business-to-business financial transactions effectively eliminates any 
distortions tax cascading would have created, but it does not eliminate 
the need for apportionment agreements with banks because sales to final 
consumers are still exempt. In Canada, Quï¿½bec's provincial VAT applies 
a zero rate to financial services. Officials we spoke with indicated 
that zero rating financial services increased Quï¿½bec's ability to 
attract and retain banks within the province. 

Insurance: 

Insurance poses the same challenges to VAT taxation as financial 
services, and many countries include insurance into their definition of 
exempt financial services. While insurance and reinsurance are exempt 
in most countries, a few have designed methods to tax them. For 
example, New Zealand exempts life insurance policies, but levies the 
VAT on the margin between premiums collected and claims paid on all 
other types of insurance policies. Consumers pay the VAT when 
purchasing the policy and insurance companies receive input tax credits 
when paying out on a policy. For example, if a consumer purchases an 
automobile insurance policy for $500 annually, he/she is charged the 
12.5 percent VAT rate, for a total of $562.50. If the consumer has an 
accident and claims $500 for the cost to repair the vehicle, the 
insurance company pays the policyholder $562.50 and claims $62.50 as 
input tax credits. The net VAT revenue collected on the policy is $0. 
Australia taxes property and casualty insurance but employs a different 
mechanism for allowing VAT registered policyholders to claim input tax 
credits. 

Real Estate: 

Real estate transactions are considered difficult to tax due to the 
inherent challenges in determining input tax credits and the 
consumption value of long-lived assets, such as real property. If a VAT 
is intended to tax current consumption, taxing the purchase of a new 
home is in effect taxing future consumption, as the purchaser may live 
in the home and "consume housing" for several years. Charging a VAT on 
real estate can also create problems at the time of transition to a 
VAT. For example, in Australia, where new residential housing is taxed 
at the standard rate but existing housing is exempt, new residential 
housing prices increased at the time of transition as a result of the 
new tax. The Australian government developed a program that gave new 
home buyers a grant of A$7,000 (US$6,497) to help offset the increase 
in housing prices. Similarly, Canada has a housing rebate that allows 
for individuals to reclaim some VAT paid on purchases of a new house or 
on substantial renovations to an existing house. 

Margin Scheme: 

Australia uses a margin scheme for certain real estate transactions to 
address the sale of existing property. In general, under the margin 
scheme the VAT is paid on the difference between the selling price and 
the value of the property on July 1, 2000--therefore taxing the value 
added since the introduction of the VAT. The seller cannot claim input 
tax credits from the original purchase. Similar margin schemes are used 
in other countries on the sales of high-value secondhand goods, such as 
works of art or antiques. 

[End of section] 

Appendix V: Carousel Fraud in the European Union: 

Carousel fraud is mainly a compliance challenge in the European Union, 
where trade borders between member countries no longer exist. With no 
customs or border agency collecting value added tax (VAT) at the 
border, fraudulent businesses take advantage of VAT-free imports. Since 
companies do not pay input VAT on imported goods and services at the 
time of importation, it opens up the opportunity for stealing the 
entire amount of VAT collected on sales. 

Figure 6 shows how carousel fraud can occur using as examples two 
European Union (EU) countries. Company 1 exports cell phones to Company 
2, and does not charge a VAT, as exports are zero-rated by the 
destination principle. Because there are no physical trade borders 
between EU countries, Company 2 is supposed to self-assess and remit 
VAT upon importing the cell phones. Company 2 does not self-assess a 
VAT but does collect VAT on the sale to Company 3. Because Company 2 
does not remit the VAT collected to the government, Company 2 can 
charge a lower price to Company 3 than what was paid on the import and 
still make a profit. The lower priced cellular phones then can continue 
through the carousel until Company 1 imports them again, beginning the 
process anew. 

Figure 6: Carousel Fraud: 

[See PDF for image] 

This figure is an illustration of Carousel Fraud, as follows: 

Company 1: 
Cell phones sold to Company 2 for ï¿½1000 plus ï¿½0 VAT. 

Company 2: 
Cell phones sold to Company 2 for ï¿½950 plus ï¿½95 VAT. 
Company 2 sells the cell phones for less than paid to Company 1, which 
allows for the cell phones to continue through the carousel, possibly 
multiple times. Company 2 makes a ï¿½45 profit on the transaction by not 
remitting the VAT collected from Company 3. 
VAT of ï¿½95 is not submitted to government. 

Company 3: 
Cell phones sold to Company 4 for ï¿½970 plus ï¿½97 VAT. 
VAT of ï¿½2 remitted (ï¿½97 VAT minus ï¿½95 credit) to government. 

Company 4: 
Cell phones sold back to Company 1 for ï¿½990 plus ï¿½0 VAT. 
ï¿½97 VAT refunded (ï¿½0 VAT minus ï¿½95 credit). 

Cycle continues. 

Source: GAO. 

[End of figure] 

The United Kingdom employs a VAT Compliance Strategy (VCS) aimed at 
closing the tax gap. One main objective of the VCS is curbing carousel 
fraud within its borders, including requiring businesses that sell 
specific goods that are often used in carousel fraud, such as cellular 
phones and computer chips, to use a specific reverse charge. The 
specific reverse charge on these items requires each business 
purchasing cellular phones or computer chips to self-assess VAT on 
their purchase. Because businesses selling these goods to other 
businesses will claim an input tax credit equal to the self-assessed 
VAT, the only collection of VAT by the government is at the final 
retail stage, similar to a retail sales tax. Since implementation of 
VCS in 2002, HM Revenue & Customs estimates the VAT gap has decreased 
by almost 2 percentage points. 

Canadian officials told us that carousel fraud, which they refer to as 
asset flipping, does occur to a limited extent in used automobile 
sales. Tax officials in Australia and New Zealand told us they have not 
had significant problems with carousel fraud because almost all 
imported goods are verified and assessed VAT at the border by their 
customs agencies. 

[End of section] 

Appendix VI: Distribution of Economic Activity by Industry Sector in 
Several Study Countries: 

Figure 7 shows the mix of economic activity in the United States, 
Australia, France, and the United Kingdom, countries for which the 
Organization for Economic Cooperation and Development (OECD) value- 
added data were available. Data for Canada and New Zealand were not 
available. 

Figure 7: Value-added by Economic Sector in Select OECD Countries: 

[See PDF for image] 

This figure is a stacked vertical bar graph depicting the following 
data: 

Country: Australia; 
Business services: 29%; 
Government and personal services: 18.9%; 
Agriculture: 3.3%; 
Industry: 19.8%; 
Construction: 6.9%; 
Transport, trade, hotels, and restaurants: 22%; 
Total: 100%. 

Country: France; 
Business services: 31.4%; 
Government and personal services: 25.5%; 
Agriculture: 2.5%; 
Industry: 15.7%; 
Construction: 5.6%; 
Transport, trade, hotels, and restaurants: 19.4%; 
Total: 100%. 

Country: United Kingdom; 
Business services: 31.5%; 
Government and personal services: 22.7%; 
Agriculture: 0.9%; 
Industry: 17%; 
Construction: 5.9%; 
Transport, trade, hotels, and restaurants: 21.9%; 
Total: 100%. 

Country: United States;	
Business services: 32.4%; 
Government and personal services: 24.9%; 
Agriculture: 1.3%; 
Industry: 17%; 
Construction: 5%; 
Transport, trade, hotels, and restaurants: 19.3%; 
Total: 100%. 

Source: OECD. 

[End of figure] 

Gross value added is defined as output minus intermediate consumption 
and equals the sum of employee compensation, gross operating surplus, 
and taxes less subsidies on production and imports, except for net 
taxes on products. The shares of each sector are calculated by dividing 
the value added in each sector by total value added. Total gross value 
added is less than the gross domestic product (GDP) because it excludes 
VAT and similar product taxes. 

Industry consists of mining and quarrying, manufacturing, and 
production and distribution of electricity, gas, and water; trade 
consists of retail and wholesale trade and repair services; real estate 
covers rents for dwellings including the imputed rents of owner- 
occupiers; and government includes public administration, law and 
order, and defense. 

[End of section] 

Appendix VII: GAO Contact and Acknowledgments: 

GAO Contact: 

James White (202) 512 - 5594: 

Acknowledgments: 

In addition to the contact named above, Josï¿½ Oyola, Assistant Director; 
LaKeshia Allen; Brian James; Drew Lindsey; Donna Miller; Edward 
Nannenhorn; Danielle Novak; and Cheryl Peterson made important 
contributions to this report. 

[End of section] 

Related GAO Products: 

Understanding the Tax Reform Debate: Background, Criteria, and 
Questions. [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-1009SP]. 
Washington, D.C.: September 2005. 

Tax Administration: Potential Impact of Alternative Taxes on Taxpayers 
and Administrators. GGD-98-37. Washington, D.C.: January 14, 1998. 

Tax Policy: Value-Added Tax: Administrative Costs Vary with Complexity 
and Number of Businesses. GGD-93-78. Washington, D.C.: May 3, 1993. 

Tax Policy: Implications of Replacing the Corporate Income Tax with a 
Consumption Tax. GGD-93-55. Washington, D.C.: May 11, 1993. 

Tax Policy: State Tax Officials Have Concerns About a Federal 
Consumption Tax. GGD-90-50. Washington, D.C.: March 21, 1990. 

Tax Policy: Value-Added Tax Issues for U.S. Tax Policymakers. GGD-89- 
125BR. Washington, D.C.: September 15, 1989. 

Tax Policy: Tax Credit and Subtraction Methods of Calculating a Value- 
Added Tax. GGD-89-87. Washington, D.C.: June 20, 1989. 

Tax Policy: Choosing Among Consumption Taxes. GGD-86-91. Washington, 
D.C.: August 20, 1986. 

The Value-Added Tax - What Else Should We Know About It? PAD-81-60. 
Washington, D.C.: March 3, 1981. 

The Value-Added Tax in the European Economic Community. ID-81-2. 
Washington, D.C.: December 5, 1980. 

[End of section] 

Footnotes: 

[1] United States Department of the Treasury, Approaches to Improve the 
Competitiveness of the U.S. Business Tax System for the 21st Century, 
(Washington, DC: Dec. 20, 2007). 

[2] The 30 OECD member countries represent countries that have attained 
a relatively high level of development and share a commitment to the 
market economy and pluralist democracy. Its members account for 60 
percent of world gross national product, three-quarters of world trade, 
and 14 percent of the world population. 

[3] For examples, see Tax Reform for Fairness, Simplicity, and Economic 
Growth: The Treasury Department Report to the President (November 1984) 
and Congressional Budget Office, The Economic Effects of Comprehensive 
Tax Reform, (July 1997). 

[4] GAO, Implications of Replacing the Corporate Income Tax with a 
Consumption Tax, GGD-93-55 (Washington, D.C.: May 1993). 

[5] In most instances, we use the term 'businesses' in this report to 
refer to the corporations, businesses, partnerships, proprietorships, 
organizations, government agencies, and other entities that are 
required to collect and remit VAT. We refer to specific types of 
entities, as appropriate. 

[6] Australia, Canada, and New Zealand refer to their VAT systems as a 
Goods and Services Tax (GST). For the purposes of this report, we will 
use the term VAT when referring to the GST systems of these countries. 

[7] Of the 29 OECD countries that have a VAT, 28 use the credit-invoice 
VAT. One country, Japan, employs a type of subtraction method VAT which 
taxes the difference between a business's net outputs and net inputs. 
Invoices are used to show proof of purchases and sales, but not proof 
of VAT paid on inputs. For the purpose of this report, we focus only on 
the credit-invoice method. 

[8] In theory, a VAT could be designed as an income tax by not allowing 
businesses to subtract investment purchases from sales, that is, by not 
allowing businesses to expense investments. Under an income tax, 
businesses would be allowed depreciation deductions that account for 
the loss in value of investments over time. In practice, VATs generally 
are designed as consumption taxes. 

[9] The VAT was not a mandatory method for calculating tax obligations 
in France until 1968, according to Restructuring the French Economy by 
William James Adams. 

[10] GAO, Tax Policy: Summary of Estimates of the Costs of the Federal 
Tax System, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-878] 
(Washington, D.C.: Aug. 26, 2005). 

[11] GAO, Understanding the Tax Reform Debate: Background, Criteria, 
and Questions, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-1009SP] 
(Washington, D.C.: September 2005). 

[12] None of our study countries have a VAT as simple as shown in table 
1, but New Zealand's VAT--which has a broad base with few exceptions-- 
is generally considered by VAT experts to have the simplest VAT design 
among OECD countries. 

[13] Similar compliance risks exist for an income tax stemming from 
either understating income or overstating deductible expenses. 

[14] Carousel fraud is a form of missing trader fraud that involves a 
series of contrived transactions, including imports and exports, with 
the aim of creating large unpaid VAT liabilities and fraudulent VAT 
repayment claims. 

[15] GAO Tax Policy: Value Added Tax: Administrative Costs Vary With 
Complexity and Number of Businesses, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO/GGD-93-78] (Washington, D.C.: 
May 3, 1993). 

[16] In some instances where an exempt good or service is used in the 
production of a taxable good or service, exemptions can produce a 
cascading effect, whereby a good or service is sold with an imbedded 
tax in the price, resulting in a tax on the tax. In this case, the 
exemption may lead to an increase in tax revenue. 

[17] Because interest is not consumption, it is not considered to be a 
tax preference under a consumption tax. 

[18] Wherever we provide foreign currency values converted to U.S. 
dollars, they represent 2008 dollars. 

[19] HMRC's estimates of the VTTL are based on the best available data 
at the time the estimates are calculated, and are therefore subject to 
a broad range of uncertainties. HMRC's analysis concludes that the 
margin of error in these estimates could be as high as +/-4 percentage 
points. 

[End of section] 

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