IMF warns against overly complex VAT refund processes

From a business point of view, we can all appreciate the value of fast, efficient VAT refund mechanisms. And no one needs to tell us about the frustration of inefficient bureaucracy. But have you ever considered the VAT refund process in terms of policy and governance? The IMF has issued a note regarding global VAT refund practices. 

The report notes that poorly managed VAT refund practices “can have profound implications for fiscal policy and management, including inaccurate deficit measurement, spending overruns, poor budget credibility, impaired treasury operations, and arrears accumulation.”

As the document points out, global VAT is hardly a marginal issue. VAT has been introduced in over 160 countries and is “one of the most important taxes in the world, both in terms of its global adoption and revenue-generating potential”.

Why it matters

The IMF authors note that access to VAT refunds may often be limited, especially in low income countries. Taxpayers may be discouraged from claiming refunds because of the complex paperwork and procedures involved. Moreover, when they do claim VAT refunds, they frequently experience delays. 

In addition, as these weak institutions and systems are vulnerable to fraud, revenue collection is negatively affected. Moreover, delayed VAT funds can cause governments to improperly account for tax revenue, leading to distortions in fiscal policy. 

In short, a poor VAT refund environment is both detrimental for business and hampers effective governance. 

Designing efficient VAT refund systems

According to the IMF note, efficient VAT refund mechanisms should have the following characteristics. They should:

• Not be too administratively onerous and legally stringent
• Be based on a risk analysis that ensures that all claims are processed while also safeguarding against fraud.
• Have all necessary resources, with measures to ensure full transparency. All relevant government departments should coordinate to ensure effective VAT refunds.  

For more detail on the proposed VAT frameworks, read the complete IMF note on “How to Manage Value-Added Tax Refunds”.

Managing the complexity of VAT refunds

As the IMF note points out, tax institutions vary significantly from country to country. However, VAT bureaucracy can be complex even in the best cases. Even sophisticated and transparent VAT refund processes often require expert guidance.

As VAT refund specialists, VAT IT is carefully monitoring global VAT institutions and policy. Get in touch with VAT IT for clarity, guidance and support on maximising VAT reclaim opportunities, under all conditions.