VAT ANTI-FRAUD POLICY IN AFRICAN COUNTRIES:

ADDRESSING FRAUD AND EVASION THROUGH LEGAL DESIGN

Rita de la Feria and Anculien Schoeman

VAT Symposium, October 2016 – South Africa

VAT fraud is common practice in many African countries. The effects of fraud go beyond the obvious loss of

tax revenues to those; it creates equity concerns and an uneven playing field for honest businesses, and it is

often associated with organised crime. Whilst fighting fraud requires a concerted policy, encompassing

various measures, legal design can significantly contribute to an increase in VAT compliance in developing

countries through the introduction of measures that reflect a mixture of positive and negative incentives. The

aim of the paper is to propose a legal framework for combating VAT fraud in developing countries, in

particular African countries, which takes into account the administrative constraints, as well as other social

factors often present in those countries.

I. General Considerations on VAT Fraud

Over 160 countries around the world apply a Value-Added Tax (VAT), of which 44 – out of 54 – are African

countries.1 Whilst there are many good policy reasons for introducing a VAT, one of the main reasons has been

its perceived imperviousness to fraud. Indeed, the inclusion of consumption taxes in the tax mix is traditionally

seen as spreading the risk of enforcement,2 and VAT perceived as less susceptible to fraud than its principal

alternative, namely Retail Sales Tax (RST). Yet, VAT, like any other type of tax, is vulnerable to fraud; whilst the

incentive for traders to ensure that suppliers provide invoices ensures that VAT is to some extent self-

enforceable, it is also true that this self-enforceability is somewhat illusory.3 This is primarily for two reasons: this

incentive is only present where the acquirer is a business registered for VAT purposes, but not where it is a final

consumer or a non-registered business; also, even for registered businesses, who have the incentive to request

the invoice, this incentive does not extend to ensuring that VAT has actually been paid. It is precisely through

these two gaps that fraud has spread.

The exact level of VAT fraud and the corresponding revenue loss is, by its own nature, difficult to estimate. Yet

revenue loss is only one of the problems associated with VAT fraud. The connection between organised crime

and certain types of fraud, namely missing trader fraud and bogus traders, as well as its use as a financing

method for illegal activities,4 has been established in criminological research since the late 1980s, early 1990s.5

Professor of Tax Law, University of Leeds, and Senior Lecturer, University of Pretoria, respectively. 1 Crowe Horwath, Africa VAT/GST Guide 2016, 2016. <www.crowehorwath.net/uploadedfiles/mu/additional-

content/home/africa%20vat%20guide%202016.pdf> accessed 26 August 2016; EY, 2016 Worldwide VAT, GST and Sales Tax Guide, 2016. <www.ey.com/GL/en/Services/Tax/Worldwide-VAT--GST-and-Sales-Tax-Guide---XMLQS?preview&XmlUrl=/ec1mages/taxguides/VAT-2016/VAT-BW.xml> accessed 26 August 2016. 2 R. Broadway et al, “Towards a Theory of the Direct–Indirect Tax Mix” (1994) Journal of Public Economics 55(1), 71-88. 3 M. Keen and S. Smith, “VAT Fraud and Evasion: What Do We Know and What Can Be Done?” (2006) National Tax Journal LIX(4), 861-887. 4 HM Government, Serious and Organised Crime Strategy, October 2013. 5 P. van Duyne, “VAT Fraud and the Policy of Global Ignorance” (1999) European Journal of Law Reform 1, 425-443. See also S White, “VAT revenue and organised crime: time for action?” (1999) European Law Review 24(4), 433-439.

VAT fraud may also have potential negative effects on legitimate traders by creating distortions to competition.

Although there are few studies showing concrete evidence of this impact, the few that do exist seem to confirm

intuition, namely that this impact may be significant in affected industries.6

Diagram 1: VAT Fraud Effects

Whilst VAT fraud and evasion can take various forms, and therefore any list will be far from exhaustive, it can be

broadly divided into six types, as set out in Table 1.7 The first two types can be broadly characterised as black

market fraud, or shadow economy fraud; the two final types require a level of sophistication and intension, and

can be broadly characterised as organised fraud.

Table 1: Typology of VAT Fraud and Evasion

Under-Reported Sales Trader may report only a proportion of sales, falsifying records and accounts

to match, or may make some sales “off the books”, by not issuing invoices.

Most common in firms selling to final consumers that do not need invoices.

Failure to Register Small businesses operating close to the level of turnover at which registration

becomes compulsory.

6 M. Frunza et al consider the impact of VAT fraud on the European carbon allowances markets between 2008 and 2009, and find it to have been extremely significant on the markets’ overall performance and its volatility, see “Statistical Evidence of Tax Fraud on the Carbon Allowances Market”, 11 March 2010, available at SSRN: http://ssrn.com/abstract=1664111. 7 This typology is based on that included in Keen and Smith, n. xx above.

Fraud

Revenue Loss

Distortions to

competition

Subsidy to Organised

Crime

Taxpayer Inequity

Firms selling to final customers predominate.

Misclassification of Commodities When different rates apply, traders may reduce their liability by exaggerating

the proportion of sales in the lower-taxes categories.

Claim for Non-Refundable Input VAT Type 1: When traders supply variety of outputs, some subject to VAT and

others exempt, there is incentive to allocate inputs to production of taxed

items.

Type 2: Items bought for private consumption may be misrepresented as

businesses inputs, allowing VAT input recovery.

Bogus Traders Companies may be set up solely to generate invoices that allow recovery of

VAT – “invoice mills” that exploit the practical impossibility of cross-checking

every invoice against evidence that earlier tax has been paid.

Tax Collected But Not Remitted Possible through false accounting, by engineering bankruptcy before tax is

paid, but crucially also, through missing trader fraud.

II. VAT Fraud and Evasion in African Countries

Of the 54 countries in Africa, 44 countries have a VAT. Although the other countries do not have a VAT as such,

most of them do either apply some form of consumption taxes, or a general sales tax. The earliest VAT system

implemented in Africa was by Ivory Coast in 1960, followed shortly thereafter in 1962 by Madagascar; four more

countries implemented VAT in the 1980’s; the 1990’s saw 21 countries adopting a VAT system, and then 17

more after 1999. 17 countries have increased their original VAT rate since implementation, whereas only 5

countries reduced their VAT rate. Table 2 below provides a summary of VAT systems in Africa, indicating the

date of introduction of the VAT system, the rate VAT was originally introduced at, the current standard VAT rate

and the reduced/increased VAT rates where applicable.

Table 2: History of VAT rates in African countries8

Country Date of

introduction

Rate at

Introduction

Standard Rate Increased/ Reduced

Rate (other than 0)

Algeria

1992 13 17 7

Angola

No VAT. Combination of a single-stage sales tax and excise duty is levied

Benin 1991 18 18

Botswana

2000 10 12

8 Crowe Horwath, 2016. n. xx above.; EY, 2016. n. xx above; RM. Bird, and P. Gendron, The VAT in Developing and

Transitional Countries (New York: Cambridge University Press 2007)

Burkina Faso

1992 15 18

Burundi

2009 18 10

Cameroon

1999 18.7 19.25

Cape Verde

2004 15 15

Central African Republic 2001 18 19

Chad

1999 18 18

Comoros No VAT. Consumption tax levied on all imported goods and on production activities and commercial and non-commercial services.

Congo (DRC)

2012 16

Congo (Republic)

1997 18 18 5

Djibouti 2009 10

Egypt 1991 2015 (new)

10

10 10

1.2 – 45 5, 15, 20, 30

Equatorial Guinea

2004 15 15 6

Eritrea

Sales tax form. Rate depends on schedule it falls into.

Ethiopia

2002 15 15 0

Gabon 1995 18 18 5, 10

Gambia

2013 15 0

Ghana 1998 2013 (new)

10

15 15

2.5, 5, 3 5

Guinea

1995 18 18 0

Guinea-Bissau

No VAT. Does however have a general sales tax

Ivory Coast 1960 8 18 9, 21.31

Kenya

1990 17 16 0

Lesotho

2001 14 14 5

Liberia Liberia has a goods and services tax in the form of a cascading tax, and not on value added to each item.

Libya

No VAT

Madagascar 1962 20 0

Malawi

2005 35 16.5 0

Mali

1991 17 18 5

Mauritania

1995 14 16 18

Mauritius

1998 10 15 0

Morocco

1986 19 20 7, 10, 14

Mozambique

1999 17 17 0

Namibia

2003 15 15 0

Niger

1986 12 19 5

Nigeria 1993 5 5 0

Rwanda

2001 15 18 0

Sao Tome and Principe No VAT or sales tax, however, some sectorial consumption taxes levied; VAT due to be introduced in 2018

Senegal

1980 20 18 10

Seychelles

2013 15 0

Sierra Leone General sales tax, no VAT

Somalia

Law not fully operational due to civil unrest

South Africa

1991 10 14 0

South Sudan

No VAT, but sales tax applies

Sudan

2000 10 17 0

Swaziland 2012 14 0

Tanzania

1998 20 18 0

Togo

1995 18 18 0

Tunisia

1988 17 18 12, 6

Uganda

1996 17 18 0

Zambia 1995 20 16 0

Zimbabwe

2004 15 15 0

As economic pressures arose and government needed more tax revenues, countries started to implement new

taxes such as VAT, or increasing existing tax rates. The West African Economic and Monetary Union (WAEMU)

countries were some of the first to implement VAT in Africa, followed by the Central African Economic and

Monetary Community (CEMAC) countries. Lack of harmonisation became problematic, especially regarding

cross border trade. In order to achieve greater harmonisation so as to simplify cross border trade and reduce

waiting times at border post,9 the WAEMU countries amended their original VAT rates so as to adopt a common

18% rate, except for Niger, which levied 19%; similarly the East African Community (EAC) countries

9 P. Letete, “Between tax competition and tax harmonisation: Co-ordination of value added taxes in SADC member states”

(2012) Law Democracy and Development 16, 119-138.

implemented a uniform VAT rate of 18%, with only Kenya applying a VAT rate of 16%. The harmonisation of

domestic consumption taxes in the WAEMU and CEMAC countries is now in line with international practices, with

the various domestic taxes grouped into only two main categories, namely VAT and excise duties, both subject

to moderate rates .10

Due to administrative problems arising where multiple VAT rates are applied, a tool to combat VAT fraud would

be to only have a single non-zero VAT rate11. From the table above, it is evident that 29 countries only have a

single VAT rate to minimise exposure to fraud. Benin and Senegal reconsidered their VAT systems in 1991

already when their multi-rate system was scrapped and only a single non-zero VAT rate is now applied. Kenya

also replaced its VAT system in 2013 by broadening its VAT base and making its agricultural inputs exempt

where it was previously zero-rated12. Kenya was followed by its neighbour, Tanzania, introducing their new VAT

system in July 201513.

The Southern African Development Community (SADC) is now one of the most important economic integration

groups in the African continent, with 15 member countries. The SADC includes a memorandum calling for tax

coordination and harmonisation between these countries to harmonise the administration of indirect taxation.14

On this basis, it has also achieved some level of VAT harmonisation on cross border trade - which is a high risk

area for fraud to occur - by introducing a harmonised form (SAD 500), where goods crossing the border are

declared. These forms can also be submitted electronically before the import or export takes place. This

documentation will be checked again by officials at the border post of the import country, where the import VAT

payable will be calculated. In order to minimise VAT fraud and create better administration harmonisation, the

South African Revenue Service (SARS) and Lesotho Revenue Authority entered into an agreement, whereby the

importer does not need to pay import VAT on indirect imports and then claim it back from the exporting country;

instead, the purchaser just submits the relevant documentation and the VAT is settled between the revenue

authorities.15 Swaziland also entered into an agreement with South Africa to improve the VAT refund scheme.16

Although harmonisation between countries presents significant advantages for cross-border trade, it is not

always achieved. Differences between the tax bases remain, where the countries zero-rate or exempt different

products; the threshold at which a vendor should register for VAT differs; and the rules for refunds of VAT credits

differs;17 and clear place of supply of service rules are also lacking, creating uncertainty as to which country

should levy the VAT.18 The fact that countries are at different levels of development, makes it more challenging to

10 L. Doe, “Harmonization of Domestic Consumption Taxes in Central and Western African Countries” (2006) International

Monetary Fund Working Paper WP/06/8. 11 A. Marking, Trade Liberalization and Tax Reforms in Cape Verde, 2010. 12 Cnossen, 2015. n. xx above. 13 EY, 2016. n. xx above. 14 P. Letete, 2012. n. xx above. 15 A. Jitsing and M. Stern, VAT Practices Within SACU and Possibilities for Harmonisation (2008). 16 International Monetary Fund, Kingdom of Swaziland (2015) IMF Country Report No. 15/353. 17 L. Doe, 2006. n. xx above. 18 H. Peterson, Tax Systems and Tax Harmonisation in the East African Community (EAC) (2009).

apply a fully uniform VAT system, and in general there is a sense that deeper economic integration first needs to

be achieved before further tax harmonisation can be achieved.19

Measuring VAT Fraud and Evasion in African Countries

Due to a lack of information on the topic, it is very difficult to measure the extent of VAT fraud. One measure that

could be used partially is referred to as the VAT compliance gap, being the difference between the actual VAT

revenue collected and the potential VAT revenue that could be collected. However, the compliance gap is not

always arising due to VAT fraud, but could also be because of a lack of understanding the law, tax avoidance,

and other factors.20 The VAT compliance gap for South Africa in the period 2007–2012 fluctuated between 5%

and 10%, which is low by international standards, which raises questions particularly given the well-known high

levels of informality in the country. Another measure which could partially be used is the c-efficiency ratio, which

is widely used to determine how well a VAT system performs. It gives the ratio between the VAT revenue

collected to the amount that could have been collected on total consumption (GDP final consumption) at the

standard VAT rate, should the law be perfectly enforced.21 Table 3 below summarises the c-efficiency ratios for

the African countries.

Table 3: C-efficiency ratios in African countries22

Country C-efficiency Country C-efficiency Country C-efficiency

Algeria 0.51 Ghana 0.39 Niger 0.11

Benin 0.45 Guinea 0.25 Rwanda 0.27

Botswana 0.61 Ivory Coast 0.11 Senegal 0.55

Burkina Faso 0.28 Kenya 0.39 Seychelles 0.87

Cameroon 0.3 Lesotho 0.48 South Africa 0.67

Cape Verde 0.65 Madagascar 0.15 Tanzania 0.31

Central African Republic 0.14 Malawi 0.34 Togo 0.43

Chad 0.14 Mali 0.52 Tunisia 0.5

Congo (Rep) 0.31 Mauritania 0.52 Uganda 0.2

Egypt 0.4 Mauritius 0.58 Zambia 0.34

Equatorial Guinea 0.15 Morocco 0.64 Zimbabwe 0.64

Ethiopia 0.11 Mozambique 0.35

Gabon 0.21 Namibia 0.56

From this table, it is evident that the country with the most efficient VAT system is Seychelles with an efficiency

ratio of 87%. It is followed by South Africa, Cape Verde, Morocco, Zimbabwe and Botswana with efficiency ratios

over 60%. The rest of the countries have a c-efficiency of below 60%.

19 P. Letete, 2012. n. xx above. 20 European Court of Auditors, Tackling Intra-Community VAT Fraud: More Action Needed, 2016. 21 International Monetary Fund. South Africa: Technical Assistance Report – Revenue Administration Gap Analysis Program

– the Value-Added Tax Gap (2015) IMF Country Report No. 15/180. 22 S. Cnossen, Mobilizing VAT Revenues in African Countries, 2015.

Fraud can be defined as an “intentional perversion of truth for the purpose of inducing another in reliance upon it

to part with some valuable thing belonging to him or to surrender a legal right.”23 The main contributors to VAT

fraud are:

Inflated refund claims: vendors claim refunds on fictitious invoices. As this gives vendors the opportunity

to receive back public funds, this is one of the most common types of fraud;24 and

Missing trader or carousel fraud: which involves cross border transactions where goods are purchased

from another country tax free, sold at VAT inclusive prices but then the trader disappears before paying

the output tax over to the revenue authority. This is the most vulnerable form of VAT fraud as it is cross

border and involves more than one taxing authority.25

The sub-Saharan African countries have large informal sectors which are often coupled with weak tax

administration and a lack of political support. This leads to problems with VAT such as evasion, and at times

fraud. The shadow economy in developing countries is important to consider when considering the design and

operation of VAT, as “VAT evasion, the size of the underground economy and corruption are closely linked”. 26

Countries with a larger informal sector which is harder to tax due to its nature of trading, such as African

countries, are very dependent on revenue from indirect tax,27 and thus it is crucial to minimise evasion and fraud

relating to it. Some firms in the informal sector are not caught in the tax net, as they are not registered for VAT,

and therefore cannot claim input tax on items purchased for the business,28 but this is far from being the case as

regards all informality, as much of it takes the form of underreported sales.

In a study done in 2000 where the size of the informal sectors in various countries was determined, it is noted

that the average informal economy as a % of Gross National Product (GNP) in 26 Asian countries was 26% and

18% for 16 Organisation for Economic Co-operation and Development (OECD) countries, whereas this average

for 23 African countries was 42%.29 These results are summarised in table 4 below, along with the size of the

shadow economy in 2006.

Corruption can be defined as “the misuse of power for private gain” and, among others, include fraud30. This is

often due to African countries, although rich in natural resources, experiencing a lot of poverty and high levels of

inequality.31 Transparency International measures the perceptions of corruption as seen by business people and

country analysts. A score between 0 and 10 is awarded, where 10 is very clean and 0 is highly corrupt. Of the

23 P. Gottshcalk, “Categories of financial crime” (2010) Journal of Financial Crime, 17(4), 441 - 458. 24 Bird and Gendron, 2007. n xx above. 25 GTZ Sector Programme Public Finance, Addressing Tax Evasion and Tax Avoidance In Developing Countries, (2015). 26 Bird and Gendron, 2007. n xx above. 27 J. Alm, J. Martinez-Vazquez and F. Schneider,‘Sizing’ the problem of the hard-to-tax (2004). 28 Bird and Gendron, 2007. n xx above. 29 F. Schneider, Size and Measurement of the Informal Economy in 110 Countries Around the World (2002) Rapid

Response Unit, World Bank. 30 K. Sylla, Challenges To Democratic Governance in Developing Countries. Defining corruption in the cultural context of

Sub-Saharan Africa. (Switzerland: Springer International Publishing 2013). 31 I. Carr, “Corruption, the Southern African Development Community Anti-corruption Protocol and the Principal—Agent—

Client Model” (2009) International Journal of Law in Context, 5(2) 147–177.

167 countries measured in 2015, only 11 of the 54 African countries lie in the top 70 on the “clean” side. Only 6

countries scored above 5. Table 4 below gives the index score given to each country, as well as its ranking out of

the 167 countries that have been measured.

Table 4: Corruption index, c-efficiency ratio, size of the shadow economy and size of the informal economy

Country Corruption

Index32

Country rank

/167

C-efficiency

ratio33

Shadow

economy

(% of GDP,

2006)34

Informal

economy

(% of GNP,

1999/2000)35

Algeria 3.6 88 0.51 30.9 34.1

Angola 1.5 163

Benin 3.7 83 0.45 48.3 45.2

Botswana 6.3 28 0.61 32.7 33.4

Burkina Faso 3.8 76 0.28 40.6 38.4

Burundi 2.1 150 39.7

Cape Verde 5.5 40 50.1* 36.8

Cameroon 2.7 130 0.3 32.2 32.8

Central African Republic 2.4 145 0.14 46.9

Chad 2.2 147 0.14 41.9

Comoros 2.6 136

Congo 2.3 146 45.9

Congo, Dem. Rep. 2.2 147 29.3*

Côte d’Ivoire 3.2 107 35.3* 43.4 39.9

Djibouti 3.4 99

Egypt 3.6 88 0.4 34.1 35.1

Equatorial Guinea … … 0.15

Eritrea 1.8 154

Ethiopia 3.3 103 0.11 37.6 40.3

Gabon 3.4 99 0.21

Gambia 2.8 123

Ghana 4.7 56 0.39 42 38.4

Guinea 2.5 139 0.25 41

Guinea-Bissau 1.7 158

Kenya 2.5 139 0.39 33.8

Lesotho 4.4 61 0.48 30.2

Liberia 3.7 83

Libya 1.6 161

Madagascar 2.8 123 0.15 39.6 39.6

Malawi 3.1 112 0.34 41.9 40.3

Mali 3.5 95 0.52 41.6 41

Mauritania 3.1 112 0.52 34.5

Mauritius 5.3 45 0.58 22.8

Morocco 3.6 88 0.64 34.8 36.4

Mozambique 3.1 112 0.35 39.6 40.3

32 African Economic Outlook, Statistics. Table 21 – Corruption perceptions index (CPI) (2016).

<www.africaneconomicoutlook.org/en/statistics> accessed 26 August 2016 33 Cnossen, 2015. n. xx above; International Monetary Fund, Revenue Mobilization in Developing Countries, March 2011. 34 F. Schneider, A. Buehn and CE. Montenegro, Shadow Economies All Over the World, New Estimates for 162 Countries

from 1999 to 2007 (2010). 35 Schneider, 2002. n xx above.

Namibia 5.3 45 0.56 28.8

Niger 3.4 99 0.11 39.9 41.9

Nigeria 2.6 136 22.9* 57.9

Rwanda 5.4 44 0.27 39.6

Sao Tome and Principe 4.2 66

Senegal 4.4 61 0.55 43.2

Seychelles 5.5 40 0.87

Sierra Leone 2.9 119

Somalia 0.8 167

South Africa 4.4 61 0.67 27.4 28.4

South Sudan 1.5 163

Sudan 1.2 165

Swaziland … …

Tanzania 3.0 117 0.31 54.8 58.3

Togo 3.2 107 0.43 35.4

Tunisia 3.8 76 0.5 36.4 38.4

Uganda 2.5 139 45.9* 42.9 43.1

Zambia 3.8 76 0.34 49.3 48.9

Zimbabwe 2.1 150 0.64 59.4

As mentioned, “VAT evasion, the size of the underground economy and corruption are closely linked”36, although

it is not always as clear and direct as can be seen in the table above. In Nigeria it is evident that the perceived

corruption is very high and thus, this perception coupled with the feeling of not wanting to give to a corrupt

government, illiteracy, poor record keeping, and poorly remunerated tax officials, results in administrative

efficiency being low, and all lead to high probably of tax fraud and evasion. Collusion between businesses and

tax authorities results in the governments being cheated.37

Cultural differences in countries can play an important role in understanding perceptions of fraud, for example in

the form of bribes. In some African traditions, the giving of gifts is a sign of politeness, respect and trust, where

as someone from another culture might view this as a bribe and condemn it.38 There are conflicting views within

African countries as the Western/European descendants staying in these countries view this gift giving process

different to the traditional African communities39. Personal and social norms are also factors influencing

voluntary tax compliance. Personal norms include religious norms, which differs from country to country, and

even person to person. Furthermore, due to lack of resources especially in developing countries, education is not

what it should be and due to the complexities of the law, most taxpayers do not have sufficient educational

background to understand it. Political affiliation also affects tax compliance. Studies have found that more liberal

supporters are less compliant than social democratic supporters.40

VAT Anti-Fraud in African Countries

36 Bird and Gendron, 2007 n. xx above. 37 AE. Ezeoha and E Ogamba, “Corporate Tax Shield or Fraud? Insight from Nigeria” (2010) International Journal of Law

and Management 52(1), 5 – 20. 38 A. Haynes, “The Struggle Against Corruption — A Comparative Analysis" (2000) Journal of Financial Crime 8(2), 123-135. 39 Sylla, 2013. n xx above. 40 E. Hoffman, E. Hoelzl and E. Kirchler, “Preconditions of Voluntary Tax Compliance: Knowledge and Evaluation of

Taxation, Norms, Fairness and Motivation to Cooperate” (2008) Journal of Psychology 216(4), 209 – 217.

In order to combat VAT fraud and evasions, countries have taken various measures, the most common of which

is levying a penalty where the VAT legislation is not complied with.41 This can be due to non-registration where

the business should be registered, filing returns late, or making late payment. These countries also charge

interest on the outstanding taxes and penalties payable by the vendor. Especially where the penalty rates are

high, it is probable that the income declared is higher due to people’s risk aversion42. It would encourage

voluntary compliance when punishing penalties are charged43.

Tax fraud is a serious concern in many countries. In 2001 in Namibia, tax fraud was estimated at 9% of Gross

Domestic Product (GDP). Namibia has an Anti-Money Laundering regime in place to combat such evasion and

the most of the Namibian Financial Intelligence Unit’s intelligence reports are to the Inland Revenue Authority.

Similarly, other developing countries have also introduced anti-money laundering measures to fight against the

receipt of ill-gotten money.44

Combatting fraud is most effective where it is not just the revenue authorities that are involved, but the public as

well. Use is often made of whistle-blowers, said to support prosocial behaviour, defined as “positive social

behaviour that is intended to benefit other persons”45. In South Africa, SARS has a link on its website where a

“suspicious activity” can be reported. This includes VAT fraud relating to the importation of goods where import

VAT should be declared, reporting a person or business that is supposed to be registered as a VAT vendor, but

is not, or someone claiming a VAT refund that is fraudulent46. Similarly, Kenya also encourages people to report

tax evasion, fraud and corruption, either in person at the Commissioner General, by mail, telephone, fax or e-

mail47. Another rewarding tool to combat fraud is the monetary incentive offered to people who report taxpayers

that are not compliant. A reward is paid in Malawi based on the value of the amount evaded and reported48.

Depending on the client, some clients first want a firm’s tax compliance certificate before appointing them to do

certain work for them. In order to simplify this process and for clients to obtain this information more easily, SARS

has a new system where a taxpayer’s tax compliance status can be viewed. This certificate will only be clear if a

number of requirements are met, such as that your tax returns and supporting documents, if required, have been

submitted, payment of all taxes has been made and that you are registered for all taxes you should be registered

41 EY, 2016. n. xx above. 42 MG, Allingham and A. Sandmo, “Income Tax Evasion: A Theoretical Analysis” (1972) Journal of Public Economics (1972)

323-338. 43 RE. Krever, VAT in Africa (Pretoria: Pretoria University Law Press 2008) 44 S. Yikona, B Slot, M Geller, B Hansen and F el Kadiri, Ill-gotten Money and the Economy: Experiences from Malawi and

Namibia, 2011. 45 JB. Dozier and MP. Miceli, “Potential Predictors of Whistle-Blowing: A Prosocial Behavior Perspective” (1985) Academy of Management Review 10(4), 823-836. 46 SARS, Report a Suspicious Activity, 2016. <www.sars.gov.za/TargTaxCrime/ReportCrime/Pages/Report-a-suspicious-

activity.aspx> accessed 26 August 2016 47 Kenya Revenue Authority, Building Taxpayers Trust Through Facilitation for Enhanced Tax Compliance.

<http://kra.go.ke/index.php/about-kra/customer-service-directory/office-of-the-cg/reporting> accessed 26 August 2016 48 C. Chiumya, Counteracting Tax Evasion in Malawi: An Analysis of the Methods and Quest for Improvement (2006) MPRA

Paper 9892.

for. If the community as a whole supports such initiatives and only contract with tax compliant suppliers, this will

already improve the compliance of taxpayers in the country as a whole49.

Registering as a VAT vendor is not an easy task and this process was complicated and made difficult in South

Africa in order to prevent VAT fraud where businesses register and claim input tax which is not valid. This delay

in the registration process was however not an effective way to combat VAT abuse50. A “single registration

system” has been implemented in May 2014 where a person or business has one unique profile at SARS that

contains all of its tax affairs51. This will improve the time it takes for first time registration to be processed, and

SARS will then also be able to better compare information. I am of opinion that checks can then be done by

viewing the income tax to determine whether the taxpayer should then not also be registered for VAT if he is not.

People do not like to struggle and waste their time. If they are already contemplating not complying, they will not

be compliant if they struggle. SARS is focussed on improving electronic systems to ensure ease of compliance52.

When an enterprise wants to set up an investment project in Ghana, it is obliged to register with the Ghana

Revenue Authority and must also register for VAT.53 In order to combat fraud, Benin’s revenue agency deployed

more staff to the units dealing with fraud and implemented stronger controls, such as improving the equipment

and number of staff that collects the revenue.54

The Republic of the Congo introduced a unique identification number whereby each registered taxpayer is given

this unique number, improving the tracking and administration for the revenue authority.55

It has been said that VAT registration thresholds should not be set too low,56 as this creates greater risks for tax

evasion. South Africa increased its tax threshold from R300 000 to R1 000 000 in 2009, with the aim of reducing

administrative costs, and the possibility of fraud taking place.57 This is, however, a controversial view as much

will depend on the level of tax literacy of taxpayers, as well as the administrative costs involved in running a low

threshold system.

49 SARS, Managing Your Tax Compliance Status With SARS, 2016.

<www.sars.gov.za/ClientSegments/Individuals/TCS/Pages/default.aspx> accessed 26 August 2016 50 J. Roeleveld and C. De Wet,‘ South Africa’. In: T. Ecker, M. Lang and I Lejeune, The Future of Indirect Taxation

(Netherlands: Kluwer Law International 2012). 51 SARS, Introduction of new single registration system at SARS, 2014. 52 B. Schlenter, “The Taxing Business of Money Laundering: South Africa” (2013) Journal of Money Laundering Control

16(2), 126 – 141. 53 Ghana Embassy, Frequently Asked Questions and Answers (Part 1), 2016.

<www.ghanaembassy.org/index.php?page=frequently-asked-questions-and-answers-part-1#main> accessed 30 August 2016 54 International Monetary Fund, Benin, (2011) IMF Country Report No. 11/60. 55 International Monetary Fund, Republic of Congo: Poverty Reduction Strategy Paper – Annual Progress Report, IMF

Country Report No. 10/69 (2010). <www.imf.org/external/ns/search.aspx?hdCountrypage=&NewQuery=congo+country+report&search=Search&filter_val=N&col=SITENG&collection=SITENG&lan=eng&iso=&requestfrom=country&countryname=&f=> accessed 30 August 2016 56 Bird and Gendron, 2007. n xx above. 57 SARS, 2014. n xx above.

Mali followed the recommendation of an International Monetary Fund mission and increased its VAT threshold

from CFAF 30 million, to CFAF 50 million and then to CFAF 100 million, making it optional for businesses that

are below the threshold to register for VAT.58 This is meant improve the administration of VAT.

Since one of the largest risks of VAT fraud is the false claims of input tax, most countries require that the vendor

claiming the input tax is in possession of a valid tax invoice. SARS for example, sets out the requirements of

what exactly must be indicated on the tax invoice for it to be valid.59 Similarly, before input tax paid on importation

can be reclaimed, the vendor must be in possession of the relevant documents. For instance, before a VAT claim

can be made in Ghana, the vendor must have a valid customer entry, an assessment notice and the tax invoices

for the services received60. The Kenya Revenue Authority is asking for proper documentation to be submitted by

the VAT vendors before refunds claimed will be paid. One of these documents is an auditor’s certificate where

the claim exceeds Ksh 1 million. This is a good tool to ensure that large false claims are not made61.

South Africa has information-sharing agreements in place which should improve the recovery of money which is

not visible in the financial system62. Cameroon’s tax authority has systems in place where information is shared

between them and the customs services. This reduces fraud on cross-border activities.63

SARS conducts audits, such as in 2011 when 165 of the richest tycoons were audited, as it was estimated that

the tax gap relating to these business persons alone amounted to R20 billion 64. VAT audits are an effective tool

to pick up VAT fraud. In South Africa, the VAT audits show that up to 60% of reporting is inaccuracy. The

construction industry is of great concern where 70% of the audited VAT cases indicate wrong disclosures65.

SARS brought in an anti-fraud measure whereby people may no longer delay the audit process so that

prescription can take place and they no longer be liable for the tax liability. Businesses took longer to provide the

requested documentation during the audit process in the hope that the audit period prescribes before an

additional assessment is raised. SARS may now extend the audit process by the time of the delay by the client66.

58 International Monetary Fund, Mali, (2013) IMF Country Report No 13/355; International Monetary Fund, Mali Technical

Assistance Report – Tax Policy – Diagnostic Assessment, (2016) 59 SARS, Tax Invoices, 2016. <www.sars.gov.za/ClientSegments/Businesses/Government/Pages/Tax-Invoices.aspx>

accessed 26 August 2016. 60 Ghana Revenue Authority, Value Added Tax, 2016. <www.gra.gov.gh/index.php/tax-information/value-added-tax> accessed 26 August 2016 61 Kenya Revenue Authority, VAT Refunds At a Glance, 2004. <www.revenue.go.ke/vat/VATRefundsataglance.html> accessed 26 August 2016 62 B. Schlenter, 2013. n xx above. 63 S. Fambon, Taxation in Developing Countries – Case Study of Cameroon, 2006.

<www.google.co.za/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0ahUKEwiEkK3lndfOAhXpBcAKHS77C7YQFggaMAA&url=https%3A%2F%2Fwww.ciaonet.org%2Fattachments%2F7447%2Fuploads&usg=AFQjCNFO7WxCaFqcLWY5UhYuheoByHSXzg&sig2=LTLBkVXqCi6ySFvL9j4p3Q&bvm=bv.129759880,d.d2s&cad=rja> accessed 26 August 2016 64 Schlenter, 2013. n xx above. 65 SARS, Compliance Programme 2012/13 – 2016/17, 2014.

<www.sars.gov.za/pages/Results.aspx?k=Compliance%20Programme> accessed 26 August 2016 66 N. Napier, SARS Hits Back: Taxpayers May No Longer Frustrate the Audit Process in the Hope of Prescription. Tax

Technical, Iss 27 2016, 2016.

Malawi pays a lot of attention to tax audits. Every taxpayer needs to be audited every three years. The Malawi

Revenue Authority has a whole division involved in the tax audits and criminal investigations67. Ghana

commissioned a task force of 40 members in August 2015 with the task of, amongst others, ensuring that

taxpayers are filing their VAT returns and to ensure that non-compliant taxpayers pay their outstanding tax

liabilities68.

SARS has followed a naming and shaming approach, whereby they release a report of “corruption crackdown” to

show their commitment to combat crimes such as fraud and abuse of the tax system69. This is a good deterrent

as people feel ashamed and guilty if they are named and shamed in public70. Ghana also followed suit and will

now also name and shame persons who do not submit tax returns or avoid timely payment of taxes.71

The reverse charge mechanism is not always practical as, for instance with the supply of e-commerce,

customers who import these services are supposed to declare this transaction and pay import tax, but they do

not. To combat this non-declaration, SARS broadened the scope of the definition of an “enterprise” and who

should be liable to register as a VAT vendor by including any foreign business making taxable supplies of more

than R50 000 in electronic services to South African residents at the end of any month72. The supplier thus has to

register as a VAT vendor.

Another tool implemented by SARS is the IT14SD, which is a reconciliation that has to be completed by

companies and close corporations, if selected for verification by SARS. From a VAT perspective, this form

requires a reconciliation between the total turnover declared for income tax purposes, against the total supplies

declared in all the VAT returns for that year of assessment. A reconciliation must also be done between the total

input tax claimed and cost of sales declared for income tax purposes. Ideally, this reconciling amount should be

below R100, otherwise reasons must be provided.73 It should thus be easier when comparing VAT information

with income tax information to pick up where there is an over-charge of input tax claims or an under-declaration

of output tax on sales.

SARS has improved its IT systems by building in an automated risk assessment tool which is used to trigger a

variance review. If a variance review is requested, the vendor needs to submit supporting documents,

67 Chiumya, 2006. n xx above. 68 Government of Ghana, Ministry of Finance, Ghana Revenue Authority Inaugurates Special Taskforce, August 2015.

<www.mofep.gov.gh/?q=content/ghana-revenue-authority-inaugurates-special-taskforce> accessed 26 August 2016 69 Polity.otg.za, SARS: Statement by the South Africa Revenue Services, Enforcement and Customs Operations for June

2014, 2014. <http://www.polity.org.za/article/sars-statement-by-the-south-africa-revenue-services-enforcement-and-customs-operations-for-june-2014-16072014-2014-07-16> accessed 26 August 2016 70 HG. Grasmick, RJ. Bursik and JK. Cochran, "Render Unto Caesar What Is Caesar's: Religiosity and Taxpayers'

Inclinations to Cheat” (1991) The Sociological Quarterly 32(2), 251-266. 71 E. Davis, B&FT, New Law to Name and Shame Tax Evaders,16 August 2016. 72 SP. Van Zyl, “The Collection of Value Added Tax on Cross-Border Digital Trade – Part 1: Registration of Foreign

Vendors” (2014) Comparative and International Law Journal of Southern Africa 47, 154 – 186 73 SARS, How To Complete the Supplementary Declaration (IT14SD) Form for Companies and Close Corporations, not

dated. <www.google.co.za/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0ahUKEwjyoKL15MvOAhWiI8AKHQBTC20QFggcMAA&url=http%3A%2F%2Fwww.thesait.org.za%2Fresource%2Fresmgr%2Fsars_how_to_complete_the_sup.pdf&usg=AFQjCNFR3e_oI9qHHwmwU7cYm1eOt0Gm3w&sig2=9muLJwDhN_scB9-Au1306A&cad=rja> accessed 26 August 2016

substantiating the information completed on the VAT return74. Vendors can also submit their returns online via e-

filing, which is much easier than standing in a queue for a long time to submit the return. Kenya also introduced

an iTax system whereby tax returns can be filed online75. Similarly, Algeria also implemented a system for online

filing of tax returns and electronic payment.76

The ease of collection of taxes can also improve compliance. “Countries, such as Nigeria, Rwanda, Tanzania

and Uganda, have also developed collection systems through the banks”. Countries such as Uganda,77

Mauritius, Morocco, South Africa and Tunisia also introduced electronic filing and payment procedures.78 Where

submission of returns, payment and monitoring thereof can take place on line, such as in Tanzania and South

Africa, this is more efficient and should thus reduce VAT fraud.79

Rwanda implemented a very advanced technological system whereby the Rwanda Revenue Authority can, close

to real time, track and monitor transactions through digital invoicing. From this system, audits can also be

conducted more effectively. The VAT law requires all registered VAT vendors to be in possession of a certified

electronic billing machine that has a sales data controller and a certified invoicing system. Through this, the

Rwanda Revenue Authority can track all transactions80. They also implemented an electronic fiscal device,

whereby each registered VAT vendor needs to install this device. It records all sales transactions and memory

cannot be erased, thus decreasing the risk that sales are under-declared81. Similarly, the Kenya Revenue

Authority enforces that each registered VAT vendor must have an electronic tax register, which captures all sales

transactions and has read only memory82.

When Gabon implemented its VAT system, it already had a basic computer system in place whereby it can track

when vendors file late, or stop filing their returns, which can then be followed up. Since the start, receipts and

notices have been issued electronically only, with 80% of the returns being submitted on time83.

Similar to Gabon, Mauritius also has a basic computerized system whereby it allocates a taxpayer identification

number to each VAT vendor, and also monitors late or stop filers. In addition to this, a school was started

whereby the staff that will be dealing with the VAT returns and the auditors were trained. Training was also given

74 BDO, New VAT system has businesses tearing their hair out, 2011. <www.bdo.bw/News/Pages/New-VAT-system.aspx>

accessed 26 August 2016 75 Kenya Revenue Authority, iTax, not dated. <https://itax.kra.go.ke/KRA-Portal/> accessed 26 August 2016 76 International Monetary Fund, Algeria 2013 Article IV Consultation (2014) IMF Country Report No. 14/32 77 Uganda Revenue Authority, Developing Uganda together. 78 J. Bodin and V Koukpaizan, The Rise of VAT in Africa – Impact and challenges. International VAT Monitor, May/June

2009, 2009. 79 GTZ Sector Programme Public Finance, 2015. n. xx above. 80 RT. Ainsworth and G. Todorov, Rwanda – Cutting-Edge VAT Compliance, 2013. 81 C. Kandiero, Malawi Revenue Authority to Counter Fraud Electronically. Bnltimes, 2013.

<http://timesmediamw.com/malawi-revenue-authority-to-counter-fraud-electronically/> accessed 26 August 2016 82 Kenya Revenue Authority, Electronic Tax Register Overview 2011 – 2012, 2011. 83 C. Grandcolas, The Occasional Failure in VAT Implementation: Lessons for the Pacific. Asian-Pacific Tax Bulletin,

January/February 2005, 2005.

free of charge to businesses and accountants. All these and other processes ensured that in 1999 already,

Mauritius had a return compliance rate of over 95%84.

Education plays an imperative role in improving compliance and thus reducing VAT fraud. By informing taxpayers

of how the VAT works, taxpayers should feel more motivated to not evade tax. In Malawi brochures are issued to

explain the taxes and the penalties involved, and public forums are held where taxpayers meet face to face with

tax officials to get advice on their tax matters. Discussions regarding taxes are also held on national radio85.

The Rwanda Revenue Authority provides education and services to its taxpayers by, for instance, informing the

taxpayers why it is important for them to contribute to the tax system. They also have a “taxpayer’s week” and

involves the political leaders who should also communicate the importance of their tax contributions86.

Not only should taxpayers be educated, but tax officials should also be trained in order to be able to handle the

returns and assessments of the taxpayers. Tax officials in Ghana are trained by Dutch tax officials for instance,

guiding them on tax assessments that are to be issued to multinational companies87.

Kenya and Ghana realised that they have limited administrative resources and that the most revenue is received

from large taxpayers. They thus set up large taxpayer units, which reduces costs to comply and should thus also

reduce fraud. This was particularly successful in Ghana where, in two years, the revenue collected increased by

86%88. Cameroon on the other hand improved its tax administration by creating tax centres for small and

medium-size enterprises. This doubled the number of taxpayers, leading to an increase in tax revenue.89 Egypt’s

tax administration also improved since it created medium and large taxpayers’ offices to assist these taxpayers

to file and pay.90

36 of the African countries are members of the African Tax Administration Forum (ATAF). ATAF’s mission is to

enhance administrative efficiency and effectiveness in order to improve the living standards of Africans91. If

partnerships are created between countries, administration between them should improve, decreasing fraud on

cross border transactions.

III. Addressing VAT Fraud through Legal Design

Fighting VAT fraud requires an integrated approach particularly in terms of tax base design, and design of

compliance measures and incentives.

84 Grandcolas, 2005. n. xx above. 85 Chiumya, 2006. n xx above. 86 GTZ Sector Programme Public Finance, 2015. n. xx above. 87 Government of the Netherlands, Government Stepping Up Support To Developing Countries on Tax Issues, 2015.

<www.government.nl/latest/news/2015/06/20/government-stepping-up-support-to-developing-countries-on-tax-issues> accessed 26 August 2016. 88 GTZ Sector Programme Public Finance, 2015. n. xx above. 89 International Monetary Fund, Cameroon (2015) IMF Country Report No. 15/331 90 International Monetary Fund, Middle East Regional Technical Assistance Center (2009) 91 African Tax Administration Forum, Overview/Member countries. <www.ataftax.org/en/about/Pages/Overview.aspx>

accessed 26 August 2016

Tax Base

Exclusions from the tax base create massive opportunities for evasion and fraud, and divert administrative

resources. Thus, a broad VAT base is one of the most important elements of fighting evasion and fraud.

Tax Compliance

Dismissed for many years as fait accompli, the fight against under-reported sales and VAT black market evasion

is getting a new lease of life through the use of technology based anti-fraud methods. In 2010, inspired by anti-

fraud mechanisms already in use in various countries around the world, the European Commission emphasised

the need, not only for the establishment of benchmarks to measure the performance of national tax

administrations, but also for the facilitation in a systematic manner of exchange between Member States of best

practices for high-risk sectors, such as restaurants, bars, or even bakeries.92 And there are now many of these,

which can be broadly divided into negative and positive incentives to tax compliance.

In terms of negative incentives, one of the most promising technology-based anti-fraud methods is the digital

invoice, first introduced in Brazil. Under the Brazilian model, invoices issued by companies with a turnover above

a certain threshold, must be digital in order to be enforceable; paper invoices are acceptable only as replicas or

evidence of prior digital invoices.93 This model has also the advantage of allowing the electronic matching-up of

invoices. The process of matching-up invoices is not new, and indeed has been in place in South Korea since

1976, but extensive administrative and compliance costs raised questions over its overall benefits.94 Electronic

invoicing proved crucial in overcoming this problem, and in 2010 Israel implemented a new online system, under

which all invoice matching would be done electronically at a massive data-warehouse. The system has

reportedly been a huge success.95 Similarly, in the United States (US), the mandatory use of certified tax

software by high-risk industry sectors, implemented in 2005, has been proved a successful negative incentive to

compliance.96

Alongside specific anti-fraud measures, such as those listed above, the European Commission has also

proposed new methods of collecting and monitoring VAT, broadly defined, by using modern technologies. In this

regard, two proposals are essentially on the table: the so-called split payment method,97 and the data warehouse

92 European Commission, Communication on the future of VAT - Towards a simpler, more robust and efficient VAT system, COM (2011) 851 final, 6 December 2011. See also European Commission, Green Paper on the Future of VAT—Towards a simpler, more robust and efficient VAT system, COM(2010) 695 final, December 1, 2010. 93 For a detailed analysis of how this model works, see R.T. Ainsworth, “Refund Fraud? Real-Time Solution! Digital Security Borrowed from the VAT (Brazil, Quebec & Belgium)” (2012) Boston University School of Law Working Paper 12-15, March 2012. 94 R. Krever, “Combating VAT Fraud: Lessons from Korea” (2014) British Tax Review 3, 329-341. 95 Israel Tax Authority, A Revolution in Value Added Tax, available at: http://www.itdweb.org/documents/A_revolution_of_Value_Added_Tax.pdf 96 W. Hellerstein, “Sales Tax Reform in the United States: The Streamlined Sales Tax Project” (2005) Bulletin for International Fiscal Documentation 59, 170. 97 Based in the original idea of a “VAT trust account” by H.-W. Sinn et al, “The Ifo Institute’s Model for Reducing VAT Fraud: Payment First, Refund Later” (2004) CESifo Forum 5(2), 30-34. For a detailed analysis of this method, see R.T. Ainsworth and B. Madzharova, “Real-Time Collection of the Value-Added Tax: Some Businesses and Legal Implications” (2012) Boston University School of Law Working Paper 12-51, October 2012.

model (SAFT), both of which have already been implemented, at least partially, in some Member States. Whilst

opinions expressed during the consultation process showed divergent opinions, as well as some scepticism,

about both methods, the Commission has stated its commitment to exploring these options further.98 The new

VAT Action paper is part of this approach.

The use of new technologies has given negative incentives to compliance a force, which they had so far lacked.99

Regardless, however, it is unsurprising that positive incentives to compliance have also developed in various

jurisdictions. Whilst this is a relatively new phenomenon, there are now various examples of this approach.

South Korea, for example, has recently introduced a “cash-receipt” system, which rewards final costumers

paying by cash, if they insist on a cash receipt that automatically reports sales to the revenue authority. The

system has reportedly achieved positive results in terms of reducing unreported cash sales.100 Several other

Asian countries, most notably China, successfully run a so-called Lottery Ticket Rewards system, under which

receipts are in effect treated as lottery tickets, with a selected one being awarded a prize, in the form of monetary

compensation.101 This system is also similar to that implemented in the Brazilian State of Sao Paolo, designated

nota fiscal paulista. Implemented in 2007, the Brazilian system rewards all consumers with a 30% rebate on

consumption tax paid, provided an electronic receipt is requested from the seller; it also gives a money prize to

one selected invoice. The system has reportedly led to an increase of up to 10% in reported sales in the

services industry.102

Nearly all the above anti-fraud measures, purporting both positive and negative incentives, have recently been

implemented in a European Union (EU) Member State, through the approval of a massive anti-fraud package. In

May 2011, in the mist of the economic and financial crisis, Portugal became the third EU country to be bailed-out

by the so-called troika, the group composed by the European Commission, the European Central Bank, and the

International Monetary Fund. Whilst the bail-out agreement included the implementation of various VAT

measures,103 one of its flagships being a brand-new, comprehensive VAT anti-fraud strategy. The strategy,

implemented gradually between 2011 and 2013, used a mixture of negative and positive incentives measures

based on the best international practices. Measures implemented included, therefore: an introduction of a

mandatory certified tax software for high-risk industries – based on the US model; mandatory electronic invoicing

and online reporting stored in a data warehouse – based on the Brazilian and the Israeli models; introduction of a

98 See R. de la Feria, “The 2011 Communication on the Future of VAT: Harnessing the economic crisis for EU VAT reform” (2012) British Tax Review 2, 119-133. On the feasibility of applying these methods at an EU-wide scale see PWC, Study of the feasibility of alternative methods for improving and simplifying the collection of VAT through he means of modern technologies and/or intermediaries, Final Report, TAXUD/2009/AO-05, September 20, 2010. 99 Traditionally econometric results suggested that they had no long-run impact, see J. Andreoni et al, “Tax Compliance” (1998) Journal of Economic Literature 36, 844. 100 See R. Krever, n. xx above; and S. Kim, “Federal Income Tax Reform: A VAT and the Cash Receipt System” (2007) Tax Notes 751, 115. 101 See M. Fabbri and S. Hemels, “Do You Want a Receipt? Combating VAT and RST Evasion with Lottery Tickets” (2013) Intertax 41(8/9), 430-443. 102 E. Mattos et al, “Programas de incentivos fiscais sao eficazes? Evidencia a partir da avaliacao do impacto do programa nota fiscal paulista sobre a arrecadacao do ICMS” (2013) Revista Brasileira de Economia 67(1). 103 Most significantly base-broadening, see R. de la Feria, ““Blueprint for Reform of VAT Rates in Europe” (2015) Intertax 43(2), 154-171.

personal income tax credit as a percentage of VAT paid on acquisitions from high-risk industries, such as

restaurants and hairdressers – based on the Sao Paolo model; and a lottery system, designated fatura da sorte,

whereby every week one invoice is rewarded with a high-value car (Audi A4) – based on Asian and Sao Paolo

models.104 The range of measures included in this package makes it difficult, if not impossible, to determine the

success of each individual measure, but the Portuguese Government has reported significant increases in the

reporting of sales, particularly after the introduction of the lottery system.105

General Anti-Fraud Rule: Third-Party Responsabilisation

In addition to the above measures which are design primarily to combat evasion, the introduction of a general

rule determining third-party responsibilisation for fraud, under which a taxable person can be denied VAT rights,

such as the right to deduct, when he/she knew, or should have known that fraud was being committed, presents

itself as particularly effective.

IV. Conclusion: The SLIM VAT

An anti-fraud policy, which takes into account the latest developments across the world in this area, particularly

in terms of technological method and legal design, is a crucial part of the SLIM VAT, as presented here.

Diagram 2: SLIM VAT

104 The results of the lottery are public and can be regularly tracked online at: https://faturas.portaldasfinancas.gov.pt/FatSorte/home.action. 105 L. Tiago, “Facturas com NIF apanham 176 mil novas empresas”, Dinheiro Vivo, 22/04/2014.

SLIM VAT

Simple

ModernLocal

Objective: adapt to socio-

economic realities

Objective: minimise pressure on Tax Administration Methods: minimal exceptions; simplified calculations; broad-based

Objective: adapt to new digital and globalised economy Methods: electronic compliance and payments; use behavioural economics; general anti-fraud rule