IMF Working Papers

VAT Fraud and Evasion: What Do We Know, and What Can be Done?

Author/Editor:

Stephen C. Smith ; Michael Keen

Publication Date:

February 1, 2007

Electronic Access:

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Summary:

Like any tax, the VAT is vulnerable to evasion and fraud. But its credit and refund mechanism does offer unique opportunities for abuse, and this has recently become an urgent concern in the European Union (EU). This paper describes the main forms of noncompliance distinctive to a VAT, considers how they can be addressed, and assesses evidence on their extent in high-income countries. While the practical significance of current difficulties in the EU should not be over-stated, administrative measures alone may prove insufficient to deal with them, and a fundamental redesign of the VAT treatment of intra-community trade required. The current difficulties in the EU largely reflect circumstances that would not apply in the United States.

Series:

Working Paper No. 2007/031

Subject:

Consumption taxes Exports Income and capital gains taxes International trade Revenue administration Tax fraud Taxes Value-added tax