On March 15-16 in Rome, Italy, the International Tax Dialogue - a joint initiative of the IMF, the OECD, the World Bank with the UN as an active observer - convened the first global tax conference to examine the experiences of countries that have Value Added Taxes (VAT). VAT is a general consumption tax assessed on the value added to goods and services as they pass through the supply chain. The conference was opened by Italian Minister of Economy and Finance, Domenico Siniscalco, and drew participants from about 100 countries, as well as representatives from international and regional tax organisations.

Today around 135 countries utilise Value Added Taxes (VAT) whilst a number of countries - notably the US – operate sales taxes, usually single-stage taxes at retail. In almost all countries these taxes are either the largest or second largest source of tax revenues.

The two-day discussion examined the policy and administrative challenges of using VAT systems in a rapidly changing economic and business environment. The issues discussed included the tax treatment of financial services, the operation of VAT in Small Island Economies, the application of VAT to the public sector and electronic commerce as well as compliance and audit issues, and the growing incidence of tax fraud.

In his opening speech, the Italian Minister of Economy and Finance, Mr Domenico Siniscalco, has underlined that the Conference offers an important opportunity to analyse the pros and cons of VAT, a tax that is now largely applied at global level and a considerable source of tax yield. Although some problems are specific to the different national contexts in which VAT is applied, there are certain issues that are common to all countries. For example, as Mr Siniscalco has noted, the coverage of the taxable base, which is necessary to ensure effectiveness and neutrality of the tax, clashes with problems in its application to the public sector, the financial sector, as well as to specific sectors, such as agriculture. The risks in applying differential rates are market distortions and increase in both administrative and compliance costs which would be borne, respectively, by administrations and traders. Mr Siniscalco has added that the increasing international VAT fraud and evasion calls for prompt and effective measures on part of the States and, above all, for closer cooperation that, at the international level, is currently based on instruments and systems for exchanging information that are still inappropriate and insufficient.

Mr. Danny Leipziger, Vice President of the World Bank’s Poverty Reduction and Economic Management Network, stressed that “In just 50 years, value added taxes have become a major source of revenue in many countries. The VAT constitutes a large portion of the total government revenues generated by developed and developing countries alike. Tax performance directly affects countries’ ability to meet the Millennium Development Goals (MDGs), as well as public perceptions of the effectiveness of government. It is, therefore, a key policy area for all concerned with revenue mobilization.”

Mrs Teresa Ter-Minassian, Director of the International Monetary Fund’s Fiscal Affairs Department, stressed the importance of the VAT for emerging market and developing countries. “The VAT has proved itself a powerful tool in modernizing and strengthening domestic tax systems, enabling these countries to better meet the challenges of financing poverty reduction and further trade liberalization. But details matter, and practice has varied widely. By bringing together for the first time the world’s leading experts and practioners in the art of the VAT, this conference is a unique opportunity for the sharing of experience on this key aspect of the world’s tax system.”

Mr. Donald Johnston, the Secretary-General of the OECD, chaired the high level opening panel. He commented that the spread of new information technologies and closer global economic integration significantly increases the risks of double taxation (or double non-taxation) arising from the interaction of different VAT systems around the world. VAT issues now had to be addressed at the international level. He added: “Perhaps the time has come to have a Model VAT Convention, just as we have Model Income Tax Convention”. He also noted that “VAT systems in many OECD countries are being systematically attacked by tax fraudsters; hence, we need better international co-operation to tackle such behaviour”.

EU Commissioner László Kovács, noting the European Commission’s satisfaction at being able to support this important international event, stressed that “the Commission will continue to pursue its objectives for VAT reform which include the simplification and modernisation of the EU’s VAT system. The system must not create obstacles for business and, within the EU, the process of tax reform must take full account of the policy objectives of the Lisbon Agenda. The economic environment within which tax systems operate has changed immeasurably in recent years and failure to recognise this will leave business with undue compliance burdens. Inefficiency within the system also adds to the operating costs of administrations and is a distraction from the need to combat systematic tax fraud. Cooperation between tax administrations is an essential component in tackling this common concern.”