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

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  • Keen, Michael
  • Smith, Stephen

Abstract

Like any tax, the VAT is vulnerable to evasion and fraud. But its credit and refund mechanism offers 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 overstated, administrative measures alone may prove insufficient to deal with them, and a fundamental redesign of the VAT treatment of intra–community trade may be required. The current difficulties in the EU largely reflect circumstances that would not apply in the U.S.

Suggested Citation

  • Keen, Michael & Smith, Stephen, 2006. "VAT Fraud and Evasion: What Do We Know and What Can Be Done?," National Tax Journal, National Tax Association, vol. 59(4), pages 861-887, December.
  • Handle: RePEc:ntj:journl:v:59:y:2006:i:4:p:861-87
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    References listed on IDEAS

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    1. Hans-Werner Sinn & Andrea Gebauer & Rüdiger Parsche, 2004. "The Ifo Institute’s Model for Reducing VAT Fraud: Payment First, Refund Later," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 5(2), pages 30-34, October.
    2. Keen, Michael & Mintz, Jack, 2004. "The optimal threshold for a value-added tax," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 559-576, March.
    3. Joel Slemrod, 2007. "Cheating Ourselves: The Economics of Tax Evasion," Journal of Economic Perspectives, American Economic Association, vol. 21(1), pages 25-48, Winter.
    4. Graham Harrison & Russell Krelove, 2005. "VAT Refunds; A Review of Country Experience," IMF Working Papers 05/218, International Monetary Fund.
    5. Kent Matthews, 2003. "VAT Evasion and VAT Avoidance: Is there a European Laffer curve for VAT?," International Review of Applied Economics, Taylor & Francis Journals, vol. 17(1), pages 105-114.
    6. Fedeli, Silvia & Forte, Francesco, 1999. "Joint income-tax and VAT-chain evasion," European Journal of Political Economy, Elsevier, vol. 15(3), pages 391-415, September.
    7. Agha, Ali & Haughton, Jonathan, 1996. "Designing VAT Systems: Some Efficiency Considerations," The Review of Economics and Statistics, MIT Press, vol. 78(2), pages 303-308, May.
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