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.
Reference: Michael Keen and Stephen Smith “VAT fraud and evasion: What do we know and what can be done?”, National Tax Journal, Vol LIX, No 4, pp 861-887, December 2006.
Link to IMF Working paper version
VIVAT Summary A short summary of the VIVAT mechanism proposed by Michael Keen and Stephen Smith in Economic Policy volume 23, (October 1996).
Some other papers on VAT
Keen, Michael and Stephen Smith. (1996). “The Future of the Value Added Tax in the European Union.” Economic Policy 23, 375–471 and 419–420.
Keen, Michael and Stephen Smith. (2000) "Viva VIVAT!", International Tax and Public Finance, Vol 7, No 6, pp 741 - 751, 2000 (ISSN 0927-5940).
Ian Crawford, Michael Keen and Stephen Smith (2009,
forthcoming) "VAT and Excises". London: Institute for Fiscal Studies. Paper
commissioned for the Mirrlees Review "Reforming the Tax System for the 21st
Century.
Pre-publication version available on the IFS website.