Updated on June 7, 2022
When the output is not taxed but the input tax is not recoverable, there is an exemption. 76 As a result, it is an anomaly in terms of VAT’s core logic. Exemptions, on the other hand, are extremely practical, generating challenges that make policy formation extremely difficult, if not impossible.
There are a few particular exemptions, such as those related to education, health, and financial services, on which there is broad agreement, according to the survey replies. Is this a well-founded consensus?
Exemptions from these essential categories are common: practically every country exempts items other than education, health, and financial services. Table 8.1, which includes the important exemptions in the subset of survey nations for which data is available, gives an idea of these extra exemptions. While the spectrum of products excused vary depending on the practice, there are some commonalities. Seven broad types can be recognized (albeit few countries have implemented all of them):
essential agricultural inputs and agricultural products
transport for passengers;
services, where there are problems
Some Key Nonstandard Exemptions in a Selection of Countries
Staff of the International Monetary Fund (IMF).
Note: The information in this table was compiled from replies to the survey detailed in Chapter 6 and thus represents the situation in early 1998. Other than education, health, and finance, other responses just mentioned the existence of exclusions, not their nature. As a result, the absence of a sample nation from this table does not imply the absence of additional exemptions, nor is the list for each country intended to be exhaustive; rather, the table is designed to be informative.
The rationale for exempting the first four categories often appears to be a belief that doing so will reduce the tax’s distributional effects, both in terms of the effect on consumer prices and, particularly in respect to agriculture, in terms of the effect on earnings. The fifth in the series
Consequences of Exemption
Revenues Fall—or Increase
The VAT chain is broken by exemption. Whether this boosts or diminishes the VAT’s net revenue depends on where the interruption occurs in the supply chain. If the exemption happens just before the final sale, the result is a revenue loss because the value added at the end of the process is tax-free.
If the exemption happens at a later stage, however, the result is an increase in net revenues: the cascading of input taxes implies that as the price charged by downstream enterprises employing the exempt item rises to meet their increased expenses, the tax on output downstream rises as well.
78 As a result, value added before the exempt stage is effectively taxed twice.
Distorted Input Choices
The VAT’s important function of retaining undistorted production decisions, outlined in Chapter 2, is gone with the exemption of commodities used as inputs into manufacturing. Producers will substitute away from some intermediate inputs because of the unrecovered taxation implied by the exemption.
The initial exemption’s distortive effects, it should be noted, can reach far beyond the areas most immediately affected. Exempting steel production, for example, will not only distort the production decisions of machine tool manufacturers who use steel as an input; the resulting impact on the price of machine tool services will distort the prices of tooled products, disadvantaging items and production methods that use such inputs extensively. It’s possible to get a break.
Incentive to Self-Supply
To encourage vertical integration and avoidance of tax through “self-supply,” cascade exemptions have been introduced. To put it another way, exempt traders have an incentive to supply taxable goods to themselves rather than purchase them and pay VAT that cannot be recouped. Although self-supply may not be viable for many exempt items due to economies of scale or the specialized nature of the activity, it appears to be most practicable for services provided by relatively unskilled workers and better suited for small-scale production. For example, banks that provide exempt financial services may find it more cost-effective to produce their own security services in-house rather than pay VAT on the services they purchase from outside vendors. When it comes to production efficiency, self-supply helps, but it comes at a price in terms of revenue.
For the most part, final consumers are exempt from the definition of exempt persons. By executing the labor themselves, they can avoid paying taxes on the value added that is included in final sales, such as the cost of having painters touch up their woodwork, for example. Of course, both the painter and the consumer have an incentive to conceal the transaction by charging no output tax and not claiming input tax. Essentially, any indirect tax creates a preference for consumers to use their purchasing power for untaxed leisure—broadly defined—rather than for paid work.
Due to rate differentiation, the incentive to self-supply may be greater than the statutory VAT rate on final product. Restaurant meals in the UK are taxed at 10%, but food in the US is taxed at 0%. Suppose, for example, that a ready-to-eat meal utilizes $0.2 of food and costs $1. (both amounts net of tax). Value added in the restaurant business is taxed at a rate of 12.5 percent rather than 10 percent because food is zero-rated; thus, a tax rate of 10/80 = 12.5 percent. A bigger incentive exists for self-supply of commodities taxed at a higher rate than at first appears since the net impact is to tax the value added more heavily than might at first appear. The same holds true for the other way around.
The concept of the effective rate of VAT on a commodity 80 that results from measuring this self-supply incentive differs significantly from the type-I effective rate described above (which focuses on input choice distortions). Here, we refer to this alternative concept, called the type-S effective rate since it evokes the idea of “self-supply,” as a ratio of net income paid in relation to a product’s value added. Consequently, the type-S effective rate will be high for lightly taxed outputs created from strongly charged inputs Appendix II further discusses the concept of the effective rate and its relationship to the type-I effective rate described above.
It’s hard to say what the best course of action should be in the face of increasing self-sufficiency. The resulting artificial grouping of activities means that organizational structures are in part influenced by other than strictly commercial concerns, and this is undesirable to that extent. it. The distortion of input-choices may be mitigated by self-supply, which is also a response to unrecovered input tax, and thus serves a socially beneficial purpose.
The fact that policy solutions to the self-supply issue differ may reflect this ambiguity to some extent. In order to avoid nonrecoverable input tax, certain taxing authorities reserve the right to tax (and reject credit for) self-supply. One way to find out is to see if the services in question can be accessed outside of the company. For VAT purposes, the question arises as to how companies should be categorized. Companies that are not qualified to reclaim input VAT, for example, have recently recommended that they be barred from joining VAT groupings in the UK, and EU grouping laws are also being considered.
Compromising the Destination Principle
In order to tax goods entering international trade, the destination principle must be compromised through exemptions. It is not possible to remove the implications at the earlier stages of the production chain of an exemption, even if exported commodities that would otherwise be exempted are normally zero-rated. The Sixth Directive, for example, allows European banks who sell financial services directly to nations outside the EU to reclaim VAT on their inputs. Companies that employ financial services offered by banks in their home jurisdiction, which are exempt rather than zero-rated, pay unrecovered input tax on their exports. Thus, the VAT’s main virtue is undermined in some way by exemption.
This is because exporting countries don’t tax imported inputs, therefore enterprises using exempt inputs have an incentive to import those inputs, which are zero-rated rather than exempted in the place of export. So exempt producers have an incentive to artificially export their output in order for domestic producers to avoid indirect taxation through the input into an exempted sector, which has zero-rated status. A number of nations (such as Colombia in 1999) have been prompted by these issues to contemplate adopting countervailing duties in order to reduce the advantage that imports of exempted commodities have over domestically manufactured replacements.
Partially Exempt Traders
Traders who sell both taxable and exempt products face difficulties. Their input tax payments must be divided between the two types of sales in order to be recouped. According to this, traders’ judgements about the composition of their sales might be distorted depending on how the treatment of inputs and outputs is perceived to differ from the underlying truth. This is often the case for the values of the two types of sales.
The ability of exemptions to feed on one another is a significant characteristic, leading to a phenomenon known as “exemption creep.” The notion that one exemption could serve as a precedent for others is not relevant here. Instead, it is the case that each exemption increases the upstream and downstream pressures for additional exemptions:
Exemption (or zero-rating) of commodities used in the production of a certain exempted item is made more difficult by creating one exemption to alleviate the tax burden on a specific item or group. Lobbyists for upstream suppliers may plausibly argue that if the government wants to alleviate the burden on that item, it should eliminate the tax on its inputs that are otherwise unrelieved?
Exempting an intermediate step in the supply chain raises the value of campaigning for an exemption by downstream users of that input. Suppose that firm B buys some input from firm A, and we can see this in action here. Exemption from tax on B80’s value added means that A, if taxable, is no longer taxed. This means that, if A is exempt, B’s gain from being exempt would be the tax avoidance of both firms’ value added if A were exempt. 81
To illustrate the first type of creep, let’s look at the agriculture sector, where exempting basic commodities has increased pressure on other countries to exempt agricultural inputs (the wider issues here being discussed in detail in the next chapter).
It is possible for exemptions to cause distortions that can be interpreted as evasion. However, a more transparent avoidance strategy could be one way to respond to exemptions. A lease of property (exempt, assume) as a contract for the storage of goods is an example given by De Wit (1995). (taxable, suppose, and hence preferable for a taxpaying lessee).
When it comes to taxation, exemption falls somewhere in the middle of the two extremes: charging a positive VAT rate and zero-rating (differing in allowing input taxes to be credited). As a result, there are two major categories of justifications for exempting.
Output Is Hard to Tax
The alternative of zero-rating is preferable in some situations to applying the VAT to production because of practical considerations or revenue requirements.
An excellent example is how small businesses are treated in the VAT system, where administrative and compliance requirements virtually prevent their involvement. A zero-rating is also not a possibility here because of the same reasons. Traders of a specific size are so immune from the rules. The question of where to draw the line is a crucial one, and it is discussed in detail in Chapter 12. A compromise between saving implementation costs and ensuring that revenue is not jeopardized and/or that small businesses are not unfairly favored may be to exclude such traders from taxation—in effect, eliminating the value added by such traders from taxation.
Secondly, there is the case where a product is offered at a lower price than it would have been on the market. There are several instances of public-sector goods and services competing with private-sector counterparts. Education institutions supported by public funds, for example, might compete with privately owned businesses that are subject to VAT by offering low-cost products and services. Zero-rating these services could bring them to parity, but it could also open the door to misuse. Exemption may be preferable, despite the fact that it still favors the public sector.
Exemption can also be utilized to ensure that taxation isn’t completely avoided in special circumstances where it’s difficult to determine the proper output for taxation. Taxation of intermediation services, most notably in the case of financial services, is an excellent example of this. The issue here is that the taxable output is, in principle, the intermediation function that is being billed for. For tax purposes, it is important to know the allocation of buyers and sellers, which can be inferred by comparing the difference between the selling and buying prices, but this information is not instantly available in the market.
Exemption as a Less Costly and Administratively Convenient Substitute for a Reduced Rate
As an alternative to exemption, if both outputs and inputs can be clearly identified, the commodity can be taxed at a reduced or even zero-rate. What if it is possible to grant an exemption, and knowing that exemptions are connected with production inefficiencies, can it ever be the desired course of action? Despite the fact that exemptions do help to alleviate some issues, this does not appear to be the case. On the other side, exemption avoids the administrative burden of reimbursements due to a zero or decreased rating (discussed further in Chapter 16). The disadvantage of exemption is that it does not address the two issues raised by rate differentiation, namely the potential for definitional conflicts and the potential for further erosion of the monetary base. Although exemptions are simpler than rate differentiations in that they do not require monitoring of either output tax or input tax recovery, there is a significant advantage to exemptions. But this raises the possibility that exclusions be exploited as an opaque tool to favor certain commodities or interest groups—multiple nominal rates are in an important sense more apparent than multiple effective rates produced by exemptions.
All of these typical exemptions, for example, can be found in the Sixth Directive, which has been referred to previously (the template of the VATs of the EU). That consensus, however, deserves further investigation. When examining an exemption, the following questions should be addressed: Why not zero-rate? Taxing at some positive rate would be preferable to taxing at a negative rate.
Taxes are normally levied on all goods and services offered by publicly owned organizations that compete with private businesses, except for the following products, which are generally exempted: The proper treatment of services provided by the public sector on a not-for-profit basis or for free to the final user – such as defense and other typical public goods – is more problematic. Here, we’re focusing on these services. Concerns about how charitable organizations and fraternal groups are treated are essentially the same.
The EU’s approach to the public sector appears to be consistent with that of most industrialized countries. Non-commercial services provided by public organisations are exempt from the Sixth Directive. The fact that it is difficult to tax output that is given away without taxing inputs into its production serves as an excellent illustration of the first justification for exemption outlined above. Finally, the public sector is seen as a final consumer of inputs utilized to produce non-commercial services that it offers.
The treatment of non-commercial public sector activity in developing nations is not well documented (no question on this was included in the survey conducted for the IMF study). Sales to government entities, for example, appear to be exempt in some situations.
What difference does it make if the public sector is tax-exempt or taxed? To be clear, even if goods and services provided for a fee by the general public are in theory taxable, the government will receive no tax revenue from them because there is no explicit charge on output. Furthermore, any revenue the government gains by denying public bodies the ability to recoup input tax on purchases will be offset by an increased cost to the government of financing the activities of those entities. Upon closer examination, it becomes apparent, however, that exempting the public sector may have the same negative consequences as exempting private operations. Specifically:
Exemption from input tax will affect production decisions since the agency doesn’t expect to be reimbursed for the tax it pays, therefore the effect on input prices it suffers is similar to that experienced by profit-maximizing private enterprises. Cost-minimization rather than profit-maximization is what causes a production inefficiency when input prices are distorted, not profit maximization, according to the authors of this paper.
Partially exempting public entities that engage in both commercial and nonprofit activity is a challenge.
Biases in favor of self-supply can also be seen in the public sector’s exemption of activities that can be outsourced out to the private sector.
There may be disagreements about classification because of a requirement that government agencies be taxed on operations that compete with those of the private sector.
Ad hoc solutions have emerged as a result of the difficulties. Some nations in the European Union, including Canada, have elected to reimburse public organizations that receive VAT payments for their exempt activity. The exemption is effectively converted into a zero-rating as a result of this. Both the potential distortion of input choices and the bias against outside contracting can be eliminated by this method of implementation As a result of this, there is less of a challenge in discriminating between commercial and non-commercial activity (within the regular VAT system for commercial activities, outside it through the rebating).
Public sector organisations should be taxed on the full range of their activity. In recent years, interest in this option has grown. Notably, New Zealand has accepted it, while Aujean, Jenkins, and Poddar have recommended it for the European Union (1999). The identification of the taxable sale raises no new difficulties of principle in connection to the crediting of input taxes. When it comes to charging fees to consumers of an item, this is simple. By this logic, all sums received by the producer that are associated with production, whether in the form of user fees or subsidy payments, should be considered taxable sales in their own right. The supplier’s revenue is equal to the increased cost to the presumed purchasing agency, hence the net revenue raised by levying output tax on subsidy payments received from other branches of government is zero. Public sector and private sector interaction ensures that the VAT chain remains intact.
The rate of tax to be applied is also a concern. This brings us back to the topic of rate differentiation. They mention a rate of 3-5% for the EU because of the commodities’ high sensitivity, which is an interesting point made by Aujean, Jenkins and Poddar.
Two of the most common exemptions from VAT mentioned in both IMF advice and practice are those for education and health, both of which are typically supplied by the public sector on a non-profit basis.
Basic education is typically exempt from taxation, whereas more specialized training delivered for a fee is typically taxed at a “standard” rate.
The right way to tax education is a difficult question to answer. Some types of training may even be better off being subsidized because of the external benefits they bring. There are a number of reasons why basic education might be exempt, but the focus is on those reasons. Accordingly, two key aspects of the education sector are relevant: First, it is a large source of government income, as well as subsidized or free educational services that compete in some way with private providers.
Because of this, a VAT on education in the traditional sense is likely to worsen the competitive imbalance between private and public options. Zero-rating could help level the playing field between public and commercial service providers. This, on the other hand, adds to the complexity of refunds (discussed in Chapter 15). Despite the fact that zero-rating is a possibility in many wealthy countries — and Australia, for example, does so — refunds remain a problem in underdeveloped countries. Furthermore, the first feature (the size of the education sector) increases the revenue cost of zero-rating basic education expenditure.
For example, in the tertiary sector when public education is supplied at cost, the case for imposing VAT on education in the traditional way, maybe at a reduced rate to reflect the growth externalities that increasingly seem to be linked with education expenditure, becomes more compelling.
It’s the same with education: Only the most essential services, such as those provided by doctors and dentists, are often exempted. There are many similarities between the arguments for and against schooling in this case. When it comes to healthcare, there may once again be externalities that necessitate subsidization. It would make sense to zero-rate essential health services, as is the case in Australia and Uganda, where medical supplies are supposedly zero-rated, and the United Kingdom, where disability aids are also zero-rated. There are a number of logistical and financial obstacles that prevent the sector’s basic supply from being zero-rated broadly.
Nonbasic health care services are predicted to rise as private provision grows and the public sector comes closer to market pricing, but this is still a long way off in many developing nations.
Financial services are exempt because of technical problems that arise from the nature of financial intermediation’s value added. VAT can be levied in the usual way for fee-paying financial services such as safekeeping and financial counselling. Service fees that fall in the gray area between what lenders get paid and what borrowers pay pose a problem. 82 When financial services are employed by registered enterprises, one must further allocate the aggregate value added by intermediation between the two sides of the transaction in order to identify it. This is a challenge.
Banks often pay their depositors 5 percent, while charging their customers 15 percent. It is clear that the bank’s value contributed is 15% – 5% = 10% of deposits (less any material inputs, and assuming too there is no risk of default). A tax is needed here. A ultimate solution would be found if all loans were made to final consumers. Instead, assume the borrower is a legally recognized business. How many of the 15 should be regarded as legitimate? As a general rule, while considering this problem, economists assume that the lender and borrower could have gotten their money at a hypothetical “pure” interest rate, without the benefit of the bank’s auxiliary services (clearing, etc). (had they been able to find suitable lenders without the help of the intermediary). This pure rate of 12 percent, for example, provides the borrower with 15 – 12 = 3 percent of the loan, and the rest 12 – 5 = 7 percent is extra value for the lender. On a $1,000 loan with a 10% VAT rate, the borrower should be charged $3 in VAT and the lender should be charged $7 in VAT, totaling 10% of the total value added on 10% of $1,000. If either the lender or the borrower is registered, these VAT payments would be creditable in the usual manner. Financial intermediation has been exempted in most nations because of the difficulties of achieving this objective, which would appear to require, in particular, determining a “pure” interest rate.
When it comes to taxing the value added in financial services, some nations like Israel have instead used the addition technique (explained in Chapter 2): that is, taxing the sum of wages and profits.
83 The subtraction method provides an option (as was at one point proposed in Canada). It is possible to tax the total value added in this sector using either the addition or subtraction technique. However, neither technique is compatible with the remainder of the VAT system’s use of the invoice-credit mechanism. As a result, neither one permits the systematic crediting of financial services provided to registered traders for the detection of embedded VAT on a transaction-by-transaction basis.
A “cash flow” approach to VAT might theoretically alleviate these issues.
84 As long as the recipient is registered, he or she will be taxed on all inflows of cash, such as loans and interest payments; and any outflows, such as repayments of loans or interest payments, will be eligible for credit. For example, imagine a $1,000 loan to a registered trader (at 15% interest) financed by a customer’s deposit of 5%. Pretend again that there is a 10% tax rate. VAT is included in the cash-flow tax.
For every $100 that the bank is legally obligated to pay as a deposit, they receive an equal amount back as a credit to their loan account. As a result of the bank’s spread on the loan, it owes tax of $10 when the loan is returned.
The company is required to pay a $100 tax at the time of the loan. Upon repayment, it receives 10% of $1,150 as a credit (principal plus interest).
If the government is able to earn the pure rate of interest of 12% on its receipt from the business of $100, it is left with net revenue of $112 + 10 – 115 = $7, which is exactly 10% of the services of $70 delivered to the consumer.
Using the cash flow approach, if the government’s interest rate is designated as pure interest, the allocation of value added and the proper crediting of input tax can be achieved. Crediting inflows and outflows equal to their respective rates means that registered traders’ revenues will never exceed zero; only unregistered trader’s margins will ever exceed the value of registered traders’ revenues.
Under the cash flow VAT, the treatment of pure insurance—insurance with no savings component—is simple, as shown in Box 8.1.
8.1. Cash Flow VAT Treatment of Pure Insurance
An insurance business receives $100 in premiums and pays out $80 in claims (excluding VAT). 20% is the tax rate (this being the tax-exclusive rate; that is, the rate charged on values not including tax).
Despite paying $16 in claims, the insurance firm is only liable for $20 in VAT on its premiums. Insurance companies are required to pay a net tax of $4, which is equal to 20% of the $20 (=100-80) value added (in this case, the excess of premiums over claims paid by the insurer). In the event of the covered event, the insurer will be able to issue the insured a check for $96 thanks to the credit.
Only $96 can be used to purchase products with a tax-exempt value of $80, thus the claim credit is used to pay for VAT on any replacement goods purchased. Consequently, the total tax collected is equal to 20% of the value added.
As long as the insured is VAT-registered, he or she can deduct $20 from the premium. This $16 in production tax will be completely offset by the $96 in tax credits from the replacement property, when the claim is paid out in full. The government receives no tax revenue at all.
The tax “sticks” only on final sales to final consumers, in line with the principle of the invoice-credit VAT.
Administratively, the cash flow method is difficult outside of pure insurance. This can be alleviated by taking a few simple steps (for example, by suspending the payment of tax, and refunds, associated with the initial receipt of loans and deposits). The scheme’s viability is questioned even within the EU, where it has been carefully reviewed. 86 Complexity will likely continue to be a problem for developing countries for some time.
In addition, it should be noted that bringing financial services within the tax net is not a surefire way to raise VAT revenues. In the event that financial services were fully taxed, revenue would be collected only from sales to ultimate customers. In contrast, when they are excluded, tax is collected on all sector inputs. 87 Which will bring in the most money is a question that must be answered empirically. For cash-strapped governments, subjecting financial services to VAT is not the fiscal panacea it appears to be.
Real Estate and Construction
In terms of long-term value, real estate is the best option. It is frequently resold since it provides services over an extended length of time. As a result, the challenges raised by its VAT treatment are the same ones that emerge for all similar commodities, albeit on a far larger scale. 88
The ideal treatment of durable goods would be to tax the flow of services in each period, with a corresponding credit if the services are used as a business input. As long as the services are offered for sale in the open market, it is simple to determine their value. A VAT credit is given to the lessee in the case of commercial real estate leasing (if not in an exempt activity). Where a danger of cascade exists, the lessor has the option to register and pay the tax, which is normally made available to them (and recovery of input tax).
However, in many circumstances, real estate services are self-supplied and so do not have a market value. However, this isn’t a big deal for businesses that employ services as inputs. Because those services are taxed at a rate that is exactly offset by a credit, there is no problem with this. As a result of the final consumption involved in homeownership, the tax should “stick” to this form of consumption. Attempts to value-impute services received from owner-occupation for tax purposes have been made in the past, but the results have been mixed, and the practice is now uncommon. Thus services enjoyed from owner occupation are—with no exception that we know of—exempt from VAT. Commercial leasing of residential property is usually exempt as well, in order to avoid distorting the option between home ownership and renting.
Despite this, owner-occupied services might be taxed in a different manner. Prepayment of VAT on owner-occupied properties is achieved by levying it at the time of purchase. Because the property’s worth is based on the value of future services, a tax is levied even before those services are used. This is implicitly the standard procedure for VAT-registered durable items. Residential property taxes should be levied using this way as well.
The issue then becomes how to tax property resale using the prepayment technique. In theory, resales should be fully taxed for the buyer and fully repaid to the seller (to capture the future services the buyer will get) (to give, in effect, a credit in relation to services taxed at purchase but not enjoyed during their ownership). 89 There would be no money coming in. This treatment is generally feasible, and should be adopted, for commercial properties. 90 Given a possible ownership period of some decades, however, this is unlikely to be practicable for owner occupation; it is simpler—and apparently universal practice—to exempt resale of owner-occupied housing.
Construction services and inputs should generally be fully taxed, and creditable only for those undertaking construction as a business activity. Taxing such inputs acquired by owner-occupiers is a rough and ready way of taxing the enhanced consumption services to which they presumably lead.
Taxing the sale of new residential properties does raise transitional issues at the time the provision is introduced. Unless also applied to first sales of preexisting properties—which, though feasible, apparently has never been done—it confers some windfall gain on owners of that initial stock, who will now be able to sell their properties at prices reflecting the increased VAT-inclusive price of new properties (though their benefit is mitigated by the increased house prices they will face if they choose to purchase another residence). This measure will also be seen as disadvantaging first-time house-buyers, a politically sensitive group in many countries. Thus Australia, for instance, provided some relief for such buyers at the time of introducing its GST. More generally, exemption from VAT for housing services is frequently cited as necessary to reduce regressivity. It is not clear, however, why housing should be favored over other forms of “necessary” consumption. Further, and especially in developing countries, the wealthy are frequently heavy consumers of housing relative to their incomes, as compared to the poor. In any event, if the impact of the VAT is to increase costs of housing for the poor, it would be far more efficient to give them direct subsidies
To the VAT’s logic and operation, exemptions are repulsive. As a result, advice and practice on the VAT are incomplete without addressing the issue of policy toward exemptions. The current discussion yields a number of conclusions.
A VAT can be undermined by exemptions. Many governments are concerned about preventing their spread, and this is likely to continue for many years to come.
To what extent do we know why some standard exemptions are granted in the first place? It is anticipated that the treatment of government and financial services will be moved from exempt to fully taxed in many wealthy countries’ VAT reform agendas in the future years.
There may be trade-offs for developing countries considering such movements toward full taxation. Administrative simplification is possible, if not in connection to the proposed cash flow VAT on financial services, but these advances to full taxation do. They could, however, put pressure on the government to lower tax rates, which could have its own set of problems.