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Frustration, including annoyance with the compliance costs, may tempt a trader to evade the vat. Straightforward greed may also tempt him. All commentators describe the theoretical self-checking mechanism of vat and all go on to elaborate how this does not work.
Estimates of vat evasion range from 2β4 percent of revenue forgone the United Kingdom to 40 percent Italy. Only Korea has tried formally to cross-match sales and purchase invoices see Chapter The Korean study shows that for the two years and , the largest penalties were associated with invoices for vat lability or credit and that delayed submissions of invoices were twice as costly as nonissuance and nonsubmission.
These results suggest that better collection and enforcement to trace deliberate fake invoices were important. It is also interesting to note that nonregistration continued to be a major problem in Korea four years into the vat.
Like other taxes vat is evaded; 1 like other taxes that are basically self-assessment systems vat requires a firm enforcement system with known and applied penalties culminating in although rarely used criminal prosecution. Deterrents should exist that increase the risk of underreporting commensurate with the degree of flagrancy and revenue involved.
A taxable person who underreports is in effect stealing and misusing funds that have been paid by his customers and that belong to the government. For a penalty to improve tax compliance it must reflect the gravity of the offense and not merely increase the risk for underreporting by more than the cost of borrowing funds such as interest. All taxpayers must be seen to be treated equally if all taxpayers are expected to pay their fair share. If an enforcement program is consistently directed only at a particular group or class of taxpayer, usually one producing a high yield per audit, that group will eventually lose faith in the fairness of the system and its levels of compliance will be vitiated.