Value-Added Taxes in Developing and Transitional Countries: Lessons and QuestionsRichard M. Bird University of Toronto - Joseph L. Rotman School of Management Abstract：The value-added tax has, in recent decades, become the most important single tax in most developing and transitional economies. This paper reviews some problems that have emerged as important as more experience has been gained with how VATs really work in many such countries and suggests some lines of research that need to be explored further to overcome those problems. 1. Introduction Few fiscal issues are more important in developing and transitional economies (DTE) than the value-added tax (VAT). Over the last few decades, VAT has swept the world. The principal reasons for the rapid spread of this form of taxation were, first, the early adoption of this form of taxation in the European Union (EU) and, second, the key role played in spreading the word to DTE by the International Monetary Fund (IMF) in particular and by international agencies and advisors more generally. The success of VAT in the EU showed that VAT worked. The consistent support and advocacy of this form of taxation by the IMF and others in a variety of countries, first in Latin America, and then around the world, encouraged and facilitated the adoption of VAT by countries with much less developed economic and administrative structures than those in the original EU member states. At the same time, for various reasons of their own, all the non-EU countries of the OECD apart from the United States have also, one by one, introduced VATs, most recently Australia in 2000. Of course, to a certain extent, as the background paper (ITD, 2005) observes, the VAT label covers a variety of taxes in different countries. Countries that belong to the EU have necessarily all adopted the same model of VAT, essentially as laid out by the Sixth Directive of 1977, although some important differences remain between VATs in EU member states (Mathias, 2004). Other countries influenced by the EU such as the recent and prospective accession countries of central and eastern Europe have also largely followed this model. Elsewhere in the world, however, while the influence of the EU model (and some member-state variants) is clear in, for example, some former colonies of EU member states, other models have been developed and adopted, notably in New Zealand and Japan. Equally importantly, the IMFs Fiscal Affairs Department, the leading change agent in this respect for in much of the world has over time evolved what is essentially its own model of an appropriate VAT for DTE, as set out initially, for instance, in Tait (1988, 1991) and most recently in Ebrill et al. (2001). While VAT countries have introduced many local variations into whatever basic model they may have started from For a small sample of early country experiences, see e.g. Gillis (1990), OEA (1993), Yoingco and Guevara (1988), and OECD (1998), and for a sample of the discussion in an important current case, that of India, see e.g. Shome (1997), Chelliah (2001), and Empowered Committee (2005).,as Victor Thuronyi (2003, p.312) has recently noted, “ while there are differences in VAT from one country to another, compared with the income tax VAT laws are remarkably similar.”When DTE have a VAT, it is invariably among the most important sources of government revenue. Indeed, anyway one cares to look at it VAT has clearly been an enormous success. Not only has it swept the world almost clear of contending general sales taxes but in many DTE it dominates the income tax as the mainstay of national finances. No previous fiscal innovation has been adopted in such a wide variety of countries so rapidly. Not all is sunshine in VATland, however. Clouds of varying sizes and shapes seem to be looming on the horizon in all VAT countries but perhaps particularly in DTE that have become increasingly dependent on VAT and hence more vulnerable to potential problems. Some of these problems have always been inherent in the structure and operation of VATs but are exacerbated by the increased fiscal weight being placed on the many DTE under pressure for new fiscal revenues for example to offset revenue losses from tariff reductions needed to accord with WTO requirements. It is thus perhaps time for a new look at the role of VAT in DTE.Specifically, are the VATs now in place in most DTE as good as they could be in economic, equity, and administrative terms? Must good VATs in such countries always follow the same pattern? Must every DTE have a VAT? Can all DTE administer a VAT sufficiently well to make the introduction of the tax worthwhile? Is a VAT always the best way to respond to the revenue problems arising from trade liberalization? Can VATs be adapted to cope with the rising demands in some countries, especially federal countries, for more access to revenues by local and regional governments? Can they deal wi