Are VAT’s days numbered? How split payment can transform the consumption taxation? by Aloisio Flávio Ferreira de Almeida published by CIAT (5/2025).
The Value Added Tax (VAT) has been, for decades, the backbone of modern tax systems in terms of consumption taxation. Adopted in more than 160 countries, VAT has proven effective in generating stable income, ensuring economic neutrality and facilitating control in analogue environments. However, rapid technological advances are challenging its supremacy. Could VAT be nearing the end of its cycle as the predominant model?
Although VAT is based on an elegant principle – to tax the added value at every stage of the production process – its implementation, in practice, generates important frictions. Companies face high compliance costs, due to the need to record tax credits and debits, issue valid invoices, manage returns and anticipate audits. Those costs are proportionately higher for SMEs, but they also negatively impact the operations of large companies. In addition, the impact on business liquidity (companies must pay VAT on their inputs at the time of purchase but only recover that value when they manage to sell) especially affects firms that operate on tight margins or long rotation cycles. In short, VAT administrative costs reduce the efficiency of the system.
