APPENDIX I: Exemptions and Preferences Introduced into the Russian VAT
APPENDIX II: Legislative Changes Submitted to the Duma, September, 1994
A substantial package of general tax reform legislation was presented to the Duma by the Russian Government in September, 1994. These changes, if adopted, would be effective January 1, 1995. Changes in the value added tax include a rate reduction, substantial base broadening, and the elimination of a portion of the structural anomalies described in this paper.
• The three percent surcharge will be eliminated, leaving the standard rate at twenty percent, and the preferential rate at ten percent.
• The credit/invoice method will be extended through the wholesale sector, leaving only the retail trading sector using the gross margin method of calculating the tax;
• The hybrid use of the cash method to determine the accrual of VAT liability on sales and the put-into-production method to determine eligibility to take credit on inputs will be eliminated, and both sides of the transaction put onto the cash method. Liability for tax and eligibility for credit will both arise upon payment.
Base Broadening Measures:
• Exemptions will be eliminated for: new construction; entertainment; research and development; casinos and gambling; and security services of the Ministry of Internal Affairs. Agriculture continues to be exempt.
• Many exemptions now applicable to imports, Including foodstuffs, will also be eliminated. Exemptions do apply, however, to: technical aid from foreign donors; grants; goods financed by credits from international financial institutions and bilateral aid; and import of capital equipment by owners of enterprises.
• Coverage of the ten percent preferential rate will be reduced. However, this reduced rate will continue to apply to a Long list of basic foodstuffs, and will apply to imported foodstuffs.
Bahl, Roy (1994), “Revenues and Revenue Assignment: Intergovernmental Fiscal Relations in the Russian Federation,” in C. Wallich, ed., Russia and the Challenge of Fiscal Federalism, International Bank for Reconstruction and Development.
China Financial & Economic Publishing House and the International Bureau of Fiscal Documentation (1991), “Regulations Concerning the Value-Added Tax of the People’s Republic of China [State Council: 18 September 1984 draft].”
Enthoven, A.J.H., Sokolov, J.V., and Petrachkov, A.M. (1992), Doing Business in Russia and the Other Former Soviet Republics: Accounting and Joint Venture Issues, Institute of Management Accountants, New Jersey.
Laws, regulations, and decrees (1991-1994), of Russia, Belarus, Ukraine, Azerbaijan, Kazakhstan and Tajikistan (translations).
* The authors would like to thank Adrienne Cheasty, Robert Conrad, Paula DeMasi, Robert Hagemann, John Norregaard, Parthasarathi Shome, Carlos Silvani, Alan A. Tait and Victor Thuronyi for helpful comments and discussions.
In this paper, the countries which were members of the Soviet Union prior to its dissolution, other than the Baltic countries, are referred to as the “transition countries;” excluding Russia, the remaining 11 countries (Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, the Kyrgyz Republic, Moldova, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan) are referred to throughout as the “other transition countries.”
And some of which are being addressed at present in Russia by the authorities.
Excluding social contributions and miscellaneous payroll charges. Social contribution data is unavailable or unreliable for several of the transition countries.
Belgium, France, Germany, Greece, Ireland, Italy, the Netherlands, Spain and the United Kingdom.
Excluding Georgia which suffered a drastic decline in revenue performance in 1993 as a result of the civil war.
Trends in the revenue performance of the transition countries are discussed in Subsection II.2 below.
This does not appear to be largely attributable to differences in the significance of the excluded social security taxes in the overall revenue structure of the country groups. For the Baltics the 1992-93 average percentage of total tax revenues contributed by social security taxes was 30 percent, while for the European OECD countries it was 27.8 percent. For the five transition countries for which data was available, the comparable figure was 26.9 percent. Average VAT rates are higher in the transition countries, and the personal income tax contributes a lower percentage of total government revenue than in the OECD.
With the exception of Uzbekistan at 30 percent, and Ukraine, which had a secondary lower rate of 22 percent along with its basic rate of 28 percent.
Russian government plans presently call for repealing this surcharge.
The treatment of exports and imports, which has varied considerably over the past three and a half years, is not discussed here; see Section V. below for an extensive analysis of this area.
See Appendix I for a detailed listing of exemptions and preferences and their dates of introduction.
Enterprise-specific exemptions have also proliferated. For example, the value added by the national gas company, Gazprom, is exempt from tax.
See Tait, 1986, for an extensive discussion of exemptions and preferences in value added taxes, and their costs and benefits.
Other than in the United Kingdom and Ireland, both of which zero-rate many types of food, while taxing others.
For example, in an analogous situation, it was recently noted that the customs tariff exemption for automobiles imported into Russia by charitable organizations has led to 80 percent of all imported automobiles being registered to such organizations.
However, in some cases, it is clearly extremely difficult to avoid the explicit or implicit negotiation of tax exemptions with potential foreign investors and, not least, donor organizations. (Examples of such issues may include the provision regarding joint development with foreign firms and the importation of books and periodicals for educational institutions.)
In May 1994, another Presidential decree on the taxation system ordered that the government submit to the Duma by September 15, 1994, new legislation which would, among other things, introduce an additional (unspecified) list of products and services which would be subject to the reduced VAT rate of 10 percent. At this point, however, it appears that this base narrowing may be being stemmed; if adopted, proposals made by the government in August 1994, would broaden the VAT base at least to some extent. See Appendix II for a discussion of legislation on the Russian VAT pending in the Duma as of October, 1994.
IMF staff estimates, based upon an unpublished study done with the Russian authorities in July 1994. The effective rate for the first half of 1994 was estimated at 19.5 percent, the increase resulting from the adoption of the 3 percent surcharge. The effective weighted average base is determined by dividing total revenue collected by the total taxable value added in the economy.
Cross-border issues and the distinctions between destination based and origin based consumption taxes are discussed in Section V below.
The denial of input credits on capital purchases violates the principle only of a consumption based VAT. Most existing western VATs are intended to tax only value added currently consumed by households. (This is not true, however, with respect to the VAT laws of most Latin American countries.) In a transaction based VAT, on the credit invoice method, taxation of produced but unconsumed (i.e., saved) value added is eliminated by making all purchases of capital inputs to production tax-free, that is, through full immediate credits for their purchases.
See, e.g., Sixth Council Directive of May 17, 1977, “On the Harmonization of the Laws of the Member States Relating to Turnover Taxes---Common System of Value Added Tax: Uniform Basis of Assessment,” Official Journal No. L145 (“the Sixth Directive”), which provides that liability is incurred for the VAT upon the earlier to occur of: (i) the issuance of an invoice; (ii) making goods available to the customer or rendering the service; or (iii) receipt of payment. This test is generally used throughout the European VATs.
And indeed is allowed for certain small businesses in the VAT laws of 12 of the 18 OECD countries which have a VAT.
In the VAT, the cash method means that credits for purchase of inputs and liabilities for sales of outputs arise only at the time of actual payment, rather than at delivery or the time the liability for payment arose.
Law of the RSFSR, Value Added Tax, December 1991; Instruction No. 1 of the State Tax Service of the RSFSR of December 9, 1991--Concerning the Procedure for the Calculation and Payment of Value Added Tax.
This is based upon Soviet accounting methods, which was based upon the transfer of cash from one account to another, rather than upon Western accrual accounting methods of determining financial income.
Although taxpayers are permitted to choose the accrual method; however, fewer than five percent of the registered VAT taxpayers in Russia are estimated to have done so.
Production and circulation/distribution costs do not include sums paid for fixed assets or intangibles. The issue of credits for capital goods is discussed in Subsection IV.3 below. Further, no offset of tax paid with respect to “non-production” costs is allowed. This concept also derives from the Soviet accounting system, in which the designation of items as related to “production” and their deductibility were essentially synonymous. Whether something is deductible, or, by derivation, creditable in the manufacturing level VAT, actually had an ideological basis in Marxism. Expenses were analyzed to determine whether they represented, directly or indirectly, labor costs relevant to society’s needs. If not, they had to come from the profit and loss account (e.g., interest charges, start-up expenditures, some research and development costs). “Direct costs” were attributed to specific products (that is, specific items of production); other allowable costs were “indirect” and were accumulated, then allocated across specific items in proportion to the basic wage costs associated with those items. See Enthoven, et al. Thus, in some instances non-capital business inputs may not be credited in the Russian system. Such a system would resemble the “ring” type of retail sales tax used, for example, in many U.S. states. (In such taxes, items acquired for “resale,” and selected other capital and non-capital inputs, may be acquired by the business free of tax; other business inputs which in a European-style VAT would be subject to credit (such as napkins used in a restaurant) are treated as “used” by the business and therefore subject to payment of sales tax at the business level.) This of course builds cascading into the system, just as the “non-production” concept in the Russian system will do.
Language in VAT Instruction No. 1 of December 9, 1991, provided that amounts of tax on creditable inputs could be deducted for the period in which settlement documents for them were received. In the Soviet system, the settlement document was an order to pay issued to the bank by the supplier. Since all enterprises and the bank were organs of the state, this was merely an accounting device. In form, the settlement document is similar to an invoice, but in function served the combined purpose of an invoice from the supplier and a check from the buyer. Thus, the intent of the language in Instruction No. 1 seems to have been consistent with the cash method of allowing credits for inputs, as in theory receipt of the settlement document would be synonymous with payment. In practice, however, the settlement documents in the present system are more like invoices, in that payment no longer results from receipt of the settlement document where no funds are available in the account. This is how large inter-enterprise arrears have been generated. In reality, then, provision for crediting on receipt of settlement documents would now be analogous to use of an accrual basis under the invoice method, where the settlement document functions as the invoice and time of supply is defined by its receipt.
This concept is, again, directly linked to the Soviet accounting requirement that all deductible or creditable costs be directly linked to specific items of production, and accounted for on physical, not financial, concepts. (For analogous treatment in another planned economy, see the “Regulations Concerning the Value Added Tax of the People’s Republic of China”, effective October 1, 1984, which provided that the “deductible tax amount” (for the credit/invoice method of calculation) and “deductible value amount” (for the subtractive method of calculation) were to be calculated either by the quantity [of inputs] purchased in the current period or the quantity actually consumed [in production]. The tax authorities were to decide which applied, based upon the “circumstances of the taxpayer.”
The Russian Ministry of Finance now plans to eliminate this hybrid method of accounting for input credits, placing the credit for inputs on the cash method as well as the liability for VAT on sales. There is apparently some uncertainty as to how the law on this point presently is supposed to be interpreted. It has been suggested that the proper interpretation now is that credit may be taken when payment for the input is made or when the input is put into production, whichever occurs later. Nonetheless, taxpayers may take the position that credit can be taken upon putting the item into production, even if payment has not been made. After the change, taxpayers will still have the option to use the accrual method for both legs of their transactions.
Part VIII, Section 19 (December 9, 1991, as amended on August 28, 1992)
If the reporting period is every 10 days rather than once per month, the credit figure arrived at for the month is simply divided by three and that amount is credited for each period within the month. Certain credits with respect to fixed assets and intangibles are added, as discussed in section 3 below.
Line (4) in the above example.
“The VAT amount that is subject to payment in respect of the budget shall be expressed as the difference between the tax amounts received from customers for sold goods (labor, services) and the tax amounts paid by [sic?] suppliers for material resources, fuel, labor, and services . . . . ” Law of Ukraine on Value Added Tax, Article 7, paragraph 2, December 20, 1991.
See Article 8, paragraph 2, as amended in August, 1993, in order to define the date of turnover as the date of receipt of payment. A series of earlier amendments to the this and another provision of the law created some ambiguity with respect to when the eligibility for VAT credit might arise, and the other provision (perhaps inadvertently) still does so.
A shift to the accrual method for VAT liability in the face of these large inter-enterprise arrears could pose transitional difficulties for enterprises. This would be mitigated by putting credits on a straight accrual basis as well. Nonetheless, there would be a sudden acceleration of VAT liability at the time of the shift, which would be worse for the enterprises which are the worst offenders in terms of inter-enterprise arrears. The most effective way to mitigate this one-time problem would be to reduce the requirements for advance payments as a transitional device.
See Section VI.
See Section VI.
For this purpose, all inputs which are subject to current credit are lumped together; separate inventories of, for example, raw materials and fuel, are not used to calculate separate average VAT rates.
For example, assume that the only inputs were a 1000 ruble inventory of widgets, acquired at a 10 percent VAT rate in the previous year, and 1000 rubles worth of fuel oil, acquired in the current period at a 23 percent VAT rate. The only items actually charged to production in the current period are 500 rubles worth of widgets. The allowable VAT would be 500 x.165 - 82.5 rubles. The VAT paid by the taxpayer which actually attached to the widgets used would have been 50 rubles.
Belarus does not mix the credit/invoice and gross-margin methods, but uses the gross-margin method at all stages of production.
This system is derived from the old turnover tax in use in the Soviet system and other planned economies. Since all prices were set in the plan, margins were contrived and prices and margins bore no relation to supply and demand, let alone value added by any particular level of production. The turnover tax was applied at whatever rate was required to leave the planned amount of “profit” in each enterprise. Such taxes simply equilibrated the wedges at each level of production to that desired by the planners. Thus, literally hundreds of different “rates” of tax existed, differing on an enterprise to enterprise basis. Furthermore, in the Soviet accounting system, “planned” profits frequently were much lower than actual margins experienced, since projected costs were overstated. This had the dual benefit for the firms that actual profit performance of enterprises looked better than targeted, and that taxes were based on the lower, planned margins, rather than the actual margins. The present trading sector VAT methodology was apparently instituted in order to comport with these familiar accounting methods, and perhaps from an inability to wholly escape from the mentality of fixed consumer prices and “profit” margins. The VAT is thus still imposed on the planned margins.
To the extent that the enterprises utilize goods or services in distribution which are not part of the goods sold, they are entitled to take VAT credits under the same methods and limitations applicable to manufacturing enterprises (described in Subsection IV. 1 above).
For example, if an item goes into inventory at a value of 100, with a tax of 20 paid on the item at that time, and is projected to be sold at 240, tax inclusive, under the defined margin system, the final tax due on sale will be (240-120) x.166, or 20. If there has been 50 percent inflation in the intervening time, so that the sale price is nominally 360, the nominal final tax will still be 20 in this system, thus reducing the value of the tax to the government. (The “right” answer would be 30; however, if indexing of the original cost were not allowed, use of “actual” (nominal) margins would give rise to a tax in this example of (360 - 120) x.166 = 40, thus benefitting the government at the expense of the taxpayer.)
In the example given, where the wholesaler charged only the VAT exclusive price to the retailer when it did not intend to remit the VAT, the net result under the credit/invoice method is actually the same for the retailer as it would have been under the properly applied method--a net profit of 30. When the wholesaler, however, charges more than the VAT exclusive price but less than the VAT inclusive price, in order to increase his own profit through tax evasion, the retailer under the credit/invoice method would have the incentive to claim VAT credit, as otherwise its own net VAT liability would increase. For example, assume that the wholesaler charged 110 to the retailer but denominated none of it as VAT and remitted no VAT. The retailer would still be liable for VAT of 30 on its sale of 160, with no offsetting credit, under the credit/invoice method. This would reduce its profit to 20. Under the gross margin method, on the other hand, in this example the retailer would pay 50 x.187 = 9.3 in VAT, leaving it with a profit of 50 - 9.3 = 40.7. This is still higher than the 30 profit which it would have made had the wholesaler charged the appropriate VAT of 23 on the VAT exclusive sale of 100. Thus the retailer under the gross margin method has the incentive to collude with the wholesaler’s evasion, which it could do without any evasion of its own.
Precedent does exist, throughout Latin America, for value added taxes which do not immediately credit capital inputs. Most of the Latin American VATs permit credit for capital inputs, but require that excess credits be carried forward, rather than refunded (e.g., Bolivia (carryforward with inflation adjustment); Chile (refunds on exports only, other net credits carryforward with inflation adjustment and, after six months, refund); Ecuador (carryforward, may apply for refund if it can be presumed that credit balance will not be exhausted after six months); Mexico (either carryforward or apply for a refund); Peru (carryforward indefinitely--during high inflation in the 1980s, Peru permitted excess capital input credits to be taken in installments); Venezuela (carryforward indefinitely)). Brazil denies a credit for inputs of fixed assets altogether. Columbia exempts imports of fixed assets used in “basic industries,” and until recently denied credits for VAT paid on inputs of other capital assets. Since 1992, the law has been amended to credit the latter against corporate income tax (with certain restrictions). Argentina permits capital input credits.
Except in the case of agricultural enterprises.
That is, VAT paid on their acquisition or production by the exporter is credited (and refunded if there are net credits) upon export, so that exports are free of VAT under the destination principle.
See Presidential Decree, December, 1993.
As of March 1994, various tax reforms were being considered by Parliament, among them the crediting of VAT paid on the purchase of capital goods. It was anticipated that this change, if made, would be phased in over three to four years.
The law as of mid-1993 did not permit such credits, and apparently the 1994 budget proposals as of December, 1993 did not include any amendment of this provision.
However, such credits are not refundable and must be carried forward from period to period until fully utilized.
As noted above, however, the carryforward of excess net credits is common in Latin American VATs. Where the credits are adjusted for inflation, the difference is simply the rate of real interest on the carryforward amount.
The law and instructions are ambiguous on this point, as they provide that excess credits are either refunded or carried forward (without specifying which applies under what circumstances or who decides). However, practice is apparently to deny refunds and insist upon carry forwards.
Diplomatic purchases, coal products, restoration and reconstruction of cultural buildings financed by donations, and Chernobyl clean-up costs financed from the budget.
And indeed is found in some of the Latin American VATs.
All of the following analysis and description is with respect to transactions between registered VAT taxpayers, unless otherwise noted.
This Subsection relies heavily upon a summary and analysis contained in an unpublished manuscript by Ken Messere (1994).
A third criterion, the site of the initial levy of the tax, is frequently used by tax administrators in categorizing taxes. Although the site of the initial levy of the tax affects what subsequent steps must be taken in order to achieve certain substantive economic effects of the tax, the site of the levy bears no necessary relation to these substantive effects. Therefore, in this paper the definitions and analysis proceed based upon the first two criteria (that is, the rate of final tax and the identity of the final beneficiary country). Various administrative procedures, including site of initial levy and subsequent adjustments, are described and analyzed within this substantive framework.
Respecting transactions taking place outside the European Union.
In the multi-stage VAT, all tax incurred in the exporting country on inputs into the export good is neutralized by rebating these taxes upon export.
This model traditionally required that border controls exist between the importing and exporting country, so that VAT could be imposed at customs points upon entry of the goods into the importing country. Administrative mechanisms and implications are discussed below.
This is why, under GATT, the rebate of domestic indirect taxes upon export is permitted.
The foregoing assumes that there are no exchange rate effects.
Of course, if the import is an intermediate good, and no tax were paid at import, the full tax would theoretically be picked up at the next stage of production. In fact, this method is an alternative to border controls. However, evasion becomes easier with each eliminated stage of taxation.
This method entails valuation problems, however. Since there is no linkage between the administration of the VAT imposed on the value added through the export stage (taxed by the exporting country), and the value added after the importation of the good (taxed by the importing country) the self-policing aspects of the credit/invoice method are lost at that point.
Country A--VAT rate - 20 percent 100 of value added
Country B--VAT rate - 25 percent 60 of value added
Product is sold from manufacturer in A to one in B; under the origin method, as defined, country A should ultimately receive 20 in VAT, country B should receive 15; total tax burden (reflecting this) borne by the consumer of the product should be 35. (Under the destination method, all value added would be taxed at the rate of the location of the consumption, for a total tax of 40, received by B.)
Product sold to manufacturer in B for 100 (no VAT attached; product is zero-rated on export from A). VAT of 25 levied by B at import at the border. 60 of value is added by manufacturer. Product sold in B for 160, plus tax of 40. Credit for 25 of tax paid on input at border. Net additional tax of 15 paid by B manufacturer. Total tax levied = 40, all accruing to country B. This is the same result as would have obtained if the original 100 of value had been produced in B. rather than in A.
Product sold to manufacturer in B for 100 plus 20 of country A VAT (this 20 levied by and retained by A). 60 of value added in country B. Product sold for 160 in B, plus 40 of VAT. Credit of 25, the amount of VAT which would have been paid on the input of 100 if it had been purchased in B rather than in the lower-taxed A. This leaves a net tax of 15 paid to country B, the correct result for 60 of value added. However, the importer/manufacturer is now better off by 5 than if he had purchased the 100 input in country B. Thus, either (i) the importer will pocket the 5 (and prefer to buy inputs from country A); or (ii) the final price will fall to 155, and consumers will prefer to purchase the goods which incorporate foreign inputs rather than domestic ones. In effect, where country B has a higher VAT rate, under the origin principle it experiences negative protection.
If country B had a rate of 20 percent, and country A a rate of 25 percent, the opposite result would occur. In the foregoing example, the importer would either have to raise the price by 5, or reduce its profit by 5 (of course, changes in profit rates or price in either case alter the VAT actually collected). Domestic goods would be favored over imported ones.
As defined in Subsection V.1 above.
See Ministry of Finance letter dated June 11, 1992, in which the Ministry directed that VAT paid with respect to these imports in excess of 28% (the then-prevailing rate in the Russian Federation) must be “charged to production” (the Soviet accounting term for non-deductible or creditable items).
Under the criteria spelled out in Subsection V.1 above, a “pure” origin system would entail: (i) taxing value added in the country of creation, not consumption; and (ii) taxing value added at the rate applicable in the country of creation, not consumption. The system described in this paragraph met the first criterion, but did not in all cases meet the second, where credit for intermediate imports was given at the rate applicable in the exporting country, rather than that which would have been applicable in Russia.
Instruction No. 1 states that exports by intermediaries are only allowed a credit [under zero-rating]: (i) if, appropriately, the correct documentation showing that the goods crossed the border is provided; and (ii) more idiosyncratically, not more than one year has passed since the VAT was paid with respect to the acquisition of the goods exported.
However, as of mid-1993, the Ukrainian State Tax Service was asserting that Russia began imposing VAT on imports from Ukraine in February 1993.
The Baltics, Georgia and Azerbaijan were specifically excluded.
These rules regarding imports apply only to intermediate goods. Presumably, this is because goods imported for resale by wholesalers or retailers fall under the gross margin method of calculation, just as do domestic goods sold at wholesale or retail. That is, the importers in these cases will pay tax on the imported good in the country of origin, then pay tax to Russia on the tax inclusive spread between the import price and the sale price. For example, importer pays 100 for an item for resale from Kazakhstan. Tax of 20 is paid to Kazakhstan treasury. Tax inclusive acquisition cost is therefore 120. Resale price, inclusive of Russian VAT, is 240. VAT due is 20. (240 - 120 = 120. Tax inclusive rate = 16.67. 120 x.1667 = 20). Under this system, there is no need to credit the earlier VAT regardless of where it was paid, or to worry about the rate at which it was paid. This is perhaps the sole positive feature of the use of the gross margin method of taxation at wholesale and retail trade-- if an origin method VAT is used, this system automatically segregates the value added prior to the wholesale or retail stage, which may occur after import.
Of course, if the total VAT on import into Russia collected at the border is retained by the federal treasury, rather than being split with the treasury of the region for which the import is destined, the revenue effects of the export problem would be offset at least to some degree as between the central government and the regions taken as a whole.
Under many European VATs, there are exceptions to this rule. Enterprises are treated as final consumers with respect to some purchases, for example, vehicles. In this situation the selling enterprise has a liability but the purchasing enterprise has no credit.
There is a vicious circle here. One enterprise’s liquidity problem gives rise to delayed payments to other enterprises, and this in turn creates liquidity problems for those enterprises, giving rise to further inter-enterprise arrears.
In the old Soviet system, tax liabilities had first priority among enterprise debts and obligations, and were paid by means of the banks making direct accounting transfers, essentially from one government account to another. Payments to suppliers had a lower priority in the system, and enterprises did not have any means to contravene this. At present, however, enterprises as a matter of practice frequently put their tax liabilities as the lowest priority, after the payment of workers, which comes first, and payments to suppliers. Although the latter also remain unsatisfied to a great extent (hence the growth of inter-enterprise arrears), when cash is available it will tend to be used for this, rather than tax debts.
For a discussion of the effect on enterprises in an excess credit position, see Subsection VI.5.
Note that this differs from the negative effect on revenue of arrears in a pure accrual based system. There, legally the credits and liabilities did offse one another, but the liabilities could go unpaid, giving rise to tax arrears, while the credits were claimed. Here, the liabilities may legally arise (long) after the credits are legally claimed.
See, Subsection IV.2 above.
A sudden shift from the cash method of determining liability to the accrual method could result in a cash flow crisis for taxpayers. This could be mitigated by reducing the requirements for advance payments. Presently, large taxpayers are required to make advance payments three times during the month, before determining their final liability for the month after the period is over. (This system protects the government from inflation to some extent.) As a transitional measure at least the advance payment requirement could be reduced to a single payment or even eliminated to mitigate the cash flow problems caused by concurrent liability for past sales and current sales.
Carryforwards of excess credits, adjusted for inflation, could serve almost the same function (with the loss to the taxpayer of the real interest value of the carryforwards for the period until they are fully utilized) with less administrative complexity, by avoiding the administration of the refunds and the abuses to which they would be subject.
And there were no exchange rate effects.
As would be used in a “pure” origin system discussed in Section V.