More countries experiment with removing VAT cash payments to combat fraud
Many countries are again evaluating split payments: the Netherlands and even the UK are undergoing evaluations and pilots.
The VAT split payment mechanism is used across various regions to improve tax compliance, reduce fraud, and enhance government revenue collection. While approaches vary by country, the fundamental principle remains the same: instead of the full payment being transferred to the seller, a portion (typically the VAT amount) is withheld and remitted directly to the tax authority.
Europe
Several European countries have implemented or experimented with VAT split payment to combat tax evasion, particularly missing trader fraud.
Poland
Poland introduced mandatory split payment in 2019 for high-risk sectors like fuel, steel, and electronics. Under this system, businesses must have two bank accounts: one for regular transactions and another exclusively for VAT. When a buyer makes a payment, the net amount goes to the seller’s main account, while the VAT portion is deposited directly into the special VAT account. The funds in this account can only be used for VAT payments to suppliers or tax authorities, reducing the risk of fraud.
Italy
Italy has a targeted split payment system that applies to transactions involving public entities and large government-owned companies. When suppliers invoice government bodies, the VAT is withheld and paid directly to the tax authority, ensuring timely collection. This mechanism prevents tax fraud and delays in VAT remittance.
Romania
Romania introduced a mandatory split payment system in 2018 but later scaled it back due to administrative burdens. Currently, the mechanism is voluntary for most businesses, except for those with outstanding tax debts. Similar to Poland, it requires separate VAT bank accounts.
Turkey
Turkey runs a prescribed list of supplies subject to a VAT split payment or withholding payment. This obligation requires the buyer to pay a percentage of the settlement directly to the tax authorities rather than to the supplier. It aims to reduce VAT fraud in certain sectors vulnerable to fraud.
Africa
Many African countries struggle with VAT evasion and have implemented split payment mechanisms to improve compliance.
Nigeria
Nigeria implemented a VAT withholding system in 2020, requiring specific businesses (such as banks and large corporations) to withhold VAT at the point of payment and remit it directly to the government. This ensures immediate tax collection, reducing the risk of non-compliance by vendors.
Egypt
Egypt applies a split payment mechanism primarily to transactions with government agencies and certain high-risk sectors. VAT is deducted at the time of payment and remitted directly to the tax authority, ensuring efficient collection.
Tanzania
Tanzania introduced VAT split payment for government-related transactions. Public institutions must withhold VAT when making payments to suppliers and remit it directly to the Tanzania Revenue Authority (TRA). This approach minimizes fraud and ensures timely tax payments.
Asia
Asian countries use different models of split payment, with some integrating digital payment systems for real-time tax collection.
China
China enforces a strict VAT withholding system in specific sectors, particularly for transactions involving foreign businesses. VAT on certain cross-border transactions is withheld and remitted by designated tax agents. Additionally, China’s Golden Tax System ensures real-time monitoring of VAT invoices, reducing fraud risks.
India
India follows a Tax Deducted at Source (TDS) mechanism for certain businesses, which functions similarly to split payment. Government agencies and specific companies must withhold a portion of the VAT (known as GST in India) and pay it directly to tax authorities. This system enhances compliance and ensures tax collection at the transaction level.
Malaysia
Malaysia experimented with a split payment VAT model before abolishing its GST system in 2018. However, discussions continue on reintroducing a similar mechanism to curb tax leakage.
South America
Brazil is including a full mandatory split payment requirement in its plan to implement a modern VAT regime from 2026. payment service providers will not only split the payment but also verify, through the tax administration system, whether the supplier has VAT credits available to offset against the VAT due on a transaction.
Argentina
Argentina’s split payment model assigns responsibility for VAT withholding to designated agents, including payment processors. Different withholding rates apply depending on the transaction type. Small businesses are exempt, while credit card payments are subject to VAT withholding. Additionally, Argentina imposes a “turnover tax” at the provincial level, which now includes foreign entities operating without subsidiaries. Some jurisdictions, such as Córdoba, require withholding at the time of payment. This approach signals a growing trend in taxing cross-border transactions.
Peru
Peru introduced split payment in 2004 under the Sistema de Pago de Obligaciones Tributarias (SPOT). This system requires businesses to use a special tax account at the National Bank, where VAT is deposited separately from regular transactions. VAT percentages vary based on the type of goods or services. If a purchaser fails to execute the required VAT deduction, they cannot claim input VAT on their tax returns. This system ensures tax obligations are met before funds are accessible for business operations.
Ecuador
Ecuador’s split payment system dates back to 1997 but was revised in 2017 when the VAT rate was lowered from 14% to 12%. Credit and debit card companies, classified as withholding agents, are required to withhold part or all of the VAT on transactions and remit it directly to the tax authority. If VAT is not fully withheld at the time of the transaction, the remaining balance is submitted monthly along with VAT returns.
Dominican Republic
The Dominican Republic implemented a split payment VAT system over a decade ago in response to increasing digital transactions. In this model, acquisition companies (financial institutions) withhold 30% of the VAT on transactions and report it weekly to the tax authority. Certain sectors, such as medicine and education, are exempt from VAT withholding.
Chile
Chile has one of the most interventionist split payment models. It introduced the withholding agent concept decades ago and later added the “Subject Change” mechanism to combat fraud and streamline tax administration. Under this approach, the VAT liability shifts from the seller to the buyer in certain transactions. The buyer must not only withhold VAT but also issue the seller’s invoice. Only taxpayers authorized by Chile’s Internal Tax Service can act as withholding agents, and VAT deductions may be partial or total, depending on the nature of the transaction.
