Boston University School of Law

VAT -- East African Community
The Tradable Services Problem
World-Class Solution

Richard T. Ainsworth
Boston University School of Law

Goran Todorov
Data Tech International Ltd

Boston University School of Law Working Paper 13-38
(August 15, 2013)


The value added taxes (VATs) of the East African Community (EAC) are open to manipulation and are leaking revenue from tradable services transactions. The EAC’s response has been to adopt a unique Reverse VAT mechanism. Something more is needed – a Digital Invoice Customs Exchange. Together these adjustments will provide a world-class solution to a world-wide problem. The EAC appears to be moving in this direction.

The vulnerability of the EAC VATs to tradable services is not surprising. The EAC borrowed VAT designs from the major VAT models, the EU VAT and the New Zealand Goods and Services Tax (NZ GST). Both of these models have the same flaw.

The flaw is structural. Both the EU VAT and the NZ GST classify supplies in two groups, goods and services, when in fact there are three classes. Each member of the EAC adopts the same classification.

The main question addressed in this paper is: Is it possible to construct a digital customs clearance regime a digital invoice based system that would advance to a customs exchange (Digital Invoice Customs Exchange, or DICE)? Could a secure, searchable, real-time digital record be kept of all imported tradable services? The EAC is close to doing this today.

This paper will show how fraudsters use tradable services to steal VAT receipts intended for the government. It will explain how the Reverse VAT (common in residence-based VAT/GST systems) attempts to block this fraud, and then demonstrates how data security measures (digital invoices) when coupled with a real-time remote audits (made possible with customs exchanges) will identify and largely eliminate B2B frauds in cross-border trades and most importantly tradable services.

It may not be common for the EAC to find itself at the forefront of global tax policy/ tax design, but this is where it finds itself today. Neither the EU nor NZ are ready for the solution that the EAC can implement now. The EAC can demonstrate the elegance of an advanced technological solution to a global VAT problem. It should do so.


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Richard T. Ainsworth Contact Information
LL.M. Tax Program
Boston University School of Law
765 Commonwealth Ave
Boston, MA 02215
Phone: (781) 773-1052

Goran Todorov
Data Tech International Ltd
Goran Todorov is a global consultant for legal and technical certification of invoicing systems, advising on implementation and certification of sales data controller systems. He is currently on special assignment in Rwanda in charge of overall management of a Certified Invoicing System for the Rwanda Revenue Authority.


This draft can be also found at the link below: