The VAT’s global appeal lies in its intrinsic features. As a tax on final household consumption, it provides governments with a stable revenue base. Its debit-credit mechanism, applied throughout the value chain, prevents the cumulative tax burden that was once common with turnover and sales taxes. This method not only ensures neutrality but also strengthens compliance: by cross-checking transactions between suppliers and customers, the VAT generates a more reliable revenue stream even in cases of business failure or fraud.

The spread of the VAT has been closely tied to trade liberalization, as developing countries reduced tariffs and became integrated into the global economy. With tariff revenues shrinking, the VAT, anchored in domestic consumption and collected at the border, offered a powerful substitute capable of offsetting and even surpassing lost customs revenue.

But after decades of widespread use, the VAT warrants reassessment. As our recent study shows, its results have been mixed. In developed economies, it has been effective at boosting tax revenue, supporting industrialization and promoting diversification. In resource-rich developing countries, by contrast, it has not delivered the expected benefits, failing to make up for lost tariff revenues and leaving governments with significant fiscal shortfalls.

With donor governments slashing foreign-aid budgets, the need to mobilize domestic resources, primarily through taxation, has become increasingly critical. This urgency was reaffirmed at the Third International Conference on Financing for Development in Addis Ababa in 2015 and July’s Fourth Conference in Seville, Spain. Both gatherings highlighted domestic revenue as crucial for achieving the United Nations’ 2030 Sustainable Development Agenda.

Beyond its impact on tax revenues, the VAT has had unintended structural consequences for resource-rich developing countries. By design, the VAT applies only to domestic consumption; exports are exempt. Under the destination principle, exporters are even entitled to full refunds on VAT paid for equipment and intermediate goods.

Combined with tariff reductions, this framework has lowered the cost of resource extraction and deepened these countries’ reliance on unprocessed raw material exports such as oil and minerals rather than fostering industries that could add value. The result has been the “resource curse”: a self-reinforcing cycle of limited diversification and economic underdevelopment.