VALUE ADDED TAX IN CROSS-BORDER SITUATIONS NOTES
Lecture 1: Introduction
Course overview:
Exam:
- Group assignment 25%
- Individual assignment 75%
Direct taxation vs indirect taxation
• Direct taxes
– Tax base erosion
– (Harmful) tax competition
1
, – Economic crisis: less revenues from direct taxes (income based)
• Indirect taxes
– Efficiency – consumption provides for a broader and more stable tax base
– Less tax competition
– Efficiency in levying and in collection
– Robust in view of aging society
Same indirect tax trends
• Shift from direct tax to indirect tax
• More countries to introduce indirect taxes
• Rates tend to increase
• Double taxation & double non-taxation – Global initiatives → OECD VAT/GST
guidelines
• Governance, risk and control
• Transparancy & fair share
Taxing consumption
The concept of taxing consumption
2
,General vs specific
• General taxes on consumption
– All goods and services
• Specific taxes on consumption
– Generally goods only
– Excises (e.g. alcoholic beverages, tobacco, gasoline)
Government level of taxation
• Federal taxes vs state taxes
• Federal taxation: (harmonized) EU VAT
• State taxation: US sales tax
• Taxation at multiple levels: Brasil
• Key issue in federal systems: revenue allocation
Consumption
• Business consumption vs private consumption
• VAT/GST’s are designed to tax private consumption
Legislative intent:
• Art. 1(2) EU VAT Directive: “general tax on consumption”
• Australian Executive Summary to the Explanatory Memorandum: “tax on private
3
, consumption in Australia”
Case law:
• ECJ 24 November 1996, Case C-317/94, Elida Gibbs: “intended to tax only the final
consumer”
• Supreme Court of New Zealand, Glenharrow Holdings Ltd. v. Commissioners of Inland
Revenue: “tax on final consumption
Taxing consumption
Taxable person (paying tax to government) vs Fina consumer (carrying tax burden)
Justification for taxing consumption
• Generally unclear on the basis of (draft) legislation
1. Justification = final consumption
– taxing the benefit one has from consumption (expenditure), which is an indicator of
the economically relevant activity of a person
2. Justification = consumption expenditure as an indicator of the ability to pay
Single stage taxation
Single stage, multiple stage, all stages taxation
Single stage:
- Manufacturer tax
- Wholesaler tax
4
, - Retail tax
Retail sales tax
- Single stage tax
- Generally limited to goods, not services
- Key advantage: simplicity
- Key disadvantage: lack of neutrality for businesses
US example:
• Typical state sales tax
– Aims to exclude B2B transactions
– Exemption for items bought for resale
– ‘Physical ingredient rule’
• Certain goods are exempt or taxed at a reduced rate
– E.g. food for preparation and consumption at home and prescribed medication
• Sales tax to be paid to state at least quarterly
– Some states provide a discount upon payment of collected tax
5
Lecture 1: Introduction
Course overview:
Exam:
- Group assignment 25%
- Individual assignment 75%
Direct taxation vs indirect taxation
• Direct taxes
– Tax base erosion
– (Harmful) tax competition
1
, – Economic crisis: less revenues from direct taxes (income based)
• Indirect taxes
– Efficiency – consumption provides for a broader and more stable tax base
– Less tax competition
– Efficiency in levying and in collection
– Robust in view of aging society
Same indirect tax trends
• Shift from direct tax to indirect tax
• More countries to introduce indirect taxes
• Rates tend to increase
• Double taxation & double non-taxation – Global initiatives → OECD VAT/GST
guidelines
• Governance, risk and control
• Transparancy & fair share
Taxing consumption
The concept of taxing consumption
2
,General vs specific
• General taxes on consumption
– All goods and services
• Specific taxes on consumption
– Generally goods only
– Excises (e.g. alcoholic beverages, tobacco, gasoline)
Government level of taxation
• Federal taxes vs state taxes
• Federal taxation: (harmonized) EU VAT
• State taxation: US sales tax
• Taxation at multiple levels: Brasil
• Key issue in federal systems: revenue allocation
Consumption
• Business consumption vs private consumption
• VAT/GST’s are designed to tax private consumption
Legislative intent:
• Art. 1(2) EU VAT Directive: “general tax on consumption”
• Australian Executive Summary to the Explanatory Memorandum: “tax on private
3
, consumption in Australia”
Case law:
• ECJ 24 November 1996, Case C-317/94, Elida Gibbs: “intended to tax only the final
consumer”
• Supreme Court of New Zealand, Glenharrow Holdings Ltd. v. Commissioners of Inland
Revenue: “tax on final consumption
Taxing consumption
Taxable person (paying tax to government) vs Fina consumer (carrying tax burden)
Justification for taxing consumption
• Generally unclear on the basis of (draft) legislation
1. Justification = final consumption
– taxing the benefit one has from consumption (expenditure), which is an indicator of
the economically relevant activity of a person
2. Justification = consumption expenditure as an indicator of the ability to pay
Single stage taxation
Single stage, multiple stage, all stages taxation
Single stage:
- Manufacturer tax
- Wholesaler tax
4
, - Retail tax
Retail sales tax
- Single stage tax
- Generally limited to goods, not services
- Key advantage: simplicity
- Key disadvantage: lack of neutrality for businesses
US example:
• Typical state sales tax
– Aims to exclude B2B transactions
– Exemption for items bought for resale
– ‘Physical ingredient rule’
• Certain goods are exempt or taxed at a reduced rate
– E.g. food for preparation and consumption at home and prescribed medication
• Sales tax to be paid to state at least quarterly
– Some states provide a discount upon payment of collected tax
5
