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VAT Abuses by forrests

VIEWS: 51 PAGES: 13

									Centre for Tax Policy and Administration

Organisation for Economic Co-operation and Development

A MODEL VAT
OECD
PARIS 27 March 2007

27 March 2007

Centre for Tax Policy and Administration

Organisation for Economic Co-operation and Development

The spread of VAT
• 140 countries now have VATs
• VATs generate significant tax revenue:
– OECD: 6.9% of GDP, 18.9% of all taxes – Mexico: 3.7% of GDP, 20.2% of all taxes

• Growing reliance on VAT revenue:
– OECD: 16.4% (1985), 18.9% (2003) – Mexico: 15.9% (1985), 20.2% (2004)
2 27 March 2007

Centre for Tax Policy and Administration

Organisation for Economic Co-operation and Development

VAT design: main policy issues
• Almost universal use of credit-invoice system and application of destination principle
• Much diversity in the structure of VATs & revenue

• Considerable variation in registration thresholds (zero to $90,000)
• VAT- a tax to refund (as well as collect)

3 27 March 2007

Centre for Tax Policy and Administration

Organisation for Economic Co-operation and Development

VAT DESIGN: RATES
• Mexico: 15% = 3.7% of GDP
• Luxembourg: 15% but = 7.1% of GDP • Germany was 16% = 6.2% of GDP

4 27 March 2007

Centre for Tax Policy and Administration

Organisation for Economic Co-operation and Development

VAT DESIGN: RATES
Exemption: No tax charged but no tax recoverable
• Exemptions: Most countries exempt financial services, education, health, charities.

• Financial Services: Difficult to ascertain value for adding tax. But New Zealand recently zero-rated business-to-business financial services.
• Education, Health, Charities – social reasons. • Exemption can be big tax-raising mechanism (UK = 8% of VAT)

5 27 March 2007

Centre for Tax Policy and Administration

Organisation for Economic Co-operation and Development

VAT DESIGN: RATES
• Zero Rate: No tax charged but tax is recoverable by business
• Few countries apply widely (UK and Ireland exceptions) • Food, Books and Newspapers most common • Mexico much wider than most (jewellery, hotel conference services, caviar)

27 March 2007

Centre for Tax Policy and Administration

Organisation for Economic Co-operation and Development

VAT DESIGN: RATES
• Reduced rates: Tax charged at a rate less than Standard Rate. Recoverable by business • Covers items zero-rated in some countries • Others include construction, domestic electricity and gas, supplies to disabled people
27 March 2007

Centre for Tax Policy and Administration

Organisation for Economic Co-operation and Development

VAT DESIGN: THRESHOLD
• France, UK and Slovak Republic have highest thresholds (c.$90,000) • 6 OECD countries have no thresholds (inc Mexico) • 4 OECD countries have collection thresholds • Some have variable thresholds (e.g. France and Ireland with one for goods, one for services)

8 27 March 2007

Centre for Tax Policy and Administration

Organisation for Economic Co-operation and Development

VAT DESIGN: THRESHOLD
• High thresholds favoured • Avoids expensive tax collection of small amounts • Removes compliance burden on small business • High cost of maintaining large number of registered businesses
27 March 2007

Centre for Tax Policy and Administration

Organisation for Economic Co-operation and Development

VAT DESIGN: THRESHOLD
• Can give some problems • Artificial splitting of businesses to keep below threshold • “Cliff-edge syndrome” • But international consensus that high thresholds are more efficient

27 March 2007

Centre for Tax Policy and Administration

Organisation for Economic Co-operation and Development

A VAT designed for sub-optimal performance?
KEY FEATURES NARROW BASE (AT STD RATE) +

LOW THRESHOLDS

REQUIRE

HIGH STANDARD RATES INCENTIVES TO EVADE

MULTIPLE RATE STRUCTURE

LARGE NUMBERS OF SMALL VALUE PAYERS

LEADING TO

COMPLEXITY

POOR USE OF AGENCY RESOURCES

RESULTING IN
27 March 2007

POOR COMPLIANCE HIGH COMPLIANCE COSTS HIGH ADMINISTRATION COSTS

11

Centre for Tax Policy and Administration

Organisation for Economic Co-operation and Development

VAT Efficiency
Features
VAT standard rate (%)

NZ
12.5

Switz.
7.6

EU15
20

Mexico
15

VAT reduced rate (no.)
VAT revenue/GDP (%) VAT C efficiency

No
9.1 96

Yes
4.0 72

Many
7.0 51

Yes
3.2 30

VAT compliance burden

Low

Low

High

High

12 27 March 2007

Centre for Tax Policy and Administration

Organisation for Economic Co-operation and Development

Improving Mexico’s VAT: Policy
• • • • Minimise zero rates Exemption for some goods? Reduced Rate in border regions? Introduce registration threshold ($50,000?)

• MAJOR CHANGES AS PART OF WIDER TAX REFORM
13 27 March 2007


								
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