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A MODEL VAT

This report analyzes the spread of VATs in 140 countries and their impact on tax revenue. It explores main policy issues and design features such as rates, exemptions, and thresholds.

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A MODEL VAT

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  1. A MODEL VAT OECD PARIS 27 March 2007

  2. 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)

  3. 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)

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

  5. 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)

  6. 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)

  7. 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

  8. 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)

  9. 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

  10. 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

  11. A VAT designed for sub-optimal performance? KEY FEATURES LOW THRESHOLDS NARROW BASE (AT STD RATE) + REQUIRE HIGH STANDARD RATES MULTIPLE RATE STRUCTURE LARGE NUMBERS OF SMALL VALUE PAYERS LEADING TO INCENTIVES TO EVADE COMPLEXITY POOR USE OF AGENCY RESOURCES RESULTING IN POOR COMPLIANCE HIGH COMPLIANCE COSTS HIGH ADMINISTRATION COSTS

  12. VAT Efficiency

  13. 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

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