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European Commission Consultation on VAT

by Migeru Sat Dec 18th, 2010 at 06:48:15 AM EST

European Commission: Green Paper on the future of VAT– Towards a simpler, more robust and efficient VAT system

The Commission invites all interested parties to submit their contributions in response to the questions raised in the ‘Green Paper on the future of VAT– Towards a simpler, more robust and efficient VAT system’. All stakeholders affected by this initiative – all citizens, organisations, businesses, public authorities, tax practitioners, tax experts and academics - are invited to provide their views on this matter
That's us
Period of consultation From 01.12.2010 to 31.05.2011
That's now.


Value added tax (VAT) constitutes a major source of revenue for national budgets of the Member States of the European Union. However, the VAT system, which is based on legislation adopted at European level and applied at national level, suffers from numerous shortcomings which do not make it fully efficient and compatible with the requirements of a true single market. The aim of this consultation is to launch a broad based debate with all the stakeholders on the evaluation of the current VAT system and the possible ways forward to strengthening its coherence with the single market and its capacity as a revenue raiser whilst reducing the cost of compliance. The Green Paper covers in particular the treatment of cross border supplies, as well as other key issues addressing tax neutrality, the degree of harmonisation required in the single market and reducing "red tape" whilst ensuring VAT revenues for Member States.
Submissions seem to be free-form (thought I expect the consultation document to lead you in a particular policy direction), and by email.
Received contributions will be published on the Internet. It is important to read the specific privacy statement attached to this consultation for information on how your personal data and contribution will be dealt with.

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So, bearing in mind that the European Commission is not going to entertain a recommendation to eliminate VAT in favor of a more progressive tax, what sort of a VAT regime do we want to recommend?

Besides, naturally, being less susceptible to carousel fraud. Which would mean levying VAT on international transactions, and also international VAT offsetting and reimbursements in some form or another?

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman

by dvx (dvx.clt ät gmail dotcom) on Fri Dec 17th, 2010 at 03:21:13 PM EST
See Chris Cook
Firstly, I have first hand knowledge - including direct contact with the general manager of the central bank - of the ongoing 'FactoRepo' initiative in Ecuador whereby any VAT-registered firm will be able to discount VAT invoices directly with the Central Bank, and thereby access working capital.

Since Ecuador is in fact 'dollarised', what FactoRepo will achieve for their Central Bank is a reduction in their reliance on dollars from a gross figure to a net figure during whatever settlement cycle they opt for. Reduced reliance on the Fed is politically attractive.

It also reduces reliance on private banks as credit intermediaries, but there is a potential role for them as service provider managers. Of course, a FactoRepo technique would work perfectly well anywhere there is a VAT system, but I suspect that banks would insist on extracting a monopoly rent that rendered it unattractive to users.

Secondly, this could be a transitional stage to a true 'Peer to Peer' credit clearing union.  In a true P2P model, businesses would issue mutually guaranteed undated credits/IOUs subject to 'guarantee limits' managed by service providers, whose agreed costs would be shared by a suitable service charge.

The mutual guarantee would be backed by payments made by both sellers and buyers into a default 'Pool' in common ownership, and the service providers would receive a share of this payment after defaults, thus aligning their interests.  

In terms of settlement of credit, any payments (which are not strictly necessary provided guarantee payments and service charges are paid) would be applied on a FIFO basis to the longest outstanding credits first.

In addition 'settlement agent' software eg Ripple Pay could seek out 'chains'. So if A owes B owes C owes D owes A then these obligations may be netted out down the chain. This is exactly how the bilateral 'off-exchange' Brent/BFOE crude oil forward contract works on contract expiry, so that open bilateral Brent contracts may be 'booked out' and price differences settled in dollars.

The outcome for (say) Ecuador would be that no actual Fed dollars would then be needed at all, and the US dollar would then be used - in the absence of anything more credible - only as a pure, abstract, 'Value Standard' or unit of measure.

For users, any excess in the Pool could be distributed equally as a dividend, and of course this would reduce negative balances and increase positive balances. The outcome would be a net transfer from those who use the guarantee to those who provide it, thereby sharing the fruits of the 'Credit Commons'.

Now, evidently the European Commission is not going to entertain such suggestions but maybe the Taxation and Customs Union staff economists will learn something new. For instance, the eye-popping idea that
sellers may discount VAT invoices directly with the Central Bank
Oh, dear, making the Central Bank carry out a useful economic function.

It's all about moving the Overton window, and about exploring new ways of doing things. We know the European Commission will choose the worst, most regressive, policy, and the one giving the financial intermediaries and the big IT corporations all the power, but we can still make a contribution to the consultation.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Sat Dec 18th, 2010 at 03:23:02 AM EST
[ Parent ]
OK, but you'll have to fill in some dots for me. In FactoRepo, interesting as it sounds, "VAT-registered firm" seems to me to be a synonym for "business with on-the-books revenues". So eligibility could be conceivably be based on a different criterion.

Which, it seems to me, makes it tangential to a discussion of VAT as revenue stream, which is what the European Commission wants to have.

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman

by dvx (dvx.clt ät gmail dotcom) on Sat Dec 18th, 2010 at 07:48:21 AM EST
[ Parent ]
This is a highly technical and specialised area and I'm not sure we're equipped to make a significant contribution. To make a meaningful contribution we need to know:

  1. The various VAT rates applied to different goods and services in each member state

  2. The various exemptions and offsets available in each member states - e.g. for small traders, public services, subsistence goods - e.g. fresh foods

  3. The tax collection mechanisms, costs, and compliance costs in each member state - time lapses for settlement, penalties for late settlement etc.

  4. The economic and opportunity costs created by trade distortions caused by variable VAT rates

I suppose our starting position should be an end goal of common rates on common goods and services, common definitions of those goods and services, common collection, compliance and enforcement mechanisms so that basically a company can operate the same VAT compliance systems regardless of where it trades within the EU.

The fraud, avoidance, administration and compliance cost reductions of a common system combined with the economic benefits could probably fund a significant overall reduction in rates or perhaps transition subsidies for those Members where greater difficulties might be experienced during the transition.

Other principles we might want to apply include:

i) Zero rates on basic subsistence foods and services, and fresh produce produced by smaller producers

ii) moderates rates - e.g. 10% on labour intensive services - hotels, restaurants, construction

iii) A higher rate on luxury, carbon energy intensive, discretionary goods and services.

Should we also set a target for the % of the total tax base which should be achieved by VAT, income taxes, capital and property taxes etc.? I.e what degree of progression should be built into the overall system? What about VAT on financial transactions - in the absence of a Tobin tax?

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Dec 17th, 2010 at 05:02:25 PM EST
You focus on taxation rates. Look at the consultation and accompanying documents
Consultation paper: Green Paper on the future of VAT- Towards a simpler, more robust and efficient VAT system (pdf 102 Kb)(102 Kb) .

Reference documents

  • `Commission Staff Working Paper - Future of VAT (pdf 502 Kb)(502 Kb) ' accompanying the Green Paper on the future of VAT
  • Study on the feasibility of alternative methods for improving and simplifying the collection of VAT through the means of modern technologies and/or financial intermediaries (pdf 7.34 Mb)(7.34 Mb)
  • Summary of the study (pdf 125 Kb)(125 Kb)
I am interested in linking this planned reform of VAT with the FactoRepo system that has been introduced in Ecuador and mentioned by Chris Cook here on ET in connection with monetary reform.

Because monetary reform is it.

Now, I don't have the slightest hope that whatever anyone submits to the consultation will be taken on, but until we've taken a stab we won't know whether we can make a contribution.

Not to be rude, but if you can reach the conclusion that

This is a highly technical and specialised area and I'm not sure we're equipped to make a significant contribution.
before, I suspect, reading the consultation document, maybe you can sit this one out.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Sat Dec 18th, 2010 at 03:15:08 AM EST
[ Parent ]
European Commission:
Study on the feasibility of alternative methods for improving and simplifying the collection of VAT through the means of modern technologies and/or financial intermediaries
Here on ET: Beyond Paper: Mobile Money (by ChrisCook on March 17th, 2010)
Such credit clearing has been routine between tens of thousands of Swiss businesses since 1934 on the WIR credit clearing system. More recently, in Ecuador, the FactoRepo system currently under development will enable VAT-registered businesses to discount their invoices directly with the Central Bank and thereby free up working capital. Neither Swiss Francs nor Dollars, respectively, actually change hands in these systems: instead credit obligations of businesses (trade credit) is simply used in payment of other obligations within a framework of trust, the WIR's being private, and FactoRepo's, public. The Swiss Franc and the Dollar are used only as the pricing reference or value standard.
But hey, evidently
This is a highly technical and specialised area and I'm not sure we're equipped to make a significant contribution.


Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Sat Dec 18th, 2010 at 03:35:07 AM EST
[ Parent ]
Easy Miguel, this had been my initial reaction as well.
But yes, I'm all in favour of introducing a Tobin tax in the VAT.

Less clear about simulating the carbon tax, because we'd lose the incentive to decarbonise any given process (since you'd pay the same rate as everybody else in the industry), in a way you might as well have the dirtiest process available, and answer any campaign by saying that you are heavily taxed on your carbon consumption, which allows for savings elsewhere and bla bla...

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Sun Dec 19th, 2010 at 04:17:43 AM EST
[ Parent ]
Junk it and go with a sales tax.

It's still regressive but at least the final consumer doesn't end-up paying for all the "Value" (sic) "Added" (ibid) along the way.


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sat Dec 18th, 2010 at 01:04:19 PM EST
How does a sales tax differ from a VAT?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Dec 18th, 2010 at 01:11:05 PM EST
[ Parent ]
Sales Tax:

A sales tax is a consumption tax charged at the point of purchase for certain goods and services. The tax amount is usually calculated by applying a percentage rate to the taxable price of a sale. A portion of the sale may be exempt from the calculation of tax, because sales tax laws usually contain a list of exemptions. Laws governing the tax may require it to be included in the price (tax-inclusive) or added to the price at the point of sale.

Most sales taxes are collected from the buyer by the seller, who remits the tax to a government agency. Sales taxes are commonly charged on sales of goods, but many sales taxes are also charged on sales of services. Ideally, a sales tax would have a high compliance rate, be difficult to avoid, and be simple to calculate and collect.




She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Sat Dec 18th, 2010 at 01:19:13 PM EST
[ Parent ]
I note the neat thing is, a Tobin Tax can be automatically "included" since the exchange of one currency for another can be viewed as a "purchase" of that currency.

;-)


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sat Dec 18th, 2010 at 01:23:23 PM EST
[ Parent ]
And this differs from a VAT how?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Dec 18th, 2010 at 01:58:01 PM EST
[ Parent ]
VAT:

A value added tax (VAT) is a form of consumption tax. It is a tax on the "value added" to a product or material, from an accounting view, at each stage of its manufacture or distribution.


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Sat Dec 18th, 2010 at 02:02:56 PM EST
[ Parent ]
(Hit post instead of preview.)

I don't like either one.  They are both regressive.  The biggest advantage to a sales tax is it is a lot easier to organize, manage, and run.  

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sat Dec 18th, 2010 at 02:10:22 PM EST
[ Parent ]
But if VAT is already organized, then the value of changing would go down?

Wikipedia has an easy comparision:

Value added tax - Wikipedia, the free encyclopedia

A value added tax (VAT) is a form of consumption tax. It is a tax on the "value added" to a product or material, from an accounting view, at each stage of its manufacture or distribution. The "value added" to a product by a business is the sale price charged to its customer, minus the cost of materials and other taxable inputs. A VAT is like a sales tax in that ultimately only the end consumer is taxed. It differs from the sales tax in that, with the latter, the tax is collected and remitted to the government only once, at the point of purchase by the end consumer. With the VAT, collections, remittances to the government, and credits for taxes already paid occur each time a business in the supply chain purchases products from another business. The reason businesses end up paying no tax is that at the time they sell the product, they receive a credit for all the tax they have paid to suppliers.

It appears that sales taxes are easier in that they apply to fewer transactions, while VAT is easier in that they always apply (and thus discourages fraud).

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Sat Dec 18th, 2010 at 02:34:26 PM EST
[ Parent ]
VAT seems to be used more as an excuse to enforce business record keeping than as a tax.

More generously, it can also help with cash flow because every quarter businesses get a short-term loan of x% of their quarterly turnover.

If the aim was revenue collection from consumers, the pay-back/pay-forward system would be unnecessary. And because cross-border pay-back/pay-forward gets complicated, VAT isn't even collected for B2B transactions in the EU.

E.g. I sold a domain name to a Dutch company at the start of the year, and although VAT was nominally charged and recovered, in practice there was one line of paperwork and no actual cash.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sat Dec 18th, 2010 at 04:05:13 PM EST
[ Parent ]
Looking into the present situation.

Basics:
Value added tax - Wikipedia, the free encyclopedia

The European Union Value Added Tax (EU VAT) is a value added tax encompassing member states in the European Union Value Added Tax Area. Joining in this is compulsory for member states of the European Union. As a consumption tax, the EU VAT taxes the consumption of goods and services in the EU VAT area. The EU VAT's key issue asks where the supply and consumption occurs thereby determining which member state will collect the VAT and which VAT rate will be charged.

Each Member State's national VAT legislation must comply with the provisions of EU VAT law as set out in Directive 2006/112/EC. This Directive sets out the basic framework for EU VAT, but does allow Member States some degree of flexibility in implementation of VAT legislation. For example different rates of VAT are allowed in different EU member states. However Directive 2006/112 requires Member states to have a minimum standard rate of VAT of 15% and one or two reduced rates not to be below 5%. Some Member States have a 0% VAT rate on certain supplies- these Member States would have agreed this as part of their EU Accession Treaty (for example, newspapers and certain magazines in Belgium). The current maximum rate in operation in the EU is 25%, though member states are free to set higher rates.

Some rules:
European Union Value Added Tax Area - Wikipedia, the free encyclopedia

When goods or services are sold to a company across a border within the area, either the buyer pays the sales country's VAT to the seller, or it is possible to register the transaction as an inter-company sale with no VAT being collected. If VAT has been paid the buyer can include it in their VAT accounts just like VAT paid locally.

When goods or services are sold to a private person across a border within the area, the buyer usually pays the sales country's VAT to the seller, and does not pay any local VAT. But if the seller's annual sales of goods to the buyer's country exceed a threshold (which varies by country), the seller must instead charge VAT in the buyer's country. These are known as the distance selling rules.[1]

EU sellers may validate the VAT number of a buyer residing within the EU Value Added Tax Area using VIES.

So far it looks fairly well thought out considering there is a mix of national systems with a federal patching.

I also note:

European Union Value Added Tax Area - Wikipedia, the free encyclopedia

Areas with special rules
  • Sweden does not want to accept the VAT union regarding alcohol (see Systembolaget) and tobacco shipped to private persons.

There might be other things we would like see taxed for social or environmental reasons. Maybe something about countries having that possibility should be included.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Sat Dec 18th, 2010 at 02:59:00 PM EST


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