A MODEL VAT

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)

MULTIPLE RATE STRUCTURE
LARGE NUMBERS OF SMALL VALUE PAYERS
REQUIRE
HIGH STANDARD RATES
LEADING TO
INCENTIVES TO EVADE
COMPLEXITY
POOR USE OF AGENCY RESOURCES
RESULTING IN
POOR COMPLIANCE HIGH COMPLIANCE COSTS HIGH
ADMINISTRATION COSTS
12
VAT Efficiency
Features NZ Switz. EU15 Mexico
VAT standard rate () 12.5 7.6 20 15
VAT reduced rate (no.) No Yes Many Yes
VAT revenue/GDP () 9.1 4.0 7.0 3.2
VAT C efficiency 96 72 51 30
VAT compliance burden Low Low High High

13
Improving Mexicos 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