Financial Activities in European VAT

Financial Activities in European VAT Synopsis

Most VAT systems exclude public bodies from the scope of value added tax (VAT) systems. However, because what is considered proper for public bodies to engage in varies over time and depends on political preference, there has been a growing awareness that the exclusion necessarily gives rise to economic distortion and legal uncertainty. A movement to include public sector bodies within the GST system to some extent or even fully (as in New Zealand) underlies the European Commission’s 2011 study on the treatment and economic impact of exemptions in the public interest. Whether the present EU treatment really is as bad as the distorting effects suggest, or whether the New Zealand model really is so perfect that jurisdictions with exclusion models ought simply to replace these existing systems with a New Zealand style system: these are the questions which triggered this research and which form the basis for the critical analysis contained in this book. Using a system design point of view, the author focuses on VAT schemes where exclusion or inclusion of public bodies are currently being applied and on how these models function. He presents an in-depth analysis of the major issues in this context, such as the treatment of public bodies as taxable persons, their right to deduct input VAT on acquisitions, and the treatment of the income of public bodies. Specific aspects examined include the following: ;

• reallocation of funds and income vs. the production/distribution/consumption cycle;

• the concept of ‘merit goods’;

• bias to self-supply instead of contracting out;

• preference to integrate vertically in the supply chain;

• applicability of VAT to government regulatory services;

• tax cascading in the public goods and services context;

• administration and compliance burden in government agencies;

• interpretational and implementation difficulties in EU Member States; and

• VAT compensation schemes considered as illegal State aid in the public sector context.