Consumption tax trends 2012 – summary
From: OECD (2012), Consumption Tax Trends 2012: VAT/GST and Excise Rates, Trends and Administration Issues, OECD Publishing written by Stéphane Buydens of the OECD Centre for Tax Policy and Administration (CTPA)
Consumption taxes include, on one hand general taxes on consumption, typically value added taxes (VAT and its equivalent in several jurisdictions the goods and services tax sales– GST) and retail sales taxes and on the other hand taxes on specific goods and services, consisting primarily of excise taxes, customs duties and certain special taxes.
Looking at the unweighted average of revenue from the five broad categories of taxes as a percentage of overall taxation in the OECD member countries, it can be seen that the proportion of consumption taxes is almost 31% (see Table 1.1).
In 2009, consumption taxes broke down to one-third for taxes on specific goods and services and two-thirds for general consumption taxes (see Tables 3.2, 3.4 and 3.7).
General consumption taxes
Retail sales taxes
A retail sales tax is a consumption tax charged only once at the last point of sale for products to the final end user.
The United States is the only OECD country within which a retail sales tax is employed as the principal consumption tax. However, the retail sales tax in the United States is not a federal tax.
Rather, it is a tax imposed at the state level. Currently, 46 of the 50 States impose retail sales taxes. In addition, over 7 500 local tax jurisdictions impose retail sales taxes in accordance with state law requirements.
To address inter-state and international taxation issues caused by the lack of harmonisation in state sales and use taxes, a number of states have entered into the Streamlined Sales and Use Tax Agreement (SSUTA available at http://www.streamlinedsalestax.org).
Value added tax
VAT is the most widespread general consumption tax in the world having been implemented by over 150 countries and in 33 of the 34 OECD member countries.
The value added tax system is based on tax collection in a staged process, with successive businesses entitled to deduct input tax on purchases and account for output tax on sales in such a way that the tax finally collected by tax authorities equals the VAT paid by the final consumer to the last vendor.
These characteristics ensure the neutrality of the tax, whatever the nature of the product, the structure of the distribution chain and the technical means used for its delivery.
When the destination principle, which is the international norm, is applied,
it allows the tax to retain its neutrality in cross-border trade. According to this principle, exports are exempt with refund of input taxes (“tax free”) and imports are taxed on the same basis and at the same rates as local production.
VAT is a neutral tax.
The concept of tax neutrality in VAT has a number of dimensions, including the absence of discrimination in a tax environment that is unbiased and impartial and the elimination of undue tax burdens and disproportionate or inappropriate compliance costs for businesses.
Neutrality is one of the principles that help to ensure the collection of the right amount of revenue by governments in the right jurisdiction.
In domestic trade, tax neutrality is achieved by the staged payment system: each (fully taxable) business pays VAT to its providers on its inputs and receives VAT from its customers on its outputs.
Input VAT incurred by each business is offset against output VAT so that the “right” amount of tax to be remitted to tax authorities by each business is the net amount or balance of those two. As a result of the staged payment system, VAT normally “flows through the business” to tax the supplies to the final consumer.
This ensures that the tax ultimately collected along a particular supply chain is proportional to the amount paid by the final consumer, whatever the nature of the supply, the structure of the distribution chain, the number of transactions or economic operators involved and the technical means used.
VAT is a consumption tax.
From an economic standpoint, VAT is a tax on final consumption by households.
Practically, the tax deduction mechanism ensures that the VAT paid by businesses along the value chain does not bear on them but, ultimately, on final consumers only.
Therefore, only people consume while businesses rather use inputs.
From a legal and practical standpoint, VAT is essentially a transaction tax, which aims at taxing the sale to the final consumer through a staged payment process across the supply chain.
VAT in cross-border trade.
The overarching purpose of the VAT as a levy on final household consumption coupled with its central design feature of a staged collection process lays the foundation for the core VAT principles bearing on international trade.
The application of the destination principle in VAT achieves neutrality in international trade.
Under the destination principle, exports are exempt with refund of input taxes (that is, free of VAT) and imports are taxed on the same basis and at the same rates as domestic supplies.
Accordingly, the total tax paid in relation to a supply is determined by the rules applicable in the jurisdiction of its consumption and therefore all revenue accrues to the jurisdiction where the supply to the final consumer occurs.
The application of the destination principle is more consistent with the main VAT principles and is accepted as the international norm.
Although most of the rules currently in force are consistent with the destination principle, their features are diverse across countries.
This can, in some instances, lead to double taxation or unintended non-taxation and create uncertainties for both business and tax administrations.
Implementation of the destination principle with respect to international trade in goods is relatively straightforward in theory and generally effective in practice, due in large part to the existence of border controls or fiscal frontiers.
Implementing the destination principle with respect to international trade in services and intangibles is more difficult.
Their nature is such that there are no customs controls that can confirm their exportation and their consequent right to be free of VAT or impose the VAT at importation.
Since it is not possible to physically follow the flow of services and intangibles across borders for tax purposes, the connection of the supply with a specific taxing jurisdiction must be done by reference to proxies.
The nature of those proxies and the way they are used may vary across jurisdictions as a result of local history and legal frameworks.
Consumption taxes on specific goods and services: Excise taxes
Excise taxes differ from VAT since they are levied on a limited range of products; are not normally liable to tax until the goods enter free circulation and are generally assessed by reference to the weight, volume, strength or quantity of the product, combined in some cases, with ad valorem taxes.
As with VAT, excise taxes aim to be neutral internationally since they are normally collected once, in the country of final consumption.
Chapter 2 – Consumption tax topics
Taxing international trade
The spread of VAT has been the most important development in taxation over the last half century. It now covers more than 150 countries and is recognised as the most efficient consumption tax both in terms of revenue for governments and neutrality towards international trade.
The challenges raised by globalisation have led governments to undertake common action to ensure a smooth interaction between VAT systems in the context of a global economy.
Governments began the process of establishing common guidelines for international VAT issues in 1998 at the OECD Ottawa Conference on electronic commerce, where Ministers welcomed the Ottawa Taxation Framework Conditions.
As a result, the OECD’s Committee on Fiscal Affairs (CFA) adopted the Guidelines on Consumption Taxation of Cross- Border Services and Intangible Property in the Context of E-commerce in 2001.
Further to the development of globalisation and cross-border trade, it became clear that many of the problems surrounding the application of VAT to e-commerce actually had their roots in the wider area of services and intangibles and that the remaining differences of approaches amongst jurisdictions still had potential for double taxation and unintended non-taxation.
The OECD therefore launched the OECD International VAT/GST Guidelines (the Guidelines) in 2006, which aim at providing guidance for governments on applying VAT more generally to cross-border trade.
It was agreed that the most pressing issue was the definition of the place of taxation for cross-border trade in services and intangibles and the conditions for the neutrality of the tax.
It was also agreed that the right to deduct input tax, an essential element in VAT systems that underpins the tax’s neutral character, should also be assured for cross-border trade. In January 2006, the CFA approved the two following basic rules:
- The burden of value added taxes themselves should not lie on taxable businesses except where explicitly provided for in legislation;
- for consumption tax purposes internationally traded services and intangibles should be taxed according to the rules of the jurisdiction of consumption.
These rules reflect the overarching purpose of a VAT to impose a broad-based tax on household consumption. According to the destination principle (see Chapter 1) the revenue of the tax should ultimately accrue to the jurisdiction where final consumption occurs.
In order to progress the work, the Guidelines are being developed in a staged process with a consultation process.
The objective is to arrive at a complete set of Guidelines applying to cross-border trade in services and intangibles by 2014.
Additional work is undertaken on improving the efficiency of the tax, the fight against VAT fraud and tax administration issues.
Cross-border VAT neutrality
In principle, the right to recover input VAT for businesses is exercised through the deduction mechanism in the staged payment process.
In a cross-border context, the export of goods and services is in principle free of VAT under the destination principle.
However, there will inevitably remain situations where businesses may incur a foreign VAT.
OECD countries have often implemented special mechanisms to avoid VAT being charged to the foreign taxpayer or to allow the foreign taxpayer to recover the input VAT incurred in the country.
The conditions and procedures for relief or recovery vary considerably between countries.
The lack of consistency in these procedures across countries and their current complexity may lead to significant compliance and administrative burdens for businesses and tax administrations.
The importance of the issue was confirmed by an OECD survey issued in 2010 “VAT/GST Relief for Foreign Businesses: The State of Play” (www.oecd.org/ctp/ct).
The CFA considered that the issue was significant enough to require remedies and undertook development of guidelines in this area.
As a result, the CFA approved International VAT Neutrality Guidelines in July 2011, after a successful public consultation. These Guidelines are one of the building blocks of the OECD International VAT/GST Guidelines.
The Commentary on the application of the International VAT Neutrality Guidelines in practice was approved for public consultation by the CFA in July 2012 and was published on the OECD website (www.oecd.org/ctp/ct) for public consultation (until 26 September 2012).
Definition of the place of taxation
According to the destination principle, the taxing rights on cross-border supplies of services and intangibles should accrue to the jurisdiction of consumption.
Although VAT primarily taxes household consumption, the multi-staged nature of the tax requires that each supply within the supply chain is subject to the rules of the relevant jurisdiction, including the intermediary supplies between businesses.
Thus, appropriate place of taxation rules should be applied at each stage of the supply chain. Over the last decade, OECD countries have amended their tax legislation to implement the destination principle.
However, there is a recognised need for a consistent set of approaches that maintain tax neutrality for business-to-business supplies and ensure the application of the destination principle for business-to-consumer supplies.
As part of the work on the OECD International VAT/GST Guidelines, a number of papers were issued for public consultation (www.oecd.org/ctp/ct).
The overall work on the Guidelines should be completed by end 2014. In addition anti-abuse provisions and mutual co-operation and dispute resolution procedures should also be developed.
Improving VAT efficiency
The current economic crisis has acted as a catalyst for structural reform in many OECD countries.
In the tax area such reforms aim at ensuring the long-term sustainability of public finances while safeguarding the competitiveness of the economy and its longer- term growth potential.
The pace and nature of reforms have varied markedly between countries but a consensus has emerged on the fact that growth-friendly tax reforms could help strengthen the jobs content of a recovery”.
This includes removing tax expenditures and shifting the tax burden towards tax bases that are less harmful to employment and growth, such as consumption taxes.
Against this background, the OECD organises its first Global Forum on VAT in Paris in November 2012 as a unique international platform for a truly global dialogue on VAT design and operation, for sharing policy analysis and experience, for identifying best practices and for strengthening international co-operation.
Tackling VAT fraud
There has been a significant and worrying trend in recent years for VAT to become a target for serious criminal activity.
Despite the measures taken by tax administrations and increased co-operation within the EU, criminal attacks against VAT systems have continued, spreading into new markets such as carbon emission allowances and energy supplies.
The development of appropriate legislation and practical tools are therefore critical to protect governments against international VAT fraud.
Chapter 3 – Value added tax: Yield, rates and structure
Limited to less than 10 countries in the late 1960s, VAT is today an essential source of revenue in more than 150 countries.
A number of factors have contributed to these developments i.e. globalisation, the systemic neutrality of the tax towards international trade and its efficiency for raising revenue.
It now accounts for approximately one fifth of the tax revenues of OECD governments and worldwide.
Key features of the VAT systems
Although most VAT systems build on the same core VAT principles, many differences exist in the way they are implemented in practice.
This is illustrated by the existence of a wide range of lower rates, exemptions and special arrangements that are frequently designed for non-tax policy objectives.
The rates of VAT
After a period of relative stability between 1996 and 2008, the average standard rate of VAT has started to rise again since 2008, suggesting that many countries have increased their VAT rates to consolidate their budgets.
With the exceptions of Chile and Japan, all OECD countries have one or more reduced rate generally applied to basic essentials such as medical and hospital care, food and water supplies and to activities that are considered socially desirable.
One of the reasons for the introduction of a differentiated rates structure is the promotion of tax equity or to stimulate consumption of “merit goods” (e.g. cultural products and education) and goods with positive externalities (e.g. energy-saving appliances).
The reasons for these reduced rates are likely to be rooted in a country’s socio-economic history, but their validity and their capacity to meet their objectives at an appropriate cost may be questionable.
In addition to reduced rates, there is also an extensive use of exemption across countries (see Table 3.11). Although it is a significant departure from the basic logic of VAT, all OECD countries (with the exceptions of New Zealand and Turkey) exempt a number of specific sectors considered as essential for social reasons, in particular health, education and charities.
In addition most countries also use exemptions for practical reasons (e.g. financial and insurance services, due to the difficulties in assessing the tax base) or for historical reasons (postal services, letting of immovable property, supply of land and buildings).
Unlike reduced rates, exemptions break the staged payment system and create specific distortions.
The exemption of items used as inputs into production removes the key feature of VAT, that of neutrality.
Exemption may introduce a cascading effect as the non-deductible tax on inputs is embedded in the subsequent selling price and is not recoverable by taxpayers further down the supply chain.
The importance of this cascading effect depends on where in the supply chain exemption occurs. If the exemption occurs immediately prior to the final sale, there is no cascading effect and the consequence is simply a loss of revenue since the value added at the final stage escapes tax.
On the other hand, if it takes place within the supply chain the distortions may be significant. For example, the exemption of financial services creates significant distortions with respect to both consumer and business decisions.
There is no consensus amongst OECD countries on the need for, or the level of, thresholds.
The main reasons for excluding “small” businesses are that the costs for the tax administration are disproportionate to the VAT revenues from their activity and, similarly, VAT compliance costs would be disproportionate for many small businesses.
The level of the threshold is often the result of a trade-off between minimising compliance and administration costs and the need to avoid jeopardising VAT revenue or distorting competition.
Restrictions to the right to deduct VAT on specific inputs
According to the VAT principles, the right to deduct input taxes should be limited to the extent that those inputs are used for the taxable purposes of businesses.
The right of deduction is legitimately denied where inputs are used to make onward transactions that fall outside the scope of the tax such as exempt transactions.
This is also the case for input tax relating to purchases that are not wholly used for furtherance of taxable business activity, for example, when they are used for the private needs of the business owner or its employees (i.e. final consumption).
Most OECD countries also have legislation in place that provides for input tax deduction blocking on a number of goods and services because of their nature rather than because of their use by businesses, generally with a view to ensure (input) taxation of their deemed final consumption e.g. restaurant meals, reception costs, hotel accommodation, use of cars by the employees of businesses, etc.
Chapter 4 – Measuring performance of VAT: The VAT revenue ratio
Given the diversity in the implementation of VAT between countries, it is reasonable to consider the influence of these features on the revenue performance of VAT systems.
One tool considered as an appropriate indicator of such a performance is the VAT Revenue Ratio (VRR), which is defined as the ratio between the actual VAT revenue collected and the revenue that would theoretically be raised if VAT was applied at the standard rate to all final consumption (Table 4.1).
In theory, the closer the VAT system of a country is to a “pure” VAT regime (i.e. where all consumption is taxed at a uniform rate), the more its VRR is close to 1.
On the other hand a low VRR can indicate a reduction of the tax base due to a large number of exemptions or reduced rates or a failure to collect all tax due (e.g. tax fraud).
The main methodological difficulty for calculating the VRR lies in the assessment of the potential tax base, since no standard assessment of the potential VAT base for all OECD countries is available.
In the absence of such data, the closest statistic for that base is final consumption expenditure as measured in the national accounts.
Few countries have a high VRR and most have a ratio below 0.65, which confirms the impact of the wide range of exemptions and reduced rates applied in OECD countries.
However, VRR figures should be interpreted with caution since they result from a combination of the policy efficiency (capacity to tax the full base at the standard rate) and compliance efficiency (the capacity of the tax administration to collect the tax due).
In addition, a number of factors such as the evolution of consumption patterns, incomplete application of the destination principle and the tax treatment of government activities may have a significant influence on the VRR in some countries.
Whilst the VRR is a useful tool for observing countries’ performance, more work is needed to identify the specific factors that influence the performance of VAT and how they interact.
Chapter 5 – Selected excise duties in OECD member countries
Excise duty, unlike VAT and general consumption taxes, is levied only on specifically defined goods. The three principal product groups that remain liable to excise duties in all OECD countries are alcoholic beverages, mineral oils and tobacco products.
While excise duties raise substantial revenue for governments, they are also used to influence customer behaviour with a view to reducing polluting emissions or consumption of products harmful for health such as tobacco and alcohol.
While the main characteristics and objectives ascribed to excise duties are approximately the same across OECD countries, their implementation, especially in respect to tax rates, sometimes gives rise to significant differences between countries (Tables 5.1 to 5.5).
For example, excise duties on wine (Table 5.2) may vary from zero to more than USD 2.5 a litre. Current excise rates for mineral oil products again illustrate the wide disparity.
For example, excise taxes on premium unleaded gasoline vary from USD 0.109 in the United States to USD 1.483 in Turkey for 1 litre.
A much more significant feature of excise duties on mineral oils is the fact that duty rates have been used to affect consumer behaviour to a greater degree than in other areas. Tobacco products are subject to excise taxes that most often rely on a combination of ad valorem and specific elements.
Chapter 6 – Taxing vehicles
Motoring has been an important source of tax revenue for a long time thanks to a wide range of taxes imposed on users of public roads.
Vehicle taxation in its widest definition represents a prime example of the use of the whole spectrum of consumption taxes.
These taxes include taxes on sale and registration of vehicles (Tables 6.1 and 6.3); periodic taxes payable in connection with the ownership or use of the vehicles (Table 6.2); taxes on fuel (Table 5.4) and other taxes and charges, such as insurance taxes, road tolls etc.
Increasingly, these taxes are adjusted to influence consumer behaviour in favour of the environment.
Table 5.3 illustrates, as an example, the wide differences in the level of taxes on sale and registration of motor vehicles. Indeed, the maximum tax for passenger cars may vary from less than 7% of the value of the car in Washington, DC, to 195% in Copenhagen.
Environment issues are increasingly taken into consideration for the design of vehicle taxation since it is increasingly considered as an efficient tool to influence customer behaviour and encourage the purchase of low polluting vehicles.
In 2012, more than two thirds of OECD countries apply rate differentiation according to environmental criteria.