Value add tax - VAT PhD. Anto Bajo Faculty of Economics and Business, University of Zagreb EU AND VAT VAT = consumption tax on the supply of goods and services European Union: free movement of goods and services important international trade Thus : need to control the correct application of the VAT rules = an international problem Added value Added value is the difference between the value of the sale of goods and services (outputs) and the value of the purchases (inputs, but not labour inputs) through which these goods and services are produced. That is, added value is the value of what the producer has added to the inputs before it sells them on as new products and services. 1
The taxation of added value The taxation of added value is done so that the taxable base does not include the tax calculated during the acquisitions of the goods and service (the input tax) but only on the value added after the acquisition (the output tax). The Nature of VAT Notion of Value Added Sales=1500, External Costs=1000 Value Added = 500 (wages, profits) Tax on Value Added 20% tax =.2 * 500 Credit Method The enterprise collects the tax from its customer» 0.2 * 1500 = 300 Correspondingly, when the enterprise purchases, it pays VAT to its suppliers» 0.2*1000 = 200 But deducts it when paying to the State» 300 200 = 100 5 The nature of VAT On Goods and Services Indirect Tax Proportional Tax 2
What is taxed? the delivery of all goods and all services carried out for compensation, personal consumption, the import of goods, It is essential, during the delivery there is a mutual causative link, that is there is a joint economic interest among the participations, irrespective of what this link between the two is called whether it is sale, exchange, agency, dealing, rent, lease ). Three type of VAT Production Consumption Income Tax base = (sales value of acquisition) * tax rate goods and services value of VAT production type (1) Tax base = sales value purchase value of material costs Issue cost of acquisition of capital goods are not deduct nor depreciation rates Total macroeconomic VAT base= Gross national product 3
VAT Production type (2) VAT base= GNP = C + I + D IG (gross investment)= IN + D GNP Gross national product C consumption, IN - investment, D depreciation Issue: investment in capital taxed two times (on purchase and selling) VAT Income type Tax base = value of sales (value of purchase material + depreciation) Net investment (gross investment-depreciation) VAT base = GNP D = C + IN + D - D VAT base = NNI = C + In Tax base - depreciation. Issue: different depreciation rate for capital goods. VAT consumption type Total value of capital acquisition sales value VAT tax base = GNP-IN-D = C There is no need to make differences between current and capital expenditures nor depreciaton rates for capital goods. 4
Key differences Production and income type VAT impose penalties on investment in capital assets. VAT Consumption type is neutral because substition capital with labour do not influence tax liabilities. VAT calculation Methods Credit methods value of VAT paid on inputs - VAT paid on sales value. Enterpreneuer in sales price of goods and service input (calculate) VAT. Price on Inputs (paid to suppliers) contans VAT (credit method are implemented in EU countries). Subtractive method (sales value of goods and services value of acqusition of capital and material costs)* VAT Additive methods Value addes equal to summ of salaries, rents, interest and net profits. Methods ENT. A ENT. B ENT. C Total Subtractive Production Gross market Retail economy 1. Sales 350 850 1.100 2.300 2. Purchase 100 350 850 1.300 3. Value added (1-2) 250 500 250 1.000 VAT (10%) 25 50 25 100 CREDIT 1. Sales 350 850 1.100 2.300 2. Tax on sales 35 85 110 230 3. Purchase 100 350 850 1.300 4. Tax on purchase 10 35 85 130 5. VAT (2-4) 25 50 25 100 Additive 1. Salaries 150 300 200 650 2. Rents 50 100 20 170 3. Interest 25 75 20 120 4. Net-profit 25 25 10 60 5. Total (1+2+3+4) 250 500 250 1.000 VAT(10%) 25 50 25 100 5
Advantages of VAT Exports are cheaper No double taxation Easier to enforce Broader tax base No preference to big business Invisible Principles of VAT taxation Destination vs. origin Taxation at the place of origin or at the place of consumption According 6 EU directives EU countries employ VAT taxation in place of consumption. VAT - Progressive tax? Income Consumption Savings VAT (20%) VAT/ consumption VAT/ income 1,000 800 200 160 20% 16% 2,000 1,000 1,000 200 20% 10% 5,000 1,500 3,500 300 20% 6% 6
VAT standard rates have been hiked strongly as a result of the crisis VAT rates application According to the provisions of the Directive, the application of the zero rate, i.e. the exemption from VAT with the right to deduct input tax, is only allowed for goods to be exported. Thus, exports are fully exempt from VAT which is only payable in the Member State of import, i.e. of consumption. However, there are some exceptions to this rule, so that some countries are allowed to apply zero rates on domestic deliveries as well. In such cases, the scope of application of the zero rate is broadly limited to the goods and services listed in Annex III to the Directive (see Box 1), to which the reduced rates may otherwise be applied. Goods and services to which the reduced VAT (in Annex III to the Directive) Foodstuffs Water supply Pharmaceutical products Medical equipment for the disabled Transport of passengers Supply of books, newspapers and periodicals Admission to cultural events and facilities Reception of radio and television broadcasting services Supply of services by artists Construction and renovation of housing as part of a social policy Supply of goods and services for agricultural production, excluding capital goods Accommodation provided in hotels Admission to sporting events Use of sporting facilities Supply of goods and services by welfare and social security organisations Supply of services by undertakers and cremation services Provision of medical and dental care Supply of services connected with street cleaning, refuse collection and waste treatment. 7
VAT rate (2) new EU member countries Country Statutory rate Reduced Zero rate 2011 2014 2011 2014 Bulgary 20 20 7 9 N Cyprus 15 18 5 i 8 5 i 8 Y Czech R. 19 21 9 15 N Estonia 18 20 5 9 N (Y) Hungary 25 27 5, 18 5, 18 No (Y) Latvia 18 21 10 12 No (Y) Lithuania 18 21 5 i 9 5 and 9 No (Y) Malta 18 18 5 5 and 7 Y Poland 22 23 7 i 3 5 i 8 Y Romania 19 24 9 5 i 9 N (Y) Slovenia 20 22 8,5 8,5 N Slovakia 19 20 10 10 and 14 N (Y) Croatia 23 25 5 5 and 13 N Source: IBFD, European Tax Surveys, available on: http://online2.ibfd.org/eth VAT rate old EU member states Super Reduced rate Reduced Standard rate Zero rate 2011 2014 2011 2014 Austria - 10 10 20 20 N Belgium - 6 and 12 15 21 21 Y Denmark - - - 25 25 Y Finland - 8 and 17 10 and 14 22 24 Y France 2,1 5,5 5,5 and 10 19,6 19,6 N Greece 4,5 9 6,5 and 13 19 23 N Ireland 4,8 13,5 9 and 13,5 21,5 23 Y Italy 4 10 10 20 22 Y Luxembourg 3 6 and 12 6 and 12 15 15 N Netherland - 6 6 19 21 N Germany - 7 7 19 19 N Portugal - 5 and 12 6 and 13 20 23 Y Spain 4 7 10 16 21 Y Sweden - 6 and 12 6 and 12 25 25 Y UK - 5 5 17,5 20 Y Source: IBFD, European Tax Surveys, available on: http://online2.ibfd.org/eth Zero rate vs. exemption A zero rate means that the producers and importers, when they deliver their products, do not calculate (declare) VAT (it is zero), but do have the right to deduct the tax prepayment contained in their input invoices, that is, the right to deduct VAT paid during import of things that relate to their economic activity. With tax exemption during delivery, tax is not calculated, but the tax prepayment contained in the input invoices cannot be deducted. This means that for a taxpayer, the application of a zero rate is more favorable than tax exemption. 8
Services and goods deliveries are exempted from VAT the renting of housing premises, services and deliveries of goods of banks, savings institution and savings and loan organizations, insurance and reinsurance companies, the organization of special games of chance in casinos and slot machine clubs, and betting, services and deliveries that are performed by doctors, dentists, nurses and physical therapists, and privately practicing biochemical laboratories, the services and deliveries of medical care performed in health care institutions, institutions of social care, institutions of chilled and adolescent care, nursery school, primary, secondary schools and universities and student catering and boarding institutions, religious communities and institutions, public institutions in culture, free-lance artists and artistic organizations, VAT exemption VAT systems lies in the principles on which the definition of the right to exemption is based. The EU system relies on the so-called functional principle, In other words, the Directive specifies the activities that are exempt from VAT, irrespective of which institution or company carries them out Tax exemptions The Directive lists a number of activities that may be exempt from VAT, irrespective of which entity carries them out. They comprise activities in the public interest and other exemptions. 9
UK France Japan Slovak R Ireland Poland Slovenia Czech R Switzerland Australia Hungary* New Zealand Italy Austria CROATIA Korea Estonia Luxembourg Canada Germany Israel Portugal* Finland Iceland Greece Belgium* Denmark Norway Netherlands* Spain Sweden Tax exemptions The activities in the public interest public postal services, the provision of hospital and medical care, social welfare and social security services, protection and education of children and young persons, school and university education, the supply of services by non-profit making (political, trade union, religious, philanthropic, etc.) organisations, Certain services linked to sport and cultural services, and services provided by public radio and television Other exemptions insurance and reinsurance transactions. the letting of immovable property. granting and negotiation of credit, negotiation of credit guarantees. Trading in and management of securities, and transactions concerning money, deposit and current accounts, as well as other means of payment Case of Highway Tolls Highways were exempt from VAT VAT was not recovered They therefore charged more This creates cascading effect Made EU goods uncompetitive Therefore exemption illegal Exemption allowed to public authorities Creates distorsions 29 VAT registration threshold (in euro) 120.000 100.000 80.000 60.000 40.000 20.000 0 Source: OECD, 2015 2010 2014 10
VAT registration thresholds Registration/collection thresholds (a) Registration/collectio Minimum Reduced threshold for Special threshold for n allowed prior to National registration General threshold suppliers of services non-profit and charitable exceeding threshold currency period (c) only sector (b) Nat. curr. USD (4) Nat. curr. USD Nat. curr. USD 30 000 34 988 Austria EUR Yes 5 years Belgium* EUR 5 580 6 319 Yes None Czech R CZR 1 000 000 67 708 Yes 1 year Denmark DKK 50 000 5 879 Yes 2 years Estonia EUR 16 000 25 582 Yes None Finland EUR 8 500 8 589 Yes None France EUR 82 200 93 551 32 900 37 443 Yes 2 years Germany EUR 17 500 21 298 Yes 5 years Greece EUR 5 000 6 678 5 000 6 678 Yes 5 years Hungary* HUF 6 000 000 42 328 Yes 1 year Iceland ISK 1 000 000 7 006 Yes None Ireland EUR 75 000 78 844 37 500 39 422 Yes None Italy EUR 30 000 35 991 Yes None Netherlands* EUR 1 345 1 537 No None New Zealand NZD 60 000 38 134 Yes None Norway NOK 50 000 5 182 Yes 2 years 140 000 14 509 Poland PLN 150 000 77 747 Yes None Portugal* EUR 10 000 14 318 Yes None Slovak R EUR 49 790 86 991 Yes 1 year Slovenia EUR 50 000 74 142 Yes 5 years Sweden SEK None Switzerland CHF 100 000 63 827 150 000 95 740 Yes 1 year UK GBP 79 000 102 851 Yes None VAT registration thresholds The inclusion in or removal from the system depends on the level of turnover realised in a certain taxable period (usually a year), the so-called VAT registration threshold. Entrepreneurs participating in the VAT system are obliged to charge VAT on all supplies of goods and services, but are also entitled to deduct the VAT declared on their input invoices for the purchased goods and services. Entrepreneurs who do not qualify for VAT registration due to their low turnovers, do not declare VAT on their delivery invoices, and are not allowed to deduct VAT paid on the purchases of goods and services. Excise tax PhD. Anto Bajo Faculty of Economics and Business, University of Zagreb 11
Excise Taxes Excise taxes are basically sales taxes that are imposed only on specific items. Excise taxes may be levied on a specific basis (a set charge based on the quantity of items) or on an ad valorem (percentage of value) basis. Gas taxes and cigarette taxes are examples of excise taxes. These taxes are most efficient at raising revenue when they are targeted on a narrow base of inelastic goods that is, goods for which changes in price do not significantly affect demand. Excise taxes are sometimes referred to as sin taxes, because they can be a way to put an economic price on activities that are considered harmful for society as a whole, such as smoking cigarettes or drinking alcohol. Excise tax Excise tax on cigarettes underlies specific method of calculation that differs from the calculation of other excise taxes. Other excise taxes on products such as alcohol, oil and petroleum products are mainly calculated and charged in the absolute amount per unit weight or volume of the tax base. For such products, only the specific excise tax applies. Excise tax on cigarettes Te excise tax on cigarettes usually consists of two components - specific and proportional (ad valorem). specific component of excise tax is determined in a fixed (absolute) amount per unit of product (e.g, excise tax per 1,000 cigarettes), proportional component is determined as a percentage of the retail price of cigarettes. 12
IT LU ES FI FR BE AT HR BH CY EE PL HU CZ LT LV MT DE SK SI BG EL PT UK RO IE SE NL DK Structure and Minimum rate for cigarettes Excise duty on cigarettes must consist of a Specific and an ad valorem element and need to apply to all cigarette price categories Specific: A fixed amount at least 64 EUR and 90 EUR (1/1/2014) per 1000 cigarettes of between 5 and 55% of total tax (excise + VAT) for the MPPC (Most Popular Price Category) Ad valorem: A percentage of the retail selling price Minimum level of taxation: A combination of both ad-valorem and specific minimum must be of at least 57% of the Retail Sales Price (RSP) of cigarettes of the Most Popular Price Category (MPPC) and of 60% of Weighted Average Price (WAP), but not less than 64 EUR and 90 EUR (1/1/2014) per 1000 cigarettes 37 The fiscal impact of excise taxes the fiscal impact of excise taxes on cigarettes significantly depends on their structure. The structure of excise tax affects the prices of cigarettes, consumer behavior, budget revenues and the tobacco industry in general. Different structures of excises cause differences in cigarette prices among countries. The retail price of tobacco products released for consumption is the price for each product set by manufacturers or their representatives or authorized agents and importers. Retail price includes excise duty, customs and value added tax. The structure of the excise taxes on cigarettes in Europe in 2015 (in %) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Specific excise Proportional excise 13
Trade Taxes Trade taxes are levied on goods that are entering the country (import duties or tariffs) or leaving the country (export duties), although taxes on exports are far less common. Like excise taxes, trade taxes may be levied either on a specific basis or an ad valorem basis. Many countries rely on trade taxes because they are relatively easy to administer when goods cross the border, it creates an opportunity to tax them. Tariffs are often defended on the grounds that they can promote economic development by giving domestic producers an advantage over importers. That enables domestic producers, particularly in new industries, to establish themselves in an environment where they might otherwise fail. Over time, the argument goes, the domestic producers will become more competitive and will no longer need protection. Meanwhile, the growth of the industry will confer benefits on the economy as a whole. Trade taxes Tariffs have not always yielded the desired results, however. Governments are not always effective at deciding which industries should be protected, and sometimes protection is offered to the industry with the most effective lobby rather than the one whose growth may be most beneficial to the country s economy. tariffs are borne by those who consume the imported goods. $ 2.60 2.40 Partial Equilibrium Models Consumers Pay Before Tax $1.20 After Tax $1.40 2.20 Suppliers Receive $1.20 $1.00 2.00 S 1 1.80 S 0 1.60 1.40 1.20 1.00 0.80 0.60 D 0 0 1 2 3 4 5 6 7 8 D 1 Quantity 14
$ 2.6 2.4 S X 2.2 2 1.8 S 1.6 1.4 1.2 1 Perfectly 0.8 Inelastic Supply D X D X 0.6 0 1 2 3 4 5 6 7 8 Quantity $ 2.6 2.4 2.2 2 1.8 S 1.6 1.4 1.2 Perfectly Elastic Supply S X 1 0.8 D X D X 0.6 0 1 2 3 4 5 6 7 8 Quantity 15