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Claims that the VAT facilitates tax enforcement by generating paper trails on transactions between firms contributed to widespread VAT adoption worldwide, but there is surprisingly little evidence. This paper analyzes the role of third-party information for VAT enforcement through two randomized experiments among over 400,000 Chilean firms. Announcing additional monitoring has less impact on transactions that are subject to a paper trail, indicating the paper trail's preventive deterrence effect. This leads to strong enforcement spillovers up the VAT chain. These findings confirm that when taking evasion into account, significant differences emerge between otherwise equivalent forms of taxation.

This paper sets out some tools for understanding the performance of the value added tax (VAT). Applying a decomposition of VAT revenues (as a share of GDP) to the universe of VATs over the last 20 years shows that developments have been driven much less by changes in standard rates than by changes in \"C-efficiency\" (an indicator of the departure of the VAT from a perfectly enforced tax levied at a uniform rate on all consumption). Decomposing C-efficiency for EU members into a \"policy gap\" (in turn divided into effects of rate differentiation and exemption) and a \"compliance gap\" (reflecting imperfect implementation) suggests that the former are in almost all cases far larger than the latter, with rate differentiation and exemptions playing roles that differ quite widely across countries.

When it comes to determining the jurisdictional reach of VAT, two principles are used by the OECD, EU policy makers and scholars, namely, the origin principle and the destination principle. These principles can mean different things. One problem is that different constructions thereof can result in confusion in the communication between legal actors and, more importantly – in different legal outcomes. Another legal issue is whether the origin and destination principles have a coercive effect. In particular, the OECD considers the destination principle to be an “international norm” that is “sanctioned” by WTO rules. However, is it really so? Does the WTO compel its members to apply the destination principle or is it a matter of choice in furtherance of the intention to achieve neutrality in international trade? The aim of this book is to bring clarity to the understanding of the origin and destination principles and to prompt policy makers to be more accurate in their use of terminology when drafting legislation. In pursuit of this objective, these principles are studied in three international legal frameworks, namely the WTO legal order, the OECD framework and the EU legal order. The study also addresses the question of the principles’ legal status in each of the selected legal frameworks. Furthermore, an evaluation is undertaken of the origin and destination principles from the perspective of the legal character of VAT as a tax on consumption. It is claimed in this book that a consumption-type VAT may also be based on the origin principle subject to certain conditions. Also addressed is the issue of the allocation of VAT in the European Union. The results of the analysis demonstrate that the different derogations available to the Member States with regard to the current EU VAT system make it an extremely complex and fragmented system. Furthermore, the proposed definitive VAT system also remains hybrid, i.e. it is based on both the origin and destination principles. The end of the book presents conclusions regarding which of the two principles is preferable for the allocation of VAT in the internal market of the European Union. This book should be of use for policy makers and other legal actors seeking to develop a deeper understanding of the origin and destination principles and their application in the internal market of the European Union.

We estimate the impact of investment tax credit on firm fixed investment in a difference-in-differences-in-differences framework, using China’s 2004 value-added tax reform pilot that introduces a permanent 17%-tax credit for fixed investment in six industries in the Northeastern region. The tax credit raises significantly fixed investment of eligible firms by 28% on average during 2004–2007 relative to 2001–2003, corresponding to a user cost elasticity of 1.84. The tax incentive has larger effects on firms that are less financially constrained such as smaller firms and firms with a larger cash flow. The result is largely driven by responses of domestic private firms and is robust to specifications addressing the issue of anticipation.

We show that even when the exchange rate cannot be devalued, a small set of conventional fiscal instruments can robustly replicate the real allocations attained under a nominal exchange rate devaluation in a dynamic New Keynesian open economy environment. We perform the analysis under alternative pricing assumptions—producer or local currency pricing, along with nominal wage stickiness; under arbitrary degrees of asset market completeness and for general stochastic sequences of devaluations. There are two types of fiscal policies equivalent to an exchange rate devaluation—one, a uniform increase in import tariff and export subsidy, and two, a value-added tax increase and a uniform payroll tax reduction. When the devaluations are anticipated, these policies need to be supplemented with a consumption tax reduction and an income tax increase. These policies are revenue neutral. In certain cases equivalence requires, in addition, a partial default on foreign bond holders. We discuss the issues of implementation of these policies, in particular, under the circumstances of a currency union.

It is well known by now that government spending has typically been procyclical in developing economies but acyclical or countercyclical in industrial countries. Little, if any, is known, however, about the cyclical behavior of tax rates (as opposed to tax revenues, which are endogenous to the business cycle and, hence, cannot shed light on the cyclicality of tax policy). We build a novel dataset on tax rates for 62 countries for the period 1960–2013 that comprises corporate income, personal income, and value-added tax rates. We find that tax policy is acyclical in industrial countries but mostly procyclical in developing countries.

Consumption Tax Trends provides information on Value Added Taxes/Goods and Services Taxes (VAT/GST) and excise duty rates in OECD member countries. It also contains information about international aspects of VAT/GST developments and the efficiency of this tax. It describes a range of other consumption taxation provisions on tobacco, alcoholic beverages, motor vehicles and aviation fuels.

This paper studies to what extent mobility reductions and confinement measures impact value-added tax (VAT) collection, which is an increasingly important type of fiscal revenue around the world. Using evidence across twenty nations and over time, we measure these effects around the COVID-19 Pandemic. For that, we benefit from the novel IDB-CIAT monthly dataset on aggregate VAT revenues (2019–2020), combining it with both mobility-restriction policies and mobility outcomes. On average, monthly VAT revenues fell up to 30% around the event of the largest drop in mobility for each country. We also estimate mobility elasticities of VAT revenue. Mobility-restriction policies rising by 10% were associated with drops in VAT of 1.4%, while a 10% drop in actual mobility decreased VAT revenues by 3%. Furthermore, we show both elasticities were significantly smaller in the last quarter of 2020. Beyond the pandemic, results matter as a benchmark for fiscal and macroeconomic variables under large disruptions.

Like any tax, the VAT is vulnerable to evasion and fraud. But its credit and refund mechanism offers unique opportunities for abuse, and this has recently become an urgent concern in the European Union (EU). This paper describes the main forms of noncompliance distinctive to a VAT, considers how they can be addressed, and assesses evidence on their extent in high-income countries. While the practical significance of current difficulties in the EU should not be overstated, administrative measures alone may prove insufficient to deal with them, and a fundamental redesign of the VAT treatment of intra-community trade may be required. The current difficulties in the EU largely reflect circumstances that would not apply in the U.S.

We study the effects of a reform to VAT rules (the reverse charge mechanism on domestic transactions) aimed at eliminating VAT fraud involving cross-border transactions within the European Union (EU). The EU VAT system is prone to fraud involving cross-border transactions between member states, whereby traders either collect VAT without rightfully remitting it to tax authorities or claim a VAT refund to which they are not entitled. We find that pre-reform fraud amounts to around 4% of the trade volume of treated products, or 0.1–0.2% of overall VAT revenues in reform countries in the year leading to the reform. We also show that fraud is concentrated in countries with higher corruption, lower customs efficiency, and lower GDP per capita. Our results represent a lower bound for the gains from local fraud removal, which appears similar in magnitude to the costs incurred by firms to comply with the reform.