The search for consensus on VAT guidelines

May 14, 2013

The OECD’s first Global Forum on VAT took place in November 2012. Here is a summary of what they discussed.

An OECD “forum” is a special form of government meeting used by the OECD to enable the association of non-OECD economies in particular areas of the organization’s work.

The first Global Forum on VAT brought more than 85 country delegations from all continents together with international organizations and academics to explore key policy trends and their impact for tax administrations and businesses.

A few business representatives, including Ernst & Young, were also invited to a part of the meeting. This is the largest meeting ever organized worldwide at the governmental level with respect to VAT/GST. The organization of this historic event illustrates the growing importance of VAT/GST and its recognition by governments worldwide.

The first Global Forum on VAT

  • Implementation of VAT from a global perspective: The aim was to set the scene by providing an overview of current policy and administrative developments in the implementation of VAT in both emerging and developed economies and by presenting the EU experience of operating VAT in a regional trading bloc.
  • Applying VAT to international trade — the challenge of economic globalization: This session explored the challenges to the principle of “taxation at destination,” the standard for applying VAT in an international context where exports are zero-rated and imports are taxed in the importing country at the VAT rate applicable to domestic production. This principle creates particular challenges with the growing international trade in services and intangibles as these items are not subject to border controls.
  • The OECD International VAT/GST Guidelines: Panelists presented the ongoing work on the development of the OECD International VAT/GST Guidelines, intended to become the internationally agreed standard for a consistent VAT treatment of cross border trade. The presentation focused on VAT neutrality in an international context and the allocation of taxing rights on international trade in services and intangibles.
  • Designing efficient and equitable VAT systems: As VAT is a major source of government revenue, the design of VAT regimes can potentially have a significant impact on a country’s economic performance. In this context, the main drivers discussed were the tax base (revenue and economic effects of broadening VAT bases), the rate structure (single rate versus reduced rates), the determination of an appropriate registration threshold and, more generally, the distributional impact of VAT, while bearing in mind the political obstacles to eliminating reduced rates and exemptions.
  • Managing VAT administration and compliance: This session explored the possibility to measure VAT compliance costs (as VAT is regarded as the most burdensome of all taxes for businesses) and different approaches to tackling VAT fraud and avoidance. The key question addressed was whether it is possible to develop an effective strategy against VAT fraud and avoidance without imposing excessive administrative burdens and compliance costs on businesses.

Business representation

Although the Global Forum on VAT is a meeting at governmental level, businesses were given the opportunity to participate and to report on their concerns about having to deal with VAT.

The business representatives who were invited to make a presentation explained that their main concern in conducting cross-border trade is the neutrality of VAT (i.e., that it should not be a burden on businesses).

They set out their view that this neutrality can be achieved only through the widespread application of the destination principle and efficient VAT refund mechanisms. Businesses reported to governments that VAT has now become a major driver for investment decisions and that VAT can even turn out to be a “show-stopper” to investing in some countries.

Conclusions

The Global Forum concluded that there is a strong need for internationally agreed principles on VAT.

It set out that its key objective should be to build the largest worldwide consensus on the OECD International VAT/GST Guidelines as the future international standard for applying VAT to cross border trade with a view to minimizing risks of double taxation and unintended non-taxation.

The OECD International VAT/GST Guidelines should be completed by 2014 and will be presented for endorsement by the Global Forum on VAT at its next meeting, expected to be held in early 2014.

We will continue to actively support and contribute to the work of the OECD in this important area of indirect tax policy, and we will report on progress and developments as they evolve.

The full version of this article was first published in the Ernst & Young Indirect Tax Briefing, Issue 6, December 2012 (pdf, 4.96 MB)

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