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Financial effects of an uncertain change in VAT rates in the EU

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  • John Pointon
  • Derek Spratley

Abstract

The aims of this paper are first, to review the background to the harmonization of VAT rates within the European Union and second, to model the financial impact of the risks surrounding structural changes in VAT rates. The underlying sales upon which VAT is based is modelled by a geometric Brownian motion. By contrast the timing of a VAT rate change, consitent with a negative exponential distribution, implies a Poisson jump if and when the VAT rate changes. By combining the geometric Brownian motion with a Poisson jump, a model is developed which requires the solution to a second-order ordinary differential equation. This provides a frmework to quantify the effects of VAT risk upon firm values. By using market interest rates and an estimate of an overall market premium the impact of VAT harmonization risk on companies within several EU countries is analysed.

Suggested Citation

  • John Pointon & Derek Spratley, 1998. "Financial effects of an uncertain change in VAT rates in the EU," The European Journal of Finance, Taylor & Francis Journals, vol. 4(1), pages 75-83.
    • Handle: RePEc:taf:eurjfi:v:4:y:1998:i:1:p:75-83
    DOI: 10.1080/13518479800000004
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    Keywords

    VAT; Europe; Poisson; Brownian;
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