Value Added Tax Treatment of Financial Services: A Developing Country Perspective
AbstractHow to tax financial services is in many ways the key ‘frontier’ issue for VAT in developed countries. No convincing conceptually correct and practical solution for capturing the bulk of financial services under the VAT has yet been developed anywhere. Developing and transitional countries face constraints that make the taxation of financial services an even more formidable challenge. Since even developed economies with sophisticated financial institutions and markets and capable tax administrations have opted with few exceptions to exempt such activities, it is not surprising that exemption also rules in almost all developing and transitional countries. Surprisingly, however, it may not be that difficult to collect at least some VAT on financial services even in such countries. This paper examines the current VAT treatment of financial services, as well as its rationales and economic effects. It then outlines alternatives to that treatment, focusing on developing and transitional economies and their tax policy constraints. Finally, the paper outlines best practices for tax reform and then proposes an alternative to the exemption system in the form of a hybrid system to capture VAT revenues in developing and transitional economies.
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Bibliographic InfoPaper provided by International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto in its series International Tax Program Papers with number 0606.
Length: 41 Pages
Date of creation: Aug 2006
Date of revision:
value added tax; financial services; developing and transitional countries;
Find related papers by JEL classification:
- H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
- O23 - Economic Development, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-09-03 (All new papers)
- NEP-FMK-2006-09-03 (Financial Markets)
- NEP-PBE-2006-09-03 (Public Economics)
- NEP-PUB-2006-09-03 (Public Finance)
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