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A New Approach to Taxing Financial Intermediation Services Under a Value–Added Tax

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  • Zee, Howell H.

Abstract

This paper contains a proposal (referred to as the "modified reverse–charging" approach) to tax financial intermediation services under a VAT. At the heart of the proposal is the application of a reverse charge that shifts the collection of the VAT on deposit interest from depositors to banks, in conjunction with the establishment of a franking mechanism managed by banks that effectively transfers the VAT so collected to borrowers as credits against the VAT on their loan interest on a transaction–by–transaction basis. The proposal is fully compatible with an invoice–credit VAT and is capable of delivering the correct theoretical result at minimal administrative costs.

Suggested Citation

  • Zee, Howell H., 2005. "A New Approach to Taxing Financial Intermediation Services Under a Value–Added Tax," National Tax Journal, National Tax Association;National Tax Journal, vol. 58(1), pages 77-92, March.
    • Handle: RePEc:ntj:journl:v:58:y:2005:i:1:p:77-92
    DOI: 10.17310/ntj.2005.1.04
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    Cited by:

    1. Lockwood, Ben, "undated". "How Should Financial Intermediation Services be Taxed?," Economic Research Papers 270779, University of Warwick - Department of Economics.
    2. Sung Man Yoon, 2018. "The Effects of the RCS’s Application in the Value Added Tax Collecting Process on the Perception of SME Taxpayer in Korea’s Trade Activity: Transparency and Fairness in Trade," Sustainability, MDPI, vol. 10(11), pages 1-14, November.
    3. Chaudhry, Sajid Mukhtar & Mullineux, Andrew & Agarwal, Natasha, 2015. "Balancing the regulation and taxation of banking," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 38-52.
    4. Silvia Fedeli & Francesco Forte, 2011. "EU VAT frauds," European Journal of Law and Economics, Springer, vol. 31(2), pages 143-166, April.
    5. Ross Garnaut & Craig Emerson & Reuben Finighan & Stephen Anthony, 2020. "Replacing Corporate Income Tax with a Cash Flow Tax," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 53(4), pages 463-481, December.
    6. Julio López-Laborda & Guillermo Peña, 2016. "A new approach to financial VAT," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1606, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    7. Arkadiusz Bernal, 2012. "Zasadność zwolnienia usług pośrednictwa finansowego z podatku od wartości dodanej," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 1-2, pages 117-133.
    8. Serhan Cevik & Jan Gottschalk & Eric Hutton & Laura Jaramillo & Pooja Karnane & Mousse Sow, 2019. "Structural transformation and tax efficiency," International Finance, Wiley Blackwell, vol. 22(3), pages 341-379, December.
    9. Larissa Bozhko, 2025. "Assessment Of The Effectiveness Of State Support Measures: Perceptions From A Pilot Regional Survey," Economy & Business Journal, International Scientific Publications, Bulgaria, vol. 19(1), pages 167-177.
    10. Guillermo Peña, 2025. "Comparison Among Indirect Taxation Methods for Financial Services," CESifo Working Paper Series 11909, CESifo.
    11. Bernal, Arkadiusz, . "Zasadność zwolnienia usług pośrednictwa finansowego z podatku od wartości dodanej," Gospodarka Narodowa-The Polish Journal of Economics, Szkoła Główna Handlowa w Warszawie / SGH Warsaw School of Economics, vol. 2012(1-2).
    12. Peter Dungan & Jack Mintz & Finn Poschmann & Thomas Wilson, 2008. "Growth Oriented Sales Tax Reform for Ontario: Replacing the Retail Sales Tax with a 7.5 Percent Value-Added Tax," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 273, September.
    13. Presiana Nenkova & Angel Angelov, 2019. "Assessing the Effects of Imposing VAT on the Services Provided by the Banking Sector – The Case of Bulgaria," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 3, pages 124-143.

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