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Foreign vs. domestic outsourcing: Does VAT taxation of intermediate commodities under destination and origin principles matter?

Author

Listed:
  • Giuseppe Bognetti

    (University of Milan)

  • MICHELE SANTONI

    (University of Milan)

Abstract

This paper considers the effects of destination vs. origin principles of intermediate commodity taxation on the organisational structure of firms in the presence of imperfectly competitive product and labour markets. The paper considers a unionised monopoly firm producing a final good by using two intermediate commodities, one of which can be imported. The paper shows that, when the origin principle is adopted, the ratio between the domestic and the foreign VAT rates on intermediates is relevant and organisational choices depend on this ratio, while VAT rates have no effects under the destination principle. In the case of linear or constant elasticity product demand curves, lower domestic rates will disincentive foreign sourcing, while lower foreign tax rates will represent an incentive.

Suggested Citation

  • Giuseppe Bognetti & MICHELE SANTONI, 2007. "Foreign vs. domestic outsourcing: Does VAT taxation of intermediate commodities under destination and origin principles matter?," UNIMI - Research Papers in Economics, Business, and Statistics unimi-1046, Universitá degli Studi di Milano.
    • Handle: RePEc:bep:unimip:unimi-1046
    Note: oai:cdlib1:unimi-1046
    as

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