VAT Treatment of Public Sector Bodies: The Canadian Model

This paper examines alternatives to the exempt VAT treatment of public bodies, non-profit organizations and charitable organizations (public service bodies). It focuses in particular on the Canadian VAT (the federal Goods and Services Tax) and its treatment of transactions involving public service bodies, including government to government transactions. Under the Canadian Goods and Services Tax rebate system, most supplies made by public service bodies are exempt but such bodies may claim a rebate for GST paid on purchases made to render such supplies. The rebate schedule is flexible and rebate rates may vary according to the nature of the activities and jurisdiction of operation (in the case of subnational VATs such as the Harmonized Sales Tax). The Canadian system therefore provides some compensation for VAT paid in purchases made in the course of providing exempt supplies and mitigates some of the inefficiencies and distributional impacts of a blanket exemption. Tax expenditure data for Canada suggest that this support is important. When compared to alternatives to exemption, the Canadian system lies between the extremes of the New Zealand and EU models. In New Zealand, nearly all transactions involving public service bodies are subject to VAT in the normal way, whereas nearly all such transactions are exempt in the EU, subject to an array of complex rules. The paper closes by arguing that the Canadian rebate system is more efficient and predictable than the EU system and should be given serious consideration as an alternative to that system, assuming that applying a New Zealand-style solution in the EU is far too radical a reform to contemplate.