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

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  • Howell H Zee

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

  • Howell H Zee, 2004. "A New Approach to Taxing Financial Intermediation Services Under a Value Added Tax," IMF Working Papers 04/119, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:04/119
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    References listed on IDEAS

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    1. Glenn Jenkins & Rup Khadka, 1998. "Value Added Tax Policy And Implementation In Singapore," Development Discussion Papers 1998-02, JDI Executive Programs.
    2. Harry Huizinga, 2002. "A European VAT on financial services?," Economic Policy, CEPR;CES;MSH, vol. 17(35), pages 497-534, October.
    3. Poddar, Satya & English, Morley, 1997. "Taxation of Financial Services Under a Value-Added Tax: Applying the Cash-Flow Approach," National Tax Journal, National Tax Association, vol. 50(1), pages 89-111, March.
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    Cited by:

    1. 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.
    2. 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.

    More about this item

    Keywords

    Financial services; VAT; financial intermediation; financial sector; Taxation; Subsidies; and Revenue;

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