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Value Added Tax Treatment of Financial Services: An Assessment and Policy Proposal for Developing Countries

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  • Pierre-Pascal Gendron

    () (The Business School, Humber College Institute of Technology & Advanced Learning, Toronto, and International Tax Program, Joseph L. rotman School of Management, University of Toronto)

Abstract

How 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 developed economies with sophisticated financial institutions and markets and capable tax administrations have opted with few exceptions (such as Québec) 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 article examines the current VAT treatment of financial services in Canada and around the world, 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, it outlines best practices for tax reform and proposes a new alternative to the exempt treatment: a hybrid system designed to capture VAT revenues in developing and transitional economies in a practical way.

Suggested Citation

  • Pierre-Pascal Gendron, 2007. "Value Added Tax Treatment of Financial Services: An Assessment and Policy Proposal for Developing Countries," International Tax Program Papers 0701, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto.
  • Handle: RePEc:ttp:itpwps:0701
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    File URL: http://www-2.rotman.utoronto.ca/iib/ITP0701.pdf
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    Keywords

    value added tax; financial services; Canada; developing and transitional countries;

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development

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