Tageblatt, 3 May 2017
By Jean-Philippe Schmit
VAT Worldwide popularity on the rise
The state finances over a third of its expenditure through indirect taxes, the most prominent of which is value added tax (VAT). An expert from PwC gives us an overview of this levy.
Stéphane Rinkin, VAT Partner at PwC, is a fan of VAT, which is also known by its French name, TVA. When he explains the fundamental principles of this tax on consumption, he speaks of "the beauty of the system".
He particularly likes VAT’s neutrality, or "third virtue": no consumer is exempt from paying it. "Like with a waterfall, everyone involved in the production chain must pay their share," says Rinkin. Both manufacturers and distributors must withhold their share of VAT at the point of sale. "VAT is due at every step of the process."
Since the aim is to tax consumption (or more precisely, final household consumption), the greatest impact of this tax is felt by the end consumer. The only way of saving on VAT is to reduce your consumption. But this would not be in the interests of the state, which expects to bank 2,747,009,855 euros in VAT receipts this year.
The first virtue is: "The more that is consumed in a country, the greater the VAT receipts are." But the expert also sees virtue in the manner in which this tax is collected. "Unlike direct taxes such as income tax, it’s not the state that collects VAT, but sellers and distributors," he says.
These virtues may also explain the success that VAT has enjoyed. Between 1965 and 2014, the share that taxes on consumption contributed to the tax receipts of OECD Member countries almost doubled, from 11.9% to 20.2%. 21 OECD Member countries increased their VAT rates at least once between 2009 and 2014. In the same period, the average tax rate rose from 17.6% to 19.1%.
"Even though Luxembourg’s VAT rate was raised two years ago from 15% to 17% in order to offset losses due to e-commerce, it remains the lowest anywhere in the EU," says Rinkin. "Hungary’s rate is the highest, at 27%." Other countries might ponder a VAT increase more often than Luxembourg. "Thanks to this stability, we remain competitive," the expert believes.
Taxing consumption through VAT
VAT enables the state to influence its citizens’ consumption. "Reduced and super-reduced VAT rates make it easier for the state to grant mere mortals access to certain goods," says Stéphane Rinkin, VAT expert at PwC. "The use of educational or healthcare services should not be taxed.” However, this does not apply to certain operations performed at private beauty clinics, he says. "The reduced tax rate does not apply here."
Not only can the state use VAT to make the consumption of perceived "positive" goods and services more attractive, but it can also use it to curtail the use of those that are regarded as negative. A leading example of this is the tax on the consumption of tobacco products, which is payable in addition to the full VAT rate. Consider replacing with the following, as the intention here is to highlight the influence of VAT, not excise duty: "Leading examples of this are tobacco products and fuel, which are subject to excise duty on top of VAT." "The Chinese Government is thinking about the ecological footprint when it works out the VAT rate", says Rinkin. "VAT has a real influence on society and how the world works."
VAT around the world
The United Arab Emirates (UAE) has always been known for its moderate tax policy. "Its citizens have to pay very, very little in tax," says the PwC partner. The UAE has never levied VAT before, but according to Rinkin: "From 1 January 2018, there is expected to be 5% VAT." He explains that India is also contemplating introducing VAT for the first time. "This will lead to radical societal changes," the tax expert believes.
The first person to discuss a VAT-like tax was Georg Wilhelm von Siemens, who devised a "refined sales tax" in 1919. But it was France that saw the first implementation of VAT in 1954, with the idea attributed to finance inspector Maurice Lauré.
"VAT is a European tax," states Stéphane Rinkin. "The rules are laid down in an EU directive." Although this directive is the basis for VAT legislation in all EU Member States, there is still “a considerable need for harmonisation." For example, there is no uniform European VAT return. "Each country has its own version."
The European Court of Justice in Luxembourg is "essential for the VAT system." The judges "shed light on the confusing situation and set the agenda." Rinkin says that it is especially complicated when a transaction involves cross-border trade. "Since the destination principle applies in most cases, the VAT is due in the country in which the end consumer resides." A Luxembourg producer that delivers goods to a business operator in France pays no VAT in Luxembourg. This delivery of goods is tax-exempt in Luxembourg and in principle, the VAT on it is payable by the business operator (buyer) in France.
"This tax exemption enables the authorities to identify fraudsters seeking to deliver their goods abroad in order to avoid VAT," says Rinkin. “Between 40 and 60 billion euros are lost in this way in the EU each year.”
Even though VAT is no longer due in the country in which the service provider is established (which has lost Luxembourg 522 million euros), Rinkin considers the solution “very innovative” and states that administrative expenses have decreased significantly.
Communications & Media Relations, PwC Luxembourg
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