Virtues and Fallacies of VAT: An Evaluation after 50 Years

Value Added Tax (“VAT”) was first implemented about 50 years ago, beginning with Denmark in 1967, France and Germany in 1968, and the Netherlands in 1969. It spread worldwide rapidly. In Japan, the Consumption Tax Law was enacted in 1988 and a unique Japanese VAT has been in operation since 1989. Today, with the exception of the United States, VAT is a major source of tax revenue in almost every country in the world.
 
This book reviews the global experience regarding VAT. It reflects on what works, what does not work, and what works but not well enough. The book is intended to serve as a guide to tax policy development in the area of VAT, which is as good as technically and politically possible.
 
The first part of the book addresses 16 technical issues of particular importance in evaluating the merits and demerits of VAT. It covers issues that are fundamental to the design of the VAT system, such as revenue performance, neutrality, rate policy, exemptions, compliance, tax gap, and fraud. It also provides an in-depth examination of interesting issues regarding the application of VAT, including ex-post adjustments, vouchers, holding companies, below-cost supplies, and contributions in kind. In addition, the book devotes individual chapters to issues related to international transactions, including transfer pricing, fixed establishment, and digital cross-border supplies.
 
The second part of the book consists of six country reports. The countries covered include New Zealand, the birthplace of a “modern” VAT; Japan, which operated a VAT that did not require an invoice; China, which operates a VAT in a transitional economy; Colombia, a developing country representing Latin America; Ethiopia, a developing country representing the African continent; and India as the most recent developing economy to introduce a VAT at the federal level. The book draws on the experiences of countries worldwide, including emerging economies as well as EU member states which have a wealth of precedents regarding VAT.
 
The chapter on Japan describes the experience from 1989 to 2019. Japan has implemented a unique VAT that does not require an invoice, unlike the VATs of other countries. Despite its deviation from the global standard, its VAT Revenue Ratio (“VRR”) has consistently been higher than the average among the OECD. The chapter focuses on the structural factors that explain this performance.
 

(Written by MASUI Yoshihiro, Professor, Graduate Schools for Law and Politics / 2022)