By Simon Cooper
With the draft Value-Added Tax (VAT) Bill out for consultation, it is appropriate to consider the experience of other countries on the subject. This is perhaps a more solid base to work from than educated speculation. I am indebted to PWC Tax Consultants, as per the referenced link, some of whose ideas I acknowledge using here.
The primary trend has been a shift in balance between various revenue sources. When European governments introduced VAT, it was a secondary strategy riding on the back of existing income and company taxes. The rate was initially low, although it has risen gradually to as high as 25 per cent in Norway, with Britain at 20 per cent since January 2011. Whether there has been a directly-related impact on other taxation streams is not clear.
Tax authorities generally consider it sound policy to oil the wheels of progress by applying a light commercial tax footprint. If conservative ones levelled the playing field completely, they might be well satisfied with themselves. Somewhere there surely must be a balance. It is fundamentally immoral to expect those on marginal incomes to pay the same tax rate as billionaires.
Governments who wish VAT to be their prime source of income are casting their votes in the same direction. Many in Britain regard 20 per cent VAT as being a bridge too far, although they do concede the need to find a way to maintain income at a level sufficient for their nanny state.
The problem becomes more dire when a broad swathe of goods and services are exempted from VAT. European Union members are free to tailor-make their models. However, most government activities and agencies are excluded, as are public interest activities such as medical care, education, non-profit organisations and financial institutions.
This places an even greater burden on the poor, as come what may, the government has a VAT budget and it will earn it. Over-reliance on free tax collectors to do the groundwork becomes progressively more risky, as the pot of gold to be withheld grows more tempting.
The PWC article concludes with an analysis of narrow and broad-based VAT/GST (general sales tax) approaches as summarised in this table, placing sample countries accordingly:
TABLE TO GO IN HERE
New Zealand has proved remarkably successful in its mission to deregulate business activity, while promoting a more prosperous life for all its citizens. Most government services there attract VAT. This enables the government to hold the rate at 12.5 per cent, up from 10 per cent in 2010. This is the final article in my current VAT series. I do hope Tribune readers found it useful.
• NB: Simon Cooper is a founding partner of Res Socius, a firm authorised by the Bahamas Investment Authority to facilitate the sale and purchase of businesses and provide management consultancy services. He is an agent for the cloud-based XERO Accounting System that is fully VAT compatible. Contact 376-1256 or visit www.ressocius.com.