This thesis develops a practicable benchmark VAT that bridges the gap between theory and practice in VAT design and provides concrete guidance for countries to evaluate, assess, and, where appropriate, reform their VATs. The potential use of the practicable benchmark in devising a reform agenda is illustrated by means of a case study based on the Chinese VAT, a tax that is at odds with the theoretical model in many respects.
Experience has shown that real-world VATs most often deviate substantially from the theoretical VAT model, revealing the disconnect between the theoretical model based primarily on economic criteria and actual VAT designs that recognise the administrative, political and technical constraints encountered in the real world. A single rate and broad-based VAT is not readily achievable in many countries and VAT designers are further faced with issues that are not addressed directly in the model, including the application of VAT to small businesses, non-resident businesses, financial supplies, low value imports, and cross-border services as well as the challenges of devising workable arrangements for VAT systems in a federal or economic community setting.
The thesis applies a tax expenditure analysis to evaluate the effectiveness, efficiency implications and revenue impact of VAT concessions. The negative consequences of concessions could be reduced with better targeting if the removal of concessions is politically unattainable. Registration threshold should be set at a level where the revenue costs are offset by the administrative savings from excluding small businesses from the VAT. Small business regimes often do not achieve the intended objectives and moreover yield efficiency and revenue costs. The best option to bring the financial and insurance sectors into full taxation is to use a separate (reduced) rate approach to tax intermediary loan services, a cash-flow model to tax insurance services and to categorise the issue and transfer of financial securities as zero-rated supplies.
Effective collection of VAT on cross-border B2C imports of low value goods and services and removal of VAT from business acquisitions by non-resident businesses could be achieved with a higher level of international cooperation through bilateral treaties and a clearing house mechanism. No single benchmark is possible in terms of the design of VAT sharing in federations or economic communities because appropriate design relies heavily on the political and structural factors in federations. The clearing house model appears to be the best option to distribute VAT revenue in most circumstances where sub-central jurisdictions have their own VATs.
The benchmark needs to be modified to accommodate local factors when applied to any particular country. It nevertheless provides a starting point for countries to evaluate and reform their VATs. The case study of China shows the process of applying the benchmark to an ill-designed real-world VAT. VAT design often reflects features of predecessor taxes and in this respect China may have an advantage notwithstanding the significant deviation of its current VAT from the benchmark. Some features inherited from the predecessor tax may make reform, particularly in respect of financial supplies, easier than in counterparts that evolved from European turnover taxes.
