Questions and Answers of Value Added Tax

Consider the following proposal in conjunction with the ABA’s proposed Investment Custody Account that would allow consumers who purchase investments to transfer those investments into a trust or
Does the purchase or rental of real estate by a business firm typically give rise to a VAT input credit? Even if the firm’s output (or some of it) is exempt or zero rated?
Many existing VATs around the world apply VAT to short-term rentals of living space, that is, hotels and other short-term lodging charges, but not to long-term residential rentals, that is, more than
Suppose that A, the buyer of a new home, is required to pay VAT on the full price of land and building at the time of purchase. Suppose, further, that after ten years A resells the home to B at a
How should a VAT treat the investment component of residential property as distinguished from the consumption component?
Under the Basic World Tax Code or ABA Model approach to applying VAT to real estate, does every lessor (landlord) of rented property become a VAT taxpayer? Under the Sixth Directive, does every
Explain the difference for VAT purposes between a warranty of a product’s performance and insurance covering the product’s loss by fire or theft.
A popular argument against sales and excise taxes is that they are not progressive as to income, that is, they are not based on the taxpayer’s ability to pay. Can sales and excise taxes be made
What does it mean to say that a sales tax distorts the pattern of consumption? Can a sales tax be neutral with respect to the pattern of consumption? How would you go about measuring distortion in
Is a system of selective excise taxes preferable to a general sales tax in a developing country? In a developed country? Is it a question of having either excise taxes or a general sales tax, or is
Assume that a country has chosen a system of selective excise taxes for administrative convenience but wants to design the tax system so that it will have a redistributive impact. Which goods and
A major problem of sales taxation is how to treat “small” firms – artisans, producers, independent contractors, itinerant vendors, small shops, owners of two- or three-family homes, family
What are the advantages and disadvantages of the various “national accounts” type bases (e.g., turnover or total transactions, gross domestic product, net product or income, or consumption)? If
If, during an accounting period (1 year), a firm pays $100 for rent, $50 for interest, $500 for materials, $1,000 for wages, and $300 for salaries to managers and if the firm realizes a profit of
If the goal of a VAT is computational simplicity, which method of calculating tax liability (addition or one of the subtraction methods) is preferable for a consumption-type VAT?
Assuming that the credit-subtraction method of calculating tax liability is used, is the GDP, Income, or Consumption VAT most compatible with the “simplified bookkeeping” used by some small
Is an Income VAT using the addition method easier to administer than an Income VAT using the sales-subtraction method?
If the tax base is to be measured by market sales transactions, rather than by the receipt of factor incomes or production during a given period, is a consumption-style VAT the logical choice?
If a firm builds a plant with its own labor force, how is the price (i.e., the value added) of this labor taken into account in the consumption-style VAT? In an Income VAT? In a GDP VAT?
Under a single rate consumption-style VAT, which method of calculating tax liability is the best if a nation wants to exempt specific commodities, such as unprocessed food or medical drugs? Does the
What are the best ways to ease the compliance burden on farmers? On small retailers? On artisans who sell primarily to businesses?
How does zero rating differ from exemption? Is the concept of zero rating appropriate for any method of calculating tax liability other than the credit invoice method? How would you describe the
Does adoption of the credit-subtraction method require the use of invoices for each transaction?
Reread footnote 87, an excerpt from Dr. Shoup’s book on public finance. Do you agree with Dr. Shoup’s last sentence in that footnote? Try to construct examples or point to examples in the
A nation is considering the possible adoption of a national sales tax. Before it proposes specific legislation, it would like you to consider some of the basic issues that may affect the structure of
Country X has a consumption-style, destination principle 10 percent European-style, credit-invoice method VAT levied on the tax-exclusive sales price of taxable goods and services and on imports. It
Nation A wants to provide special treatment for some suppliers of goods and services and for some specific goods and services. In the following questions, you should decide if the special treatment
Why do most nations that impose VAT zero rate all exports of goods, but zero rate only limited categories of services?
Taxpayer A is a building contractor. In order to help his son to start his own business, he gives him two used trucks and a crane. What will be the tax consequences? Would the situation be different
In order to characterize the “taxable person,” how do New Vatopia and the EU Sixth Directive take into account: • The nature of the activity performed• The place where this activity is
Can a person carrying on only exempt activities be a “taxable person” under the EU Sixth Directive? How does New Vatopia handle the ideas of exempt persons and exempt activities?
How are occasional transactions treated in the New Vatopia VAT and the EU Sixth Directive?
Under which circumstances are governments and other public law organizations deemed to be “taxable persons” under the EU Sixth Directive and the New Vatopia VAT?
Does either the receipt of rents from movable (personal) or immovable (real) property, or the receipt of wages lead to the status of “taxable person” under either the EU Sixth Directive or the
Suppose you are drafting VAT legislation for your country. In defining the “taxable person” or “registered person,” would you rely on:a. The definition of business for income tax
Is a merger between two companies a taxable transaction for VAT purposes? Is a special treatment provided in this case by the New Vatopia VAT and the EU Sixth Directive? Why?
In the cases discussed in this chapter, can you identify the value added or the item that can be regarded as adding value to the personal consumption being taxed at the end of the line, that is, the
Mr. Brown is a lawyer who has always kept the deepest attachment to the university where he graduated and gladly helps it on many instances with his legal advice given free of charge. Is there any
In defining taxable transactions, do the EU Sixth Directive and the ABA Model take into account the onerous or gratuitous nature of the operation, or the contractual nature of the operation?
What are the main purposes of the distinction drawn by the EU Sixth Directive between goods and services? Could you draft a VAT Code without using this distinction?
One might think that a consumption type VAT system does not need any special treatment for input credits on capital goods. Explain why special treatment is provided by the Sixth Directive and how
What is the link between the tax credit mechanism and the concepts of self-supplies and self-services for business purposes under the Sixth Directive Art’s. 5(7) and 6(3)? How are these concepts
In a VAT system, there are two ways to prevent private consumption from escaping tax when such consumption takes place in a business context: (a) Deny the input tax credit,(b) Tax a deemed
How should public (government-owned) domestic and international transportation services be treated under a VAT?
If international competitive pressures force the zero rating of business to business international transportation services, will it be administratively feasible to apply VAT to consumer international
What are the advantages and disadvantages, to the government and to businesses subject to VAT, if businesses can use the same method of accounting for VAT purposes that they use for income tax
Mr. Black is a furniture manufacturer. For his daughter’s wedding, he gives her various furniture that he has manufactured. The cost of raw materials, supplies, and other items may be estimated at
What are the different factors that make it difficult (or even impossible) for a VAT to reach all consumption expenditures? Is a direct expenditure tax likely to be more comprehensive in this
Suppose that you are drafting a VAT statute. Would you choose to tax or to exempt the following items:• Legal services • Medical care• Foreign travels• Education• Leasing and letting of
Now that you understand the concept of a zero rate of VAT, can you imagine the use of a negative rate of VAT, that is, consumption subsidy (temporary or selective)? How would such a system operate?
Is there any reason for nonprofits and units of government to register and report taxable sales on all taxable sales, even if they do not meet the registration threshold required for other businesses
What is the definition of a nonprofit organization (NPO) in the New Vatopia VAT?
What is the VAT regime applicable to NPOs and governmental bodies in the Vatopia VAT and in New Zealand?
What is the justification for exempting NPOs from VAT? Evaluate this justification.
Would the use of an addition type VAT, rather than the credit method, be desirable with respect to NPOs? Explain how it might work.
What are the VAT consequences under the New Vatopia VAT and other VATs if an NPO exports goods or services?
If you have to choose among the approaches discussed to cover NPOs and governments under the VAT, which would you choose for the United States? For your own country?
Assume that Consumer borrows $1,000 from a friend to pay a Master Card bill that was entirely for personal consumption items, namely, a new stereo music setup. In the current year, Consumer pays $100
Consumer purchases a car for $13,000, paying a $3,000 cash down payment and financing the other $10,000. In the first year, in addition to the down payment, Consumer pays $1,000 principal and $1,200
Bank lends Consumer $1,000 and Business $10,000 from funds received from depositors. Bank collects $150 interest from Consumer and $1,000 interest from Business. Bank pays depositors $770 interest on
If the VAT is imposed on the value of financial intermediation services, should the purchaser of those services receive an input credit for the VAT? If so, how should this credit be calculated?
Underwriter charges Corporation $100,000 for its services in marketing $1,000,000 of Corporation’s bonds (or alternatively 1,000 shares of Corporation’s stock). Should the underwriting fee be
Are there tax policy or economic reasons to exempt from VAT the value of financial intermediation services?a. If these services are exempt, how should the exemption be provided? How should financial
Bank takes deposits and makes loans. In addition, it provides checking accounts, safe deposit boxes, and estate and financial planning services to its customers. Assuming that financial
Should the existence of a competitive international market for financial intermediation services affect the decision to tax or exempt these services?
What is the rationale of the New Zealand decision to tax property casualty insurance but not life insurance?
If a legislature decides to tax some or all insurance services, what difference does it make to a business that purchases a taxable insurance policy if the legislature adopts the New Zealand or
Should a company selling property or casualty insurance charge VAT on the value of its intermediation services or on the entire premium? What does the difference between the premium and the value of
The main interjurisdictional issues in the context of federal countries are: a. Dividing the VAT tax base among the jurisdictions while avoiding overlapping and underlapping. b. Collecting the tax
Are the issues in (1) the main issues for common markets? If not, what different problems do they pose?
Assume that in the United States the subnational units of government (states) are not willing to give up their power to define their tax base, their penalties, and so on, and that therefore the
States in the United States and provinces in Canada derive a significant portion of the RST revenue (ranging from 15 to 33 percent) from tax on business inputs. How will this fact affect the state
If a single branch of government administers both a federal and state VAT, should the administrative function be given to the federal government, or the state governments, or divided between them?
What interstate competition problems are likely to arise if some but not all states in a federal system harmonize their RSTs with the federal VAT?
What are the administrative advantages and disadvantages associated with the imposition of a federal EU-style VAT alongside state RSTs?
If there is a federal–state integrated sales-subtraction VAT, with the states imposing varying tax rates, how can a business calculate its input credit for the state component of the combined VAT?
The Treaty of Rome in the EU [European Union, formerly the European Economic Community (EEC), and later the EC (European Community)] is analogous to the national “constitution” in federal