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2	Overview International indirect tax overview What is a GST / VAT? The ‘destination principle’ How does a GST work? Key concepts & terminologies Exemptions and zero rating (and international examples)
3	International indirect tax overview Why indirect tax? Existing base too narrow Covers wider base beyond traditional direct taxpayers More stable Tax on expenditure/consumption rather than income – grows with the economy Aid to compliance across tax base (e.g. direct tax) – matched to other tax obligations
4	GST or VAT – what’s in a name? UK / EU – VAT NZ – GST Singapore – GST Canada – GST Australia – GST
5	Value Added Tax Models What is “value added” ? How do we get to a VAT - why is it favoured? Consequences of choosing a VAT Principles to be adopted in designing a VAT The international model why exempt and multiple rates UK examples
6	How do we get to favour a GST? Single stage sales tax (WST) - features taxes goods but not all goods does not tax services operates at the manufacture / wholesale level Consequences narrow base - higher rates cascade Hence distortionary discriminatory uncompetitive risk to revenue base
7	How do you fix it ? Tax goods and services broader base - lower rate Lift to retail level horizontal equity Relieve business from tax on inputs - (eliminates cascade) exemption (RST) credit offset (VAT/GST)
8	Why a GST and not a RST ? Retail Sales Tax (RST) - quotation of exemption on business inputs judge sale on the basis of the status of the purchaser audit of use and change of use part business use - telephone and car same number of registrants revenue at risk in single stage GST - credit for tax on business inputs status of purchaser not relevant purchaser judges entitlement to relief multi stage - revenue security
9	What is a GST? For most jurisdictions, GST is a tax on domestic consumption at ad valorem rates Tax base is the price paid for consumption NOT the value of manufacture or production Described as Multi stage Credit offset Invoice based (!)
10	What is a GST? 3 types of invoice-based credit method GSTs Multi-rate VAT with many exemptions and special regimes (based on EU Sixth Directive) Modified VAT/GST in developing countries which either stops short of retail level or is limited only to goods (based on sales tax concept, e.g. Mainland China VAT) Single rate, broad-based (New Zealand, Singapore) Other regimes represent something in between EU and NZ models e.g. Australia
11	What is value added ? Two methods Subtraction method Addition method Internationally, the model is based on the subtraction method
12	Subtraction method Tax on sales (output tax) less Tax on non-wage purchases (input tax) = Value added tax
13	Addition method
14	"The result is that" The result is that… the international model uses the subtraction method (i.e. tax on outputs less tax on inputs) BUT at each level of the production and distribution chain what is collected is tax on the value added (i.e. profits plus labour)
15	GST - How does it work? 100 10 0 10 200 20 10 10 400 40 20 20 800 80 40 40 Pays 880 80
16	The consequence of choosing a GST is that many transactions are taxed that have no revenue impact i.e. no tax is actually collected on business to business transactions This is important feature to be borne in mind in the design and administration
17	The ‘destination principle’ Tax is only payable when goods or services are consumed in the jurisdiction Not where they are produced Legislation intended to ensure that when goods or services are exported for consumption in other countries, any GST paid with respect to the goods or services exported prior to the time of export is refunded GST is levied on goods for home consumption Imports are subjected to GST Re-exported goods are free of GST
18	How does a GST work? Multi-staged tax levied on each occasion that a supply or importation is made Tax is imposed on supplies made by taxpayers carrying on commercial activity not by private individuals All businesses making taxable supplies are registered Some supplies are relieved of all ‘prior’ tax when sold (usually exports) and some are taxed prior to final consumption (financial services) Exempt in customs zones like EU and Russia (‘destination principle’)
19	How does a GST work? Standard rate applying to most taxable supplies of goods & services (EU - multiple rates, recent GSTs - typically 2 – zero and standard) Cascading tax on successive supplies prevented by giving registered purchases a (refundable) credit Not all business acquisitions entitle buyer to recover input tax Heavily reliant on documents with supplies – tracing mechanism Requires periodic returns and tax remittances, (e.g. quarterly, monthly or annually)
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22	GST: 3 Types of Supplies Taxable supplies and importations taxed at 10% in these examples Zero-rated no GST imposed on supply, but input tax recovery allowed Exempt supplies no GST imposed on supply and no input tax recovery
23	What do the terms Zero Rated and Exempt mean?
24	Zero Rated means no GST on supplies but full credit for input taxes
25	"Exports – under ‘destination..." Exports – under ‘destination principle’ Certain health and education goods Certain government activities Charities and certain religious institutions Going concerns
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27	GST - How does it work? 100 10 0 10 200 20 10 10 400 40 20 20 800 0 40 (40) Pays 800 0
28	Exempt means no GST but No credit for input taxes
29	"Financial services (including insurance" Financial services (including insurance) Gambling & lotteries Education and health services Government Residential property
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31	GST - How does it work? 100 10 0 10 200 20 10 10 400 40 20 20 800 0 40 0 Pays 800 40
32	Indirect tax overview The vendor must 1. Charge and collect the correct tax 2. Issue the correct invoice 3. Lodge returns and pay the tax collected The purchaser must 1. Pay the tax on the purchase 2. Collect and retain the invoice 3. Lodge a return and claim the correct credit
33	What design features MUST be adopted Limit the number of choices that need to be made at the time of the transaction Accounting rules must be kept consistent with commercial practice Invoices, returns and other documents must be kept consistent with commercial practice Cash flow issues have to be addressed
34	In practice, this means preference for … a single rate of tax no (or minimal) exceptions return periods that suit the taxpayer - not the Revenue (eg balance on a Sunday) the return in which the tax and credit is accounted for suits the taxpayer and not the Revenue (eg cash basis for small business)
35	OK in theory ... but what happens in practice? Europe, Canada Multiple rates Many Exemptions New Zealand, Singapore Limited exemptions - single rate C.f. Australia More exemptions – single rate
36	Why do the international models have exemptions, zero rates and multiple rates? Technical difficulties of the output - input model financial services gambling government funded services not for profits land second hand goods
37	Why do the international models have exemptions, zero rates and multiple rates? Limitation of price impact (also meritorious) residential rents housing clothing health and education (government funded) food
38	Why do the international models have exemptions, zero rates and multiple rates? Neutrality requirements residential rents v. owner occupied government funded services v. private provided (and charged for) not for profits v. businesses exemptions breed exemptions, e.g. substitutes or encourages product modification to meet exemption
39	Why do the international models have exemptions, zero rates and multiple rates? “Constitutional” EU 6th Directive Federal / State taxing powers Diplomatic immunities
40	What do we get from all this? It’s difficult to define exceptions and maintain neutrality what is the exception trying to achieve? The risks are with the supplier and the business purchaser Exceptions increase compliance costs and audit activity The practical difficulties of collecting the correct tax leads to “special arrangements” … and exploitation of those arrangements
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