International support builds for cross-border VAT reforms

Plans for sweeping cross-border VAT reforms that would standardise the application of the tax in different countries have been endorsed by national governments. Some 86 countries agreed to the first international framework for applying national VAT rules to cross-border transactions.

Meeting in Tokyo last week, representatives from the various national governments endorsed a new set of OECD Guidelines for the application of VAT or GST (Goods and Services Tax) to international trade.

The aim is to reduce inconsistencies and problems that arise from applying VAT in different countries. The OECD wants to ensure “neutrality” in cross-border trade and to create a more coherent taxation of business-to-business (B2B) trade in services.

VAT has long been a headache for businesses transacting across frontiers. As the OECD points out, it is a problem when the tax is applied to international trade, as different tax jurisdictions often use different rules to determine which of them has the right to tax a transaction. As a result of this confusion, there is the risk of double taxation or in some cases under-taxation.

 “The endorsement of these guidelines is a big step towards reducing double taxation and under-taxation in trade,” OECD deputy secretary-general Rintaro Tamaki said. “The guidelines are good for the private sector and good for governments as they should boost both trade and tax revenues.”

The aim of the agreement is also to tackle VAT fraud, which Mr Tamaki notes has “become more complex and increasingly international, involving companies around the world and complex cross-border structures”. He added: “We have heard at this Global Forum that VAT fraud does not only affect government revenues, but that it can also distort entire markets.”

Also mentioned at the forum was the practice by some countries of reducing VAT rates to alleviate the burden on poorer households. However, the OECD said that discussions confirmed that this approach is a “very expensive way of providing support to the poor, particularly when compared to the use of targeted cash transfers”.