Archive for U.S. VAT?

VAT unlikely in Puerto Rico – now what?

Puerto Rico is on the brink of NOT introducing a VAT on June 1. The PR parliament has overwhelmingly voted in favor of a proposal to abolish the plans to introduce a VAT, and to stick to the existing Sales and Use Tax system.

However, the governor may veto this proposal.

Our friend Carlos Serrano (cserrano@reichardescalera.com) writes:

“At this time, certainty on the tax consequences of commercial transactions for June 1, 2016 and thereafter is unattainable. The bill, as approved, will hopefully make its way quickly to La Fortaleza to either become law or be vetoed and in the eventuality of the latter, the outcome will continue to be uncertain until a potentially unprecedented vote at both the House and Senate. If anything can be assured, it is that there will not be a dull moment in the long running saga of Puerto Rico’s attempt at a comprehensive tax reform.”

See Carlos’ entire message here:

Download (PDF, Unknown)

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Things people say about a VAT in the U.S.

I thought that this was an interesting set of comments. Some writers are clearly well-educated about how a VAT works and its impact on the economy.

Enjoy at: http://blogs.wsj.com/briefly/2016/03/03/time-for-a-value-added-tax-in-the-u-s-readers-have-their-say-at-a-glance/

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A VAT, Ted, but not as we know it.

Unprecedented, amazing times here in the U.S., where the election circus gets crazier by the day. One of the Republican presidential candidates, Ted Cruz, who currently runs as a solid second, has proposed to replace most taxes with a “Flat Business Tax”. And due to Mr. Cruz’ increased profile, the Flat Business Tax gets a fair share of media coverage.

I looked forward to hearing from the Tax Policy Center, which is a think-tank of tax experts and not immediately connected to any of the political parties. Len Burman is one of their experts, and Len wrote a brief article about the Flat Business Tax and calls it a subtraction method VAT. It’s a quick read – have a look at it here: http://taxvox.taxpolicycenter.org/2016/01/15/ted-cruzs-business-flat-tax-is-a-vat/. He writes:

“Cruz’s VAT is different from the European version in the way it’s administered and in scope.

Most countries use a credit-invoice VAT where firms are responsible for tax on the entire sale price, but claim a credit for taxes already paid by their suppliers. If all their suppliers remit the VAT, then the credits completely offset the tax owed on purchased inputs. And the ultimate tax liability is the same as under the subtraction-method. The credit method is considered an improvement since it is self-enforcing: Purchasers will demand tax invoices from their suppliers so they can claim the credits.”

With this explanation, my point is still that Cruz’ Flat Business Tax is not a VAT as we know it – see my earlier comments here: http://www.us-vat.com/blog/?p=1141 and here http://www.us-vat.com/blog/?p=1127. Some form of the subtraction-method VAT has only been tested in France for a couple of years – I think from 1948 to 1954 – to be ditched swiftly in favor to the VAT that by now the rest of the world has embraced. And the current consumption tax in Japan looks somewhat like a subtraction-method VAT, but only from a distance.

What seems to be underestimated is the economic angle: a subtraction-method VAT is not at all a tax on individuals – subtraction method VAT is a tax on businesses, like Cruz correctly points out. It is just another calculation method to tax business profit.

And credit invoice VAT is not at all a tax on businesses (because only businesses can credit) – it is ultimately a tax on the end purchaser, the individual who does not have a right to credit the invoiced tax.

Therefore, subtraction-method VAT and credit-invoice VAT are profoundly different taxes, with significant differences throughout the supply chain and in the final tax burden.

Interestingly, the U.S. General Accounting Office produced a report in 1989 that discussed various forms of VAT – I linked the pdf below. They basically say that subtraction-VAT is simpler, but credit-invoice VAT is more flexible.

Still, it’s very unlikely that the U.S. will introduce any federal indirect tax under the next few presidents – whether we call it a VAT or not. In the meantime, look out for more critiques on the Cruz tax plans, like here: https://tinyurl.com/z5ddkb5

The most recent analysis of Ted Cruz’ entire tax plan is here:

Download (PDF, 7KB)

The 1989 report of the U.S. General Accounting Office:

Download (PDF, 3.79MB)

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Trying to understand a VAT in the U.S.

Over the past couple of weeks we have seen an uptick in chatter about a VAT in the U.S.

First, one of the Republican presidential hopefuls, Ted Cruz, floated an indirect tax on businesses. He called it a Flat Business Tax.

Then, Cruz’ nemesis Marco Rubio blasted Cruz during a televised debate for trying to introduce a VAT. Both Cruz and Rubio have no idea what a VAT is, and in particular they don’t understand why 99% of the other countries are actually quite happy with their VAT or VAT-like indirect tax.

The Cruz-Rubio exchange magically relieved some columnists from their writers’ block. Here are a couple examples for your reading enjoyment:

“VAT appears in places such as Europe and Canada, and it is a useful tool in funding social welfare programs. Governments of those countries routinely impose a tax on the amount an employer pays to workers, which is one of the reasons why Rubio links Cruz’s ideas with a European-style VAT. ” (http://www.economywatch.com/features/The-Ted-Cruz-Tax-Plan-Realistic-Feat-or-Campaign-Hot-Air0118.html)

That is a payroll tax, not a VAT.

“Our current tax system should be simplified, and should not be vilified as an oddity because we’re the world’s only major non-VAT economy. Being different is not a bad thing. It’s kept the lid on our spending for years, and accounts for much of our dynamism and competitive advantage.” (http://fortune.com/2016/01/18/ted-cruzs-tax-plan-vat/)

Hmm… Really? Not having a VAT but rather a heavy burden of income taxes “accounts for much of our dynamism and competitive advantage”? Sounds a bit short-sighted to me.

“[…] the VAT tax is embedded in both the prices that business that are charging and in the wages they pay their employees.” (https://www.washingtonpost.com/blogs/right-turn/wp/2016/01/15/can-we-kill-the-idea-of-a-value-added-tax-now/)

VAT does not have to be embedded – it is perfectly acceptable for retailers to make VAT visible on cash receipts. And broadly speaking VAT is not a cost in business-to-business transactions. And still I don’t get that idea of VAT being embedded in wages paid to employees, as a payroll tax. That is not the VAT as we know it.

“In Britain, hot food is exempt from tax, so some stores have microwaves to heat the food, which then exempts it from VAT.” (http://www.economics21.org/commentary/value-added-tax-plan-vat-bad-cruz-paul-01-14-2016)

Oh those snarky Brits!

VATinfo.org featured a nice slide:

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The impact of a VAT introduction

The UAE still plans on introducing a VAT in 2018 – currently the thinking is that the rate will be in the range of 3-5%.

I sometimes get questions about the impact of the greenfield introduction of a VAT – this article has a couple of interesting thoughts: http://gulfnews.com/business/economy/vat-an-inevitable-transition-for-uae-economy-1.1654543

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Cruz offers a VAT, but not as we know it

It seems like VAT pops up a couple of times in every election cycle. This time it is Ted Cruz, one of the Republican presidential hopefuls, who proposes a “Business Flat Tax”.

Cruz says that:

“all companies will pay a simple, low rate Business Flat Tax of 16 percent. The tax will be based on revenues minus expenses such as equipment, computers, and other business investments.”

The Tax Foundation has reviewed the impact of the entire plan (BFT is just an element of a bigger plan) and says of the BFT:

“Enacts a broad-based, 16 percent “Business Transfer Tax” or value-added tax. This tax is levied on all business profits, less capital investment. This would include the payroll of business, government, and non-profit institutions, as well as net imports. The tax would exempt from taxation the purchase of health insurance.

A business transfer tax is also often known as a subtraction-method value-added tax. While its base is identical in economic terms to that of the credit-invoice VAT seen in many OECD countries, it is calculated from corporate accounts, not on individual transactions.”

The Tax Foundation’s entire analysis is here:  http://taxfoundation.org/article/details-and-analysis-senator-ted-cruz-s-tax-plan.

Interesting!

So, like in sales tax, under BFT we don’t have to deal with the burden of mandatory invoicing – no input tax calculation on purchase invoices and not output tax on sales invoices, but rather Accounts Receivable minus Accounts Payable is the gross tax base, from which some adjustments can be made (the capital investments that may not appear on Accounts Payable, depending on the accounting rules).

Also, we don’t have to worry about tax rules of goods vs. services, inter-state zero-rating, reverse charges, imports and exports, because all these sales and purchases would be included in the company’s accounts, and thus included in BFT’s tax base. The trouble is that exports would be standard rated, but surely these supplies can be simply excluded from the tax base.

However, my main critique is that I can’t see any VAT-like indirect tax without invoices. Sure, not every VAT is as invoice-focused as the European type (think the consumption tax in Japan), but in reality even the auditors of Mr. Cruz’ plan would like to see more support for the input tax credit than simply putting a purchase in the AP account. Or ensuring that every sale is booked in AR. There are plenty of excellent examples in Brazil, China, Taiwan and elsewhere, where invoicing is a key driver for taxability, yet the admin burden can be simplified with online clearing.

The somewhat-optional “fiscal voucher” system that Puerto Rico proposes for the April 1, 2016 introduction of VAT will probably have to get more serious if Puerto Rico wants to improve on anti-fraud auditing and reporting.

The New York Times has a recent article on Cruz’ tax plans – not easy on the eyes because of the staccato writing style of the author: http://nyti.ms/1Ow5jDx

Cruz has always been the enfant terrible of the Republican mainstay and it would be hard to imagine conservatives agreeing on a tax plan like this. But hey, Cruz is a key player at this point of the elections (December 2015) and he even has a good chance of becoming the Republican presidential nominee.

Let’s see what happens – I will keep you updated.

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VAT in the U.S. – what is a VAT?

The TaxProf Blog reports on an article in the Wall Street Journal that labels some Republican tax plans as a “Value-Added Tax”. Apparently the “business flat tax” or “business activity tax” are considered Value-Added Taxes, which I believe is incorrect. Of course there is no set definition of a VAT or GST, at least not as the rest of the world know it.

The WSJ then continues to state that

“Almost every country in the world uses a VAT, imposing a tax on middle-class consumers and workers to fund benefits such as parental leave and health insurance.”

which I believe is a rather narrow statement as well. In itself, most VAT systems are regressive, which means in this framework that the tax burden is on the lower income brackets rather than the higher, even though this effect may be neutralized by way of other tax or non-tax subsidies.

Have a look at the article here:

http://taxprof.typepad.com/taxprof_blog/2015/11/wsj-value-added-tax-catches-on-in-republican-presidential-race.html

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