Governments endorse new OECD guidelines on VAT

Guidelines aim to address unco-ordinated application of tariff and its effects on trade


More than 86 states, including Ireland, have endorsed new OECD guidelines to co-ordinate the application of VAT on internationally traded goods and services.

Agreed at an OECD-hosted global forum on VAT in Toyko this week, the guidelines address problems that arise from national VAT systems being applied in an uncoordinated way.

While the tariff is a major source of revenue for governments it becomes problematic when applied to international trade, particularly in services - which accounts for major portion of Irish exports.

Different tax jurisdictions use different rules to determine which of them has the right to tax a transaction.

This creates the risk of double taxation, which can damage trade as well as result in under-taxation, eating into potential government revenue.

The new guidelines set standards aimed at ensuring neutrality in cross-border trade and a more coherent taxation of business-to-business trade in services.

The first part makes sure VAT targets private consumption and not businesses, so that it has a neutral effect on production, and levels the playing field for domestic and foreign businesses in cross-border trade.

The second part aims to ensure that business-to-business trade in services is only taxed in the country of the recipient of the service.

“The endorsement of these Guidelines is a big step towards reducing double taxation and under-taxation in trade,” OECD deputy secretary-general Rintaro Tamaki told the forum.

“The guidelines are good for the private sector and good for governments as they should boost both trade and tax revenues. I encourage countries to start using them from today.”

Because of the strong multinational presence in Ireland, the value of exports of goods and services here is over 110 per cent of annual gross domestic product.

Earlier this month, the Department of Finance admitted an error in relation to VAT the latest set of exchequer returns.

The department said €101 million had been wrongly classified as VAT when it should have been classified as income tax.

The Toyko forum also discussed the equity impact of VAT.

Countries often implement reduced rates to alleviate the burden on poorer households but states agreed it was “a very expensive way” of providing support to the poor, particularly when compared to the use of targeted cash transfers.