Opting for opting in? : an evaluation of the European Commission’s proposals for reforming VAT on financial services

This paper provides a legal and economic analysis of the European Commission’s recent proposals for reforming the application of VAT to financial services, with particular focus on their “third pillar”, under which firms would be allowed to opt-into taxation on exempt insurance and financial services. From a legal perspective, we show that the proposals’ “first and second pillar” would give rise to considerable interpretative and qualification problems, resulting in as much complexity and legal uncertainty as the current regime. Equally, an option to tax could potentially follow significantly different legal designs, which would give rise to discrepancies in the application of the option amongst Member States. On the economic side, we show that quite generally, when firms cannot coordinate their behaviour, they have an individual incentive to opt-in on business-to-business (B2B) transactions, but not on business-to-consumer (B2C) transactions. We also show that opting in eliminates the cost disadvantage that EU financial services firms face in competing with foreign firms for B2B sales. But, these results do not hold if firms can coordinate their behaviour. An estimate of the upper bound on the amount of tax revenue that might be lost from allowing opting-in is provided for a number of EU countries

Presumptive Taxation of the Hard-to-Tax

This paper concerns the use of presumptive taxation methods in taxing the hard to tax, which is a subset of presumptive taxation more generally. Since other papers are concerned with the concept of the "hard to tax", I will not dwell on it, beyond noting that it is rooted in the practicalities of tax administration, and has to do with groups of taxpayers whose tax amounts are quite low compared with the administrative costs that would have to be incurred by the tax administration to assess the proper amount of tax. The term is commonly used to refer to small farmers and small businesses (self-employed persons), and I will take the concept to refer to these groups for purposes of this paper. The following factors contribute to their being hard to tax.Working Paper Number 03-25