The GST and Financial Services: Pausing for Perspective

The treatment of financial services has long been viewed as one of the more technical, and difficult, areas in value added taxation. Financial intermediaries add value by reducing transaction costs for clients. While in principle this value added should be taxed under a comprehensive VAT, this has proven to be difficult to do in practice because of measurement issues.  The predominant approach adopted in most countries — albeit with several variations on the theme — has thus been to exempt most financial services from VAT. This was the approach adopted in Canada at the initiation of the GST just over twenty years ago. While this approach is far from perfect, and introduces several distortions into the economy, it has by and large been concluded that it is the most practical approach to dealing with financial services under a VAT. Two decades of legal wrangling and Ottawa’s habit of retroactively legislating changes to the GST as it relates to financial services have served to muddy the waters in Canada.  Recent changes have significantly altered the scope for exemption and resulted in an uneven playing field across financial services. This paper argues that the best solution for Canada is to stick with the exemption approach, but to go back to basics with an eye for reducing existing distortions and restoring a semblance of neutrality. Specifically, the paper calls for a reset of the “arranging for” exemption for financial services; the creation of a new GST-recovery system for financial services; a new structure for taxing imported supplies; and a limit to retroactive legislative amendments and minimum requirements for future amendments. The authors also argue that consideration should be given to zero-rating “business to business” financial transactions so as to remove the GST embedded in transactions between financial institutions and businesses

The selection of auditor firms by companies in the new issue market

The paper provides some empirical evidence on the question of product differentiation in the market for audits. Using agency cost and signalling frameworks we posit that there will be a demand for varying levels of audit quality. Because audit quality is not directly observable to investors we postulate that quality will be proxied by the auditor's brand name reputation. Big Eight auditors are categorised as being high quality producers. Using data on companies newly listing on the New Zealand Stock Exchange we test the derived models of auditor choice. Auditor choice is a dummy variable (0,1) partitioned on the basis of non Big Eight and Big Eight accounting firms. The results provide support for the idea of product differentiation in the market for audits

Communicating by employee reports: a survey of employee attitudes

Over the past few years there has been a growing interest in the general disclosure of a companys financial information to all of its employees. 'In rnany cases this has Inanifested itself in the form of a firm issuing \Vhat is known as an employee repon to ·its staff. Typicall). an employee report summarises the factual information contained in the statutO'I)' annual report but does so in a simplified fonn \\1hich is easier for non-accountants to understand. In addition. the employee r~eport often contains non-financial information \Vhi·ch does not appear in the annual accounts nor in any other company publication. While un·ion negotiators may have access to dctail·ed accounting infonnation. the general rank and file etnr.Joyecs probably get most of their financial kno\vledge about 'the ent~erprise they 'NOrk for via an em ployee report. A recent study by Firth and Smith (1984) found that nearly one-half of publicly listed Nevl Zealand companies currently produce some form of e1nployee r·eport. Additionally. many of the New Zealand subsidiaries of 'larger overseas firms also issue such reports. ln spite of the large number of finns involved. there has not. until no\v. been any fonnal a sessment of employee attitudes regarding such reports. The purpose oft he paper is to address this need by reporting the results of a questionnaire-based survey of employee opinion