The latest edition of the OECD study on consumption tax trends has been published. The OECD study covers the general taxes on goods and services such as VAT and sales tax plus the taxes on specific goods and services such as insurance premium tax, excise taxes and customs duties.
The study points out that consumption taxes (including both taxes on general consumption and those on specific goods and services) amounted to around 31% of total tax revenue in the OECD countries in 2012 and this percentage has remained approximately the same since 1975. What has however changed is the composition of the consumption taxes.
The taxes on general consumption, such as VAT, currently raise an average of 20.2% of total tax revenue in the OECD (compared to 11.9% in 1965). Of this amount, VAT has become the largest tax on general consumption, bringing in 19.5% of total tax revenue in OECD countries in 2012.
A recent trend is that the revenue from VAT has recovered after a fall during the financial crisis owing to the reduced consumption levels. The recovery in VAT revenues is mainly due to increases in VAT rates in the OECD countries. By contrast the revenues from specific taxes on goods and services (customs, excise etc) have fallen and amounted to only 10.7% of total tax revenue in OECD countries in 2012.
VAT standard rates increased in the years from 2009 to 2014. The average standard VAT rate rose from 17.6% in January 2009 to 19.1% in January 2014, and ten of the OECD countries now have a standard rate above 22%. The study also noted that those OECD countries that are also members of the European Union (EU) had higher standard rates that the OECD generally (an average of 21.7% compared to 19.1% for the whole OECD).
The study points out that although VAT standard rates have risen in recent years the base to which they apply has not broadened. OECD countries still apply reduced VAT rates to a wide range of products or services including basic essentials, culture or sport. The reduced rates of VAT have not been increased to the same extent as standard rates. Wide use is made of exemptions for activities that are difficult to tax such as financial services or exemptions for distributional purposes such as those on health, education or charitable activities.
In addition to narrowing the tax base these VAT exemptions create a cascading effect in the case of business to business (B2B) supplies thereby introducing economic distortions. The input tax charged on the inputs used in making the exempt supplies cannot be reclaimed so this tax becomes part of the cost of the supply, and at a later stage in the supply chain further VAT could be charged on this, thereby producing the cascading effect.
The introduction of international VAT/GST guidelines which are being drafted by the OECD aims to reduce the level of uncertainty and double taxation resulting from the differences between VAT systems and inconsistency in charging VAT on cross-border supplies. The guidelines aim to standardize the operation of the destination principle in business to business cross-border supplies of services and intangibles so the VAT will be charged according to the rules in the destination country (where the customer is located). Guidelines are also being drafted on cross-border sales of services to private customers.
The study concludes that there is still potential for raising additional revenue from VAT. The study looks at the VAT Revenue Ratio (VRR) which is the comparison of VAT actually raised with amounts that could be raised if the standard rate were to be applied to the whole of the potential tax base. This reveals that the VRR is 0.55 for the whole OECD, so almost half the potential VAT is not being collected owing to the lower rates and exemptions, VAT fraud, evasion or tax planning. This means that more VAT could be collected by charging more goods and services to VAT at the standard rate, while closing the VAT gap with more effective measures to prevent fraud and evasion.
Currently the lower rates and exemptions benefit all households including higher as well as lower income groups. The exemptions with distributional objectives could be removed and low income households could be compensated through benefits systems. This would more effectively target lower income households and would raise more tax revenue for governments.
Over the past decade revenue raised from excise duties has remained stable, at around 8% of total tax revenues of OECD countries. Within the OECD there are large differences in amounts collected from excise taxes, for example in Turkey 17.8% of tax revenues came from excise taxes in 2011 while in New Zealand the figure was 2.8%.
Another trend in consumption taxes is the taxation of motor vehicles with the objective of influencing consumer behavior. In 2014 27 OECD countries were charging reduced taxes on purchase or on annual registration charges for motor vehicles depending on specified environmental or fuel efficiency criteria. Most of these countries charge purchase or annual registration taxes on polluting emissions while 19 of the countries have introduced exemptions for electric or hybrid vehicles.