Taxation of Financial Services: VAT, FAT or WHAT?

Irina Alexeeva

Summary:

The main objective of this thesis is to investigate the economic effects of imposing the value added tax (VAT) on financial services. Over the past decades a strong debate has been going on whether the VAT should and especially could be imposed on the financial services that traditionally have been exempt from it. The exemption seems to be widely perceived as undesirable because of the number of important distortions that it leads to. At the same time, the administrative and technical difficulties associated with imposing the VAT on financial services have been preventing many countries from making changes in the existing VAT treatment of the financial sector. There is also a number of theoretical arguments in favor of the exemption. Some economists take a step back from the implementation problems and pose a question whether the financial services should be taxed at all. The main argument against introducing the VAT on financial services is that the tax might create additional distortions, for example distortions in households’ consumption vs. saving decisions as a result of change in relative price of saving.

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Published Feb. 20, 2015 10:50 AM - Last modified June 3, 2016 12:37 PM