A New Approach to Taxing Financial Intermediation Services Under a Value Added Tax

A New Approach to Taxing Financial Intermediation Services Under a Value Added Tax

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This paper contains a proposal (referred to as the qmodified reverse-chargingq approach) to tax financial intermediation services under a VAT. At the heart of the proposal is the application of a reverse charge that shifts the collection of the VAT on deposit interest from depositors to banks, in conjunction with the establishment of a franking mechanism managed by banks that effectively transfers the VAT so collected to borrowers as credits against the VAT on their loan interest on a transaction-by-transaction basis. The proposal is fully compatible with an invoice-credit VAT and is capable of delivering the correct theoretical result at minimal administrative costs.However, it is ad hoc and may only reduce (rather than completely eliminate) the overtaxation of businesses on their purchases of financial intermediation services . Moreover, the problem of undertaxation of final consumers could actually beanbsp;...


Title:A New Approach to Taxing Financial Intermediation Services Under a Value Added Tax
Author: Mr. Howell H. Zee
Publisher:International Monetary Fund - 2004-07-01
ISBN-13:

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