Draft OECD Commentary on the International VAT/GST Neutrality Guidelines.

September 26, 2012

On September 26, 2012, TEI submitted the following comments to the Organisation for Economic Co-operation and Development praising the Draft Commentary on the International VAT/GST Neutrality Guidelines and recommending changes to the document to strengthen the application of the VAT neutrality principle by ensuring that businesses do not bear the burden of the tax or unnecessary administrative rules for claiming VAT refunds. The comments, which took the form of a letter from TEI President Carita R. Twinem to Stephane Buydens, VAT Policy Advisor of the OECD's Consumption Taxes Unit, were prepared under the aegis of TEI's European Indirect Tax Committee, whose chair is Siegert Slagman of Phillip Morris International. Daniel B. De Jong, TEI Tax Counsel, serves as legal staff liaison to the European Indirect Tax Committee and coordinated the preparation of TEI's letter. TEI comments on the OECD's Guidelines for VAT Neutrality were reprinted in the May-June 2011 issue of The Tax Executive.

On 26 June 2012, Working Party 9 on Consumption Taxes of the Organisation for Economic Co-operation and Development (OECD) released a consultation document setting forth its Draft Commentary on the International VAT/GST Neutrality Guidelines: Achieving Neutrality in Practice (the Draft Commentary). This Draft Commentary is meant to complement the International VAT/GST Neutrality Guidelines approved by the Committee on Fiscal Affairs of the OECD in July 2011 (the VAT Neutrality Guidelines). Tax Executives Institute submitted comments on the VAT Neutrality Guidelines on 31 March 2010. As President of Tax Executive Institute, I am pleased to submit the following comments on the Draft Commentary.

Tax Executives Institute

Tax Executives Institute (TEI) was founded in 1944 to serve the professional needs of in-house tax professionals. Today the organisation has 55 chapters in North America, Europe, and Asia. As the preeminent international association of business tax professionals, TEI has a significant interest in promoting sound tax policy, as well as in the fair and efficient administration of the tax laws, at all levels of government. Our 7,000 members represent 3,000 of the largest companies in Europe, the United States, Canada, and Asia.

In 1999, TEI chartered a chapter in Europe, which today encompasses a cross-section of European and multinational companies. TEI members are accountants, lawyers and other corporate and business employees responsible for the tax affairs of their employers in an executive, administrative, or managerial capacity. The Institute espouses organisational values and goals that include integrity, effectiveness and efficiency, and dedication to improving the tax system for the benefit of taxpayers and tax administrators alike.

General Comments on the Draft Commentary

Viewed as an economically neutral and transparent tool for raising government revenue, VATs have been adopted around the world. In the late 1960s, fewer than 10 countries employed a VAT. Today, that number is more than 150, including all but one of the OECD countries. The worldwide economic crisis has placed increased attention on the tax, in part because "[r]aising the standard VAT rate has often been considered as the easiest way to increase revenues from the tax, particularly at a time when many governments are seeking ways to address large fiscal deficits." (1) The higher the VAT rate, however, the more important it is to get the tax right and, in particular, to ensure the neutrality of VAT systems internationally. TEI commends the OECD and its Working Party 9 for their ongoing efforts to develop international VAT guidelines and appreciates this opportunity to comment on the Draft Commentary on International VAT/GST Neutrality Guidelines: Achieving Neutrality in Practice (Draft Commentary).

VAT is a transaction-based tax that aims to tax final consumption. The fundamental principle of the VAT is that it is borne by the final consumer rather than any of the intermediaries in the supply chain. Thus, to the extent businesses act as the tax collector on behalf of governments (rather than as a consumer), neutrality is critical. Recent actions by governments undermine this foundational principle. For example, a number of countries in Europe have delayed the refund of VAT overpayments, depriving businesses of the working capital they need to fund their ongoing operations. (2) Additionally, certain countries have created high administrative...