The proliferation of VAT — Part 1

Although sales taxes on individual commodities (excises), such as cooking oil, can be traced to 2000 BCE, levying general sales taxes (levied on a large number or on all goods and services) is mainly a modern development. The first turnover tax was the ‘Alcabala’ introduced in mediaeval Spain and its colonies. But turnover taxes took a flight early in the 20th century as a an emergence measure by many states in Europe and the United States to ensure sufficient government revenue in times of war (World War I) and economic distress (the Great Depression). Although they were introduced as temporary taxes, general sales taxes have never been abolished by countries that introduced them. Most turnover taxes have been replaced over time by other types of general sales taxes, which could mitigate economic distortions inherent to turnover taxes. In North America at the sub-national level we find mostly retail sales taxes, but the rest of the world, gradually, opted for value added tax (VAT).

In 1920 the German industrialist Carl Friedrich von Siemens invented VAT, but the first country to adopt VAT was France by gradually modifying its existing turnover tax. The first step, in 1948, applied the tax only to manufacturers and in 1954 the tax was extended to the production and wholesale stages of the supply chain. In fact, France did not adopt a full VAT until 1968, a year after Denmark had replaced its turnover with a consumption type VAT.

The initial spread of VAT can be credited to the European integration process, which requires the establishment of a common market and mutatis mutandis harmonisation of taxes. In fact, new member states must introduce VAT.

In 1986 New Zealand introduced a VAT that significantly improved the European model. The New Zealand VAT is highly regarded among technical experts and considered to be the world’s most efficient system. Although some call it the “Modern VAT,” it is not a completely new design but rather a modification of the European model. It became the new standard for other countries — such as Canada, South Africa, Singapore and Australia — who modelled their VAT on New Zealand’s VAT.

The VAT is the fiscal success story of the twentieth century. Currently, approximately 160 countries, and essentially every developed country except the United States, levy a VAT. VATs are generally imposed at the national level, but some countries — notably Brazil and Canada — combine national and subnational VATs or a national VAT with subnational Retail Sales Taxes. This year India introduced GST, another variant o VAT.

For a decade the GCC countries have been discussing VAT and with the signing of the VAT Framework Agreement it is now clear that each of the countries have to implement VAT in the course of 2018. The situation of the GCC resembles that of the EU in that both are based on a customs union and share a need for a VAT that is harmonised in its application among the member states. Of course, the political dimension in the GCC is far different from the one in the EU some 50 years ago. As the Framework Agreement demonstrates, the GCC has been well-advised and been able to follow best practices when designing a VAT tailored to its unique situation. [Dr Robert F van Brederode is of counsel to Horwath Mak Ghazali in Oman. He is a tax lawyer, practitioner and scholar with over 30 years of experience in global VAT. He had served Crowe Horwath International as the global indirect tax leader, and as the national practice leader for VAT services of the US member firm. Robert is the author of dozens of academic journal articles and 8 books. He can be reached at Robert.brederode@ crowehorwath.om.]