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Financial Activities in European VAT: A Theoretical and Legal Research of the European VAT System

By Oskar Henkow


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Most VAT systems exclude public bodies from the scope of value added tax (VAT) systems. However, because what is considered proper for public bodies to engage in varies over time and depends on political preference, there has been a growing awareness that the exclusion necessarily gives rise to economic distortion and legal uncertainty. A movement to include public sector bodies within the GST system to some extent or even fully (as in New Zealand) underlies the European Commission’s 2011 study on the treatment and economic impact of exemptions in the public interest. Whether the present EU treatment really is as bad as the distorting effects suggest, or whether the New Zealand model really is so perfect that jurisdictions with exclusion models ought simply to replace these existing systems with a New Zealand style system: these are the questions which triggered this research and which form the basis for the critical analysis contained in this book. Using a system design point of view, the author focuses on VAT schemes where exclusion or inclusion of public bodies are currently being applied and on how these models function. He presents an in-depth analysis of the major issues in this context, such as the treatment of public bodies as taxable persons, their right to deduct input VAT on acquisitions, and the treatment of the income of public bodies. Specific aspects examined include the following: ;
  • reallocation of funds and income vs. the production/distribution/consumption cycle;
  • the concept of ‘merit goods’;
  • bias to self-supply instead of contracting out;
  • preference to integrate vertically in the supply chain;
  • applicability of VAT to government regulatory services;
  • tax cascading in the public goods and services context;
  • administration and compliance burden in government agencies;
  • interpretational and implementation difficulties in EU Member States; and
  • VAT compensation schemes considered as illegal State aid in the public sector context.
The book concludes with an insightful discussion of what might be considered as ‘best practice’ in relation to both the exclusion and full tax models. Peerless in its thorough discussion of the treatment of public bodies in various VAT systems, and in the EU VAT system in particular, this study will be warmly welcomed by practitioners, academics, and policymakers as a giant step.

Resources DM Piece
DM Piece
Last Updated 03/10/2008
Update Frequency As Needed
Product Line Kluwer Law International
ISBN 9789041127037
SKU 10059124-0001
Table of Contents



1. Introduction.

2. The financial sector, money and interest.

3. Consumption and financial activities.

4. The exemptions for financial services.

5. The scope.

6. Taxable person.

7. Taxable transactions.

8. Place of supply.

9. Chargeable event and chargeability of VAT.

10. Taxable amount.

11. Deduction of input VAT.

12. Possible treatments of financial services.

13. Final remarks and future reforms.

List of references.


Annex I.

Annex II.