chapter 17 Definitions

Alan Tait
Published Date:
June 1988
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Dreich, adj., dreary, long-lasting, persistent; tiresome, hard to bear; … of sermons, … long-winded; dry, uninteresting; … of tasks, … difficult, requiring close attention. . . .

—The Concise Scots Dictionary, Mairi Robinson, ed.

(Aberdeen University Press, 1985)

Academic discussions of VAT refer to “businesses” or “firms” paying VAT, but there is rarely any recognition of the problems of defining just who, exactly, is liable to pay VAT. In practice, all countries must begin by defining, under the law, who is liable to pay VAT. At bottom, the question in applying the law is, who can be prosecuted for nonpayment of VAT? Practices differ but the problems are, broadly, common to all countries, and some comment is in order on what existing VAT codes have found to be the problems, with some speculation on “best” solutions. Some comment is also appropriate on the problems of defining place and time of supply, what is the value of a sale, and the definitions of “goods” and “services.”

Who Should Pay VAT?

Taxable Persons

A clear way to think about liability to VAT is to recognize that though VAT is charged on the supply of goods and services, these are supplied by “taxable persons” who must register for VAT and be accountable to the authorities for the tax they have collected. Essentially, the taxpayer must be a legal entity that can be sued. Thus, the definition of “taxable person” is important.

Though it is a person who is liable for VAT, not all persons are liable; they are liable only if they carry on a business. If a private person sells something, say, furniture or clothing, generally he would not be liable to VAT. However, this apparently neat distinction leads to many borderline cases (how often do I have to sell furniture to turn it into a business?), and it is best to look first at the definition of a person and then at the definition of a business.

A person carrying on a business (which achieves a turnover, or employs a number of persons, or whatever criterion is used to place it above a minimum size—see Chapter 6) is liable to tax. If the person has two branches, each below the minimum size but together above, he must amalgamate his turnovers (supplies) and be liable to register (see below for further discussion). A person or company, acting as an agent and paying bills on behalf of another taxable person, is not usually treated as making a supply but as performing a service for which he will be charged separately. The VAT will be charged (if applied to services) on that agent’s supply of his service.


Partnerships are a most difficult business relationship to tax. The partnership in Anglo-Saxon law is not a legal entity and cannot be sued; it is the individuals forming a partnership that can be (ultimately) taken to court. However, because a partnership is a flexible arrangement where persons can change partnerships and be members of many partnerships—or sometimes the same persons can be members of different (but identically composed) partnerships—much administrative time can be occupied chasing the registration, deregistration, and reregistration of changing partnerships. Moreover, the very nature of a partnership where profits, as well as liabilities, are borne individually means that when the composition of a partnership changes, the VAT liability has to be recalculated before and after the change.

In civil law countries (broadly derived from the French code), partnerships can be legal entities and as such can be registered for and be liable to VAT. Such a solution seems more straightforward and undoubtedly avoids the tangles into which the British VAT law gets itself over this issue. Even in the United Kingdom, it has been accepted for VAT that a partnership can be registered in the name of a firm. However, in most civil law countries, most partnerships are not legal entities; they are usually registered in the managing partner’s name. Generally, all partnerships can be sued, but if there is a “sleeping partner” (who provides capital), he can only be sued up to the amount of capital he has provided.

If the same individuals carry on several different businesses, under separate partnership agreements, they should have to aggregate their supplies for VAT. If the partnerships were composed of different individuals, they could each be registered separately. This provision can allow a limited number of partners to combine in different groups, but never the same combination, to reduce their VAT liability. It also can involve the authorities in numerous reregistrations each time a partnership name changes. There is no simple solution to this problem and each country has its own devices.


To reduce the administrative hassle of reregistration each time the “taxable person” of, say, a club changes (this could be annually if it were the elected treasurer), it might be acceptable to make the firm or club, as a legal entity, the taxable person, while retaining the usual requirement for most cases that an individual must be named the taxable person. Similarly, tax tribunals or courts must be able to look behind the firm as necessary to establish if the taxable persons are responsible for more than one firm or club.

Groups of Companies

It is usual to allow a group of companies to register as a group. This allows all intracompany supplies to be disregarded for VAT and a single return made for the entire group.

For this legislation to be operated, a “group of companies” has to be defined. For instance, in New Zealand, companies are in a group when they have two thirds common ownership or control. “Ownership” and “control” are further defined as proportions of the paid-up capital, the nominal value of allotted shares, the voting power held by persons, or the prescribed portions of profits to which persons would be entitled if profits were distributed as dividends.1 Such groups can apply to the Commissioner to be treated as a group for VAT and one company must be nominated to be the representative member. The representative member has the responsibility for filing VAT returns and making tax payments on behalf of the group. All members of the group must adopt the same taxable period and use the same accounting basis, and all members are “jointly and severally” liable for any tax payable by the representative member.

The member designated as the person in the group is responsible for signing the VAT return. Experience has shown that sometimes staff members in remote subsidiaries are unaware that their figures are used in a VAT return and mistakes subsequently can embarrass the signing person.2 It is important for groups to ensure that everyone is aware of his responsibilities in supplying information for VAT.

Other Persons

Provisions should be made to cover other possible taxpayers. These include personal representatives, liquidators and receivers, agents for absentees, and auctioneers. The liability of a new company for tax payable by former companies with substantially the same shareholders should also be covered. This last is needed to anticipate a possible evasion of VAT by a company going out of business owing VAT and reformulating itself anew for trading without the obligation to settle the old liabilities.

A taxable person is liable to VAT if he supplies goods or services in the course of carrying on a business. Therefore the next question usually is, what is a business for the purposes of VAT?

A “Business” or “Taxable Activity” for VAT

Some form of “business test” must be used. To avoid confusion with the “badges of trade” type tests in the income tax acts and to indicate that it is likely to be a wider concept, the term “taxable activity” might be used, as is the practice, again, in New Zealand. The sort of tests used include the following:3

  • Continuity

    Supplies should be made regularly and fairly frequently as part of a continuing activity. Isolated or single transactions will not usually be liable to VAT.

  • Value

    The supplies should be for a significant amount; trivial, even if repeated, transactions would not usually count.

  • Profit (in the Accounting Sense)

    Not necessary; after all, large concerns can create substantial value added and pay large sums in wages, yet make no profit (many publicly owned firms do precisely this). Such firms should certainly pay VAT.

  • Active Control

    Control should be in the hands of the supplier. He should be actively engaged in the “control or management of the assets concerned” (including operation through an agent).4 The proprietor should be independent and, hence, should be excluded from coverage.

  • Intra Versus Intertrade

    Supplies should be to members outside the organization and not just between members of the organization.

  • Appearance of Business

    The activities should have the characteristics of a normal commercial undertaking with some acceptable method of record keeping in place.

Recognizing what is a business for the definition of a “taxable person engaged in business” does not end the matter. Taxable persons may decide to break up their large (and hence taxable) business into several smaller units each with a turnover below the VAT exemption limit, thus reducing tax liability. Such behavior is more likely the higher the exemption limit. Authorities are always torn between the temptation to reduce administrative costs by raising the exemption limit and the danger of increasing avoidance by making the breakup of business into nontaxable units more attractive.

There have to be supplementary criteria to the definition of business to help define what is a separate business. This is also important when defining the taxable person carrying on a business. It is quite possible for a single businessman to claim that his twenty shops are all separate businesses (or even partnerships with each individual manager as a partner with the central businessman). Examples of such rules follow:5

  • Premises

    The person carrying on the business should own or rent the premises and equipment.

  • Records and Accounts

    These should be maintained for the separate business.

  • Invoices (Both Purchase and Sale)

    All invoices must be in the name of the person carrying on the business, and the arrangements for the supply must be directly between the taxable person and the customer.

  • Legal

    Legal responsibility must be with the taxable person.

  • Bank Accounts

    These should be in the taxable person’s name.

  • Wages and Social Security Contributions

    Such contributions should be paid by the taxable person.

  • Income Tax Benefits

    These should be identified separately for the business.

If these criteria are met, the business might be considered separate for VAT purposes, but even so, in some countries, if it could be proved that the intent was to evade VAT, then tax might still be claimed. However, in most cases, objective and independently verifiable criteria have to be evaluated to establish either VAT liability or registration as a taxable person carrying on a separate business.

In general, the scope of the tests (depending on each country’s decisions) should ensure that it encompasses not only companies but also self-employed individuals (including, ideally, members of professions), partnerships, cooperatives, trusts, charities, clubs, government departments (see below), state corporations, and local authorities.

There always will be marginal debatable cases. For instance, although a charity may be defined as a taxable person, exemptions can be made for certain welfare supplies by charities and public bodies. Such services would have to be supplied for nonprofit reasons (that is, no net consideration could be thought to be made) and would be associated with health care or spiritual care. Even this can cause danger; a place of spiritual retreat has to be distinguished from a health farm or from a fake church.6

Of course, this will still leave some debatable cases. If an individual is in the habit of selling secondhand goods, for example, in the United States if he held frequent “garage sales,” that might be construed as a business liable to be registered for VAT, as, indeed, it can today for the state sales taxes.

Generally, VAT administrations readily assume that a “business” is taxable, since a basic rule for the authorities is always to tax until you run into a final consumer or an exempt activity.

Traders Versus Descriptions of Business

Some vats do not apply to all stages of production. It is possible to have a manufacturing-stage VAT (Indonesia) or a VAT through the wholesale stage but stopping short of the retail stage (see Chapter 1). On the purely technical side, it is easier to achieve simplicity with a broad-based tax using no distinctions between stages of production.

Taxpayers under vat should be known as “traders” or “businesses” and not as “wholesalers” or “retailers.” It is almost impossible to produce a watertight definition of a manufacturer or wholesaler; some manufacturers are also wholesalers and many wholesalers are retailers. This sort of distinction almost always leads to complex rules about minimum markups or maximum retail percentages that, in practice, create more distortions than they solve (see Chapter 1, section on “To the Retail Sale?”). Taxing all traders eliminates the need for price adjustments when the taxpayer skips the last taxable stage in the chain of production and distribution and sells the goods at a stage that is outside the tax coverage. Another advantage is that complex rules to deal with transactions that are not at arm’s length are no longer required, since there is no incentive to split up companies to minimize the portion of value added subject to tax.

Place of Supply

To be liable to vat, the supply of goods or services must be made within the country. That may seem simple, but first “country” has to be defined to include the continental shelf and territorial sea (important in these days of supplying oil rigs, or covering a complex archipelago), and to exclude free ports or free zones (see below).

Goods are considered supplied where they are physically located when they are allocated to a customer. If the goods are outside the country when allocated, the supply is outside the scope of VAT. Of course, if the same goods are subsequently imported, they become liable to VAT at importation. If goods are installed or assembled, then the place where that is done is the place of supply.

The usual place of supply for services is where the service is “rendered,” or, as a secondary alternative, the usual place of residence of an individual supplying the service or the country where the supplying country is legally incorporated.

This concept of service “rendered” is not the same as that used in the U.K. and New Zealand VATs, where services are treated as made in the place where the supplier “belongs.” The concept of “belonging” is peculiar to VAT legislation, but is now more usually replaced by the idea of the place where the service is rendered or performed. The two are not necessarily the same. If advice is given on advertising, say, by a person visiting a country, then the value of that advice can be deemed to be taxable in the country where the individual has his fixed office or establishment. Alternatively, the VAT liability can arise in the country where the service is rendered.

Generally, it seems more desirable to identify where the service is rendered, otherwise substantial amounts of value added supplied abroad could be tax free; in these days of computer data banks and swift international information, the movement of services might prove too difficult to pin down, except in respect of the person or agency who actually gains advantage from it (see section on “Imports and Exports,” below, for further discussion).

Finally, there are three relatively minor points. First, the supply of services connected with land (for example, services of real estate agents and architects and for site supervision) should be deemed to be rendered at the place where the land is situated. Second, services relating to the international transfer of passengers should be deemed to be supplied outside the national territory. Third, services that can be deemed to be supplied where they are physically performed; these include cultural, artistic, sporting, and educational services, as well as activities connected with the transfer of goods (for example, loading, handling, and temporary storage), the valuation of goods, and cottage industries.

This leaves only self-supply as a relatively minor issue. If goods produced by a business are used internally, instead of being purchased from outside in the usual way, there is no purchase invoice and there can be a loss of tax credit to the business. Sometimes the authorities allow companies to claim self-supply. However, to avoid many trivial cases, such treatment is usually restricted to only a few significant items. For example, if an automobile manufacturer or a retailer supplied a vehicle, this could be sufficiently frequent and expensive to merit special treatment. An unusual example is that under U.K. legislation, the self-supply of stationery in an exempt or partially exempt business is allowed if the value exceeds the registration limit.

Time of Supply

The important point about time of supply is that the VAT is liable at the rate applicable at a particular time. If the rate changes (and VAT rates frequently have, usually upward—see Chapter 2), then determining the time the supply took place can make a substantial difference in tax liability and is especially important on major purchases (for example, new housing or plant and equipment). Countries employ different rules, some of which tend to confuse the issue of invoices, the requirements for invoices, the dates when goods were actually moved to a purchaser, and the dates when they were available to a purchaser. Special time of supply provisions usually cover transactions such as placing bets, lotteries, coin-operated machines, deferred-payment agreements, employee fringe benefits, and door-to-door sales.

In general, the clearest way to express the options on this issue is as follows. The time of supply is the earlier of:

  • When the invoice is issued. This is the best, and clearest, dated documentary evidence.

  • When the goods are made available to the customer or the services rendered.

  • When payment is made.

These rules can cover most contingencies. However, for products with continuous supply (for example, electricity), the good is available and used by the purchaser but VAT can only be levied when the invoice is issued. In other cases, for example, if goods are supplied on a sale or return basis (where the customer has the option to return a good and not pay the full amount if he is dissatisfied or has no further use for the item), the time of supply is when the customer receives the goods; if there is an increase in the VAT rate after he gets an invoice, the appropriate rate to be applied would be that in operation when the customer physically received the goods. These seem to be sensible, straightforward, and generally applicable rules that, once more, can be open to interpretative ruling by the authorities.

Value of Goods and Services Supplied

All businesses under the vat must make a return of their turnover. The concept of gross takings is crucial to any business, no matter how large or small. However, as simple as this may be to state in theory or in textbooks, in practice the flexibility of business creates numerous problems for actual vat administration.

Businessmen will often come to formal or informal agreements with their customers on the means and promptness of payment. Relatively few traders get paid immediately in cash. Credit sales in developed countries are the most common form of sale with payment delayed for a month or two. Sales can be settled by check but, depending on the efficiency of the banking system, checks can take some time to clear (up to two months in one large and complex developing country) and span different vat periods. Even more difficult are the numerous ways in which business can accommodate customers by making provisional sales, by partial down payments, and by sale or return agreements. A point to remember is that the crucial evidence of supplying a taxable good under vat is the invoice. It is the invoice showing the tax content of the goods supplied that is the essential document of control. However, the following points need to be clarified and are exemplified in the examples shown in Table 17-1.

Table 17-1.New Zealand: 10 Percent VAT—Examples of Supply, Value,1 and Consideration2
Type of



Tax, and

Time of Supply:

Invoice or

Payments Basis
1.Supply for consideration in money only (or expressed as money)Cash sale, “arm’s length” transaction, counter sale, trade-inCustomer purchases a radio from a shop for $NZ 220Amount paid less tax = $NZ 200; tax = $NZ 20; total paid = $NZ 220Earlier of: invoice or date of paymentVast majority of supplies
2.No consideration (other than to an associated person)Gift, free samples, give-awaysFree sample to prospective customerNilFrequent
3.Periodic payments and hire arrangements (not including hire-purchases; see No. 4, below)Lease, rental, hire of toolsA businessman rents a computer for 12 months; payments of $NZ 550 are due monthlyConsideration less tax = $NZ 500 monthly; tax = $NZ 50 per payment; total paid = $NZ 550 per monthly paymentEarlier of date payment due or payment receivedVery common
4.Goods or services under a hire-purchase agreementHire purchase, “tick,” “never, never,” extended payment installment planCustomer purchases refrigerator on hire purchase over three years; cash price = $NZ 1,100 (including VAT); imprest = $NZ 600; total -$NZ 1,700Cash price less tax = $NZ 1,000; tax = $NZ 100; total = $NZ 1,100Time when hire-purchase agreement signedCommon
5.Layby salesReserved goodsStore sells cricket bat in May for $NZ 55 to be picked up in SeptemberConsideration less tax = $NZ 50; tax = $NZ 5; total amount = $NZ 55When ownership passes, i.e., when full payment is made (September)Fairly common
6.Canceled layby salesReserved goods canceledCustomer buys cricket baton layby for $NZ 55; gives up game; retailer retains deposit of $NZ 11Amount retained less tax = $NZ 10; tax = $NZ 1; total amount retained = $NZ 11Date of cancellationOccasional
7.Supply to an associate who may claim an input tax credit (i.e., a registered person)Gifts to associates, any sales to associatesRegistered person sells spouse goods for use in spouse’s business for $NZ 22 (normally sells for $NZ 100)Amount paid less tax = $NZ 20; tax = $NZ 2; total = $NZ 22Earlier of: invoice or date of paymentOccasional
8.Supply to un registered associate or to a registered associate for private use, for no consideration or for less than open market value of that supplyGifts to associates, sales to associatesRegistered person sells goods to uncle for private use for $NZ 300 (open market value $NZ 434.50 including tax)Amount paid less tax = $NZ 395.00; tax = $NZ 39.50; open market value = $NZ 434.50Date when supply physically occurs unless invoice issued or payment made promptlyOccasional
9.Consideration not known at time goods are removedFarmer contracts to sell his produce to a cannery in return for an initial payment of $NZ 770,000, and:Consideration less tax = $NZ 700,000; tax = $NZ 70,000; total = $NZ 770,000Earlier of: invoice or payment due or payment madeCommon
A “wash-up” payment at the end of the season dependent on export prices received; it turns out that his payment is $NZ 110,000Consideration less tax = $NZ 100,000; tax = $NZ 10,000; total = $NZ 110,000
10.Tokens with no face valueRedeemable vouchersTwo milk tokens sold by a dairy for $NZ 1.10Cost less tax = $NZ 1; tax = $NZ 0.10; total = $NZ 1.10Earlier of: invoice or date of paymentCommon
Those two tokens are later used to get two bottles of milk from the milkmanNil
11.Tokens with face valueVouchers, record tokens, etc.Department store sells gift voucher for $NZ 11NilEarlier of: invoke or date of payment (by way of voucher for goods) in return for goods for which voucher swappedFairly common
Voucher Eater swapped for $NZ 1.10 worth of goods from storeConsideration less tax $NZ 10; tax = $NZ 1; total = $NZ 11
12.Purchase of secondhand goodsRegistered person buys tools for business in garage sale for $NZ 110Amount paid less tax = $NZ 100; tax = $NZ 10; total = $NZ 110Earlier of: invoke or date of paymentOccasional
13.Debit notes issuedUndercharging penalties for late paymentA business issues a debit note for $NZ 60.50 in relation to a previous supplyTotal debit less tax = $NZ 55; tax = $NZ 5.50; total = $NZ 60.50Date when it is realized that charge for original supply is too low or date payment receivedCommon
14.Debit notes receivedA business receives a debit note for $NZ 60.50 in relation to a supply previously receivedTotal debit less tax = $NZ 55; tax = $NZ 5.50; total = $NZ 60.50Date on which debit note is issued or payment madeCommon
15.Credit notes issuedOvercharging discountedA business issues a credit note for $NZ 77 in relation to a previously invoiced supplyTotal credit less tax $NZ 70; tax = $NZ 7; total credit = $NZ 77Date when it is realized that charge for original supply was too high or date payment madeCommon
16.Credit notes receivedA business received a credit note for $NZ 77 in relation to a previously invoiced supplyTotal credit less tax = $NZ 70; tax = $NZ 7; total credit = $NZ 77Date on which credit note is issued or date payment receivedCommon
17.Late tax invoicesGoods received with invoice and paid for $NZ 550; no tax invoke received$NZ 503; tax = $NZ 50; total = $NZ 550Earlier of: invoice or date of paymentCommon
Tax invoice for above goods not received until six months later$NZ 500; tax = $NZ 50; total = $NZ 550Earlier of invoke or date of payment, but not before tax invoice receivedOccasional
18Commercial accommodation up to 4 weeksHotel stays, motel stays, short stays in boarding housesPerson stays in a hotel for two days at cost of $NZ 165Amount paid less tax = $NZ 150; tax = $NZ 15; full charge = $NZ 165Earlier of: invoice or date of paymentCommon
19a.Commercial accommodation over 4 weeksLong-term stays in hotels, motelsPerson on transfer stays in motel for 10 weeksConsideration less tax; tax fraction of consideration in money; 50 percent of accommodation charge for the fifth to tenth weeksEarlier of: invoke or date of paymentFrequent
19b.Commercial accommodation over 14 weeks in a residential establishmentRest homes, hospitalsElderly person residing in a rest homeConsideration less tax; tax fraction of consideration in money; 60 percent of accommodation charge from list dayEarlier of: invoice or date of paymentFrequent
20.Coin operated machinesSlot machines, vending machines, parking meters, video gamesThe owner of a video parlor removes the day’s takings of $NZ 60.50 from a machineTakings less tax = $NZ 55; tax = $NZ 5.50; takings from machine = $NZ 60.50Date on which machine is emptiedCommon
21.Door-to-door salesSalesperson visits a home and sells $NZ 55 worth of cosmetics on January 16, 1987 (purchaser does not subsequently cancel the sale)Consideration less tax = $NZ 50; tax = $NZ 5; total = $NZ 55On eighth day after purchase date (January 24,1987)Common
22.Progress pay menuA builder enters into an agreement to build a house for $NZ 231,000 (including tax); the agreement provides for payments to be made as follows:Consideration less tax =Earliest of: date progress payment is due, or date progress payment is received, or date invoice relating to progress payment is issued, or date of paymentOccasional
10 percent on signing = $NZ 23,100$NZ 21,000; tax = $NZ 2,100; total = $NZ 23,100
25 percent when foundation laid = $NZ 57,750;$NZ 57,500; tax = $NZ 57,750; total = $NZ 57,750
35 percent when roof on = $NZ 80,850$NZ 73,500; tax = $NZ 7,350 total = $NZ 80,850
25 percent when internal work completed = $NZ 57,750$NZ 52,500; tax = $NZ 5,250; total = $NZ 57,750
5 percent on completion = $NZ 11,550$NZ 10,500; tax = $NZ 1,050; total = $NZ 11,500
23.Contract variationsBuilder contracts to erect building for $NZ 770,000Consideration less tax = $NZ 700,000; tax =$NZ 70,000; contract price = $NZ 770,000Earlier of: invoice or date of paymentCommon
Builder-owner requires extra room to be added at a cost of $NZ 55,000Consideration for variation less tax = $NZ 50,000; tax = $NZ 5,000; total = $NZ 55,000Date when payment for variation made
24.Grants and subsidiesGovernment grants and subsidies, research grantsGovernment, through the Ministry of Agriculture, pays a grant of $NZ 22,000 to a laboratory for Fishing researchConsideration less tax = $NZ 20,000; tax = $NZ 2,000; total payment = $NZ 22,000Earlier of: invoice or date of paymentFairly common
25.Raffles and other prize competitionsLotteries, bingo, housie, coin pokerSports dub runs a raffle; total cash prizes = $ NZ 2,200; sales of tickets bring in in $NZ 6,600Money received less cash prizes less tax on difference = $NZ 4,000; tax = $NZ 400; money received less cash prizes = $NZ 4,400Date on which result is first determined (e.g., when drawing commences)Common
26.Rate payments to local authoritiesLocal property levy for ServicesLocal authority assesses rates of $NZ 880 for a properlyConsideration less tax = $NZ 880; tax = $NZ 80; total = $NZ 880Earlier of: invoice or date of paymentCommon
27.Racing betsTotal of $NZ 110,000 is placed as bets on a horse race; of this amount, 20 percent is required to be deducted before dividends are paidTotal deduction less tax = $NZ 20,000; tax = $NZ 2,000; total deductions made = $NZ 22,000Date on which deductions are madeCommon
28.Insurance indemnities paidCash claim payments madeAn insurance company pays $NZ 1,650 cash on a claim made by a businessAmount paid less tax = $NZ 1,500; tax = $NZ 150; total = $NZ 1,650Date of paymentRare—only insurance companies affected
Sources: New Zealand, Inland Revenue, GST Guide (Wellington, June 1986), pp. 34–39, and Goods and Services Tax: Supplement to the GST Guide (Wellington), pp. 10–11.

Value is the tax-exclusive amount paid (or consideration less tax).

Consideration is the tax-inclusive amount paid (or value plus tax).

Sources: New Zealand, Inland Revenue, GST Guide (Wellington, June 1986), pp. 34–39, and Goods and Services Tax: Supplement to the GST Guide (Wellington), pp. 10–11.

Value is the tax-exclusive amount paid (or consideration less tax).

Consideration is the tax-inclusive amount paid (or value plus tax).


There are three forms of discount: unconditional, prompt payment, and contingent. The most obvious example of an unconditional discount would be a shop having a sale; if the item is purchased, the discount is claimed and settlement is made at the time of purchase. When the customer pays the discounted amount, the vat is levied on the discount price and shown on the invoice for that discounted amount.

The most common form of trade discount is conditional on prompt payment. Most traders will try to encourage payment within, say, 28 days, by offering some discount. Indeed, in some promotional schemes, even a retail sale discount can be supplemented by allowing credit to run for three months. The sale invoice issued at the time of purchase will show the vat liability on the discounted price. If the customer does not take up the offer, the tax value is on the undiscounted amount. Modern billing procedures provide two amounts—the full price and the vat, and the discounted price and the discounted vat.

Finally, there are discounts that are contingent on the customer doing something else. For instance, a discount can be allowed with a provision that the customer will later earn the discount by buying a certain quantity of further goods. In this case, the vat supply invoice will show the full amount to be paid without the discount; should the purchaser later act in a way that means he can obtain this discount, the amount of tax liability can be adjusted by issuing a credit note.


Credit, or a contingent discount, can permit a purchaser to reclaim all the tax on the supply as an input tax. The scheme can operate in two ways. Both seller and purchaser can agree that the credit need not affect the original vat (usually because the credit is going to be used in the near future and is not permitted to be used for a good with a different rate; that is, the credit will be used for a similar good to that originally purchased). Alternatively, the credit can be held for some time and allowed to be used for the purchase of some other good liable to a completely different vat rate. In the latter case, both purchaser and seller should adjust the original vat charge and a credit note should be issued to the purchaser with, of course, the seller keeping a copy. The credit note shows the details of registration numbers and addresses, but also must show the total amount credited excluding the vat and the rate and amount of vat credited. When the purchaser receives a credit note which includes vat, then he must reduce his input tax by the amount shown in the tax period when he receives the credit note.

Credit notes (like invoices) are valuable documents, not only in respect of their commercial value but also because they affect the input tax liabilities and output tax liabilities of traders. Therefore, the administrators of vat have an interest in defining clearly conditions under which credit notes can be issued and the adjustments that must be made to the VAT returns in respect of credit notes.

If goods are returned (because they are damaged or in some other way unsatisfactory) and the original supplier replaces them, then the original VAT charge can be allowed to stand or it can be canceled and an entirely new transaction established. If the replacement goods are identical and at an identical price and are supplied free of charge, then no further VAT responsibility is involved. If the replacement goods are supplied at a lower price than the original goods, then a credit note can be issued; if the replacement goods are supplied at a price higher than the original goods, then a supplemental VAT liability can be established for the difference (see Table 17-1, examples 13–16).

Trading on Credit

Credit cards are commonly used for retail purchases in cash-and-carry outlets. Such sales are considered to be cash sales and must be treated for VAT in the same way as would a cash sale. The value for VAT liability should be based on the full retail price and not on the assessment net of credit company charges.


A cash deposit can be made for two purposes: the deposit can be a down payment to secure the eventual supply of a good or the deposit can act as a security to ensure the particular good is kept in stock for that particular customer until he can pay the rest of the price. In the first case, where the deposit is an initial payment, VAT should be charged within the taxable period in the normal way; the further VAT liability, when the eventual supply is made, is liable in that appropriate tax period.

The deposit, which is made as a security, can be excluded from gross takings and treated simply as a temporary expansion of business liquidity until the full payment is made and the good is actually supplied to the purchaser when the VAT will be liable.

Sale or Return

Many businesses allow goods to be removed from the premises “on approval.” The goods are not actually sold and can be returned within some agreed time. Sometimes, a deposit of the full value is required from the recipient, for example, on sales of automobiles. For vat, it is usual that this transaction is not considered as a supply until the time when the purchaser agrees to purchase or to pay. In the interim, the seller must continue to view these goods as part of his stock. Once the goods are agreed to be bought by the customer, then the sale is put through with a VAT invoice in the normal way. Similarly, of course, if the sale is not retail, the purchaser cannot claim the VAT shown on his purchase document as an offset to his VAT liability until he has confirmed the purchase and has been issued the appropriate invoice by the seller.

Finance Houses

Many businesses use finance houses to provide the liquidity for their sales. The credit is arranged for a purchaser through the finance house, which formally adopts the ownership of the goods sold. In this case, the sale is a cash sale to the finance house and should be shown as such with the tax charged on the cash sale value.

Promotion Schemes

Many businesses, both retail and other, indulge in promotional schemes to induce customers to trade with them. These are common in both developed and developing countries and, while understandable from a commercial point of view, they are an annoyance to the tax administrator. The basic point is clear; the VAT is liable on the price actually paid by the customer. However, some examples can show the potential hazards.

A frequent retail scheme is one in which a coupon is attached or claimed when an article is sold that can be redeemed when a further charge is made for another article. The public can collect the coupons attached to the existing articles or from magazines and newspapers or, indeed, sometimes obtain them through the post. The VAT treatment in this case is straightforward. The tax at the appropriate amount is charged on the second good at the normal retail price for which that second good usually sells, regardless of the coupons given in lieu of cash payment. If the seller is financing the scheme himself (say, through newspaper advertisements), this is the end of the transaction as far as VAT is concerned. If, on the other hand, the scheme is financed by a finance house or by the original manufacturer, then it is expected that the seller recoups the value of the coupon from that original supplier. The actual goods in the transaction have been invoiced through the usual trade channels at the full invoiced price.

There are other schemes (and no doubt many more will be invented), where coupons are supplied with goods, but the coupons can be redeemed for other goods without any further charge (see Table 17-1, examples 10 and 11). As far as VAT is concerned, the tax liability is on the goods with the coupons sold in the normal way, and the assumed result of this is that the VAT is charged (in advance on the redemption of goods at the same rate as that applied to the original goods sold). Should the redemption of goods actually be liable for rates quite different from those applicable to the original goods, obvious problems arise. For instance, this could happen even in a simple standard rate VAT system if a purchaser were allowed to “redeem” a package holiday abroad on some substantial purchase, such as an automobile. While the car purchaser might be paying VAT at the standard rate, the holiday abroad, if travel agents’ services were not taxable, would be tax free.

Perhaps this is one of those cases where the possible abuse of the system is so slight that it does not deserve any special treatment as far as the tax authorities are concerned. However, should the authorities wish to tackle this issue, methods have been tried. For instance, the U.K. legislation requires the seller, if the original goods and redemption goods are taxable at different rates, to make adjustments so that the tax on redemption goods is levied at the rate appropriate to those goods at the time when the coupons were sold. And the value of the redemption goods is either the price paid on the original goods and coupons together or the actual cost of the redemption goods to the seller, whichever is higher. Alternatively, the whole transaction can be treated as one sale and the VAT calculated on apportioned values of the goods concerned.

In some countries, trading stamps involving elaborate redemption centers and cumulative books of trading stamps are used. These schemes can involve extremely large sums of money and substantial implied costs to the purchaser and, further, a complex differential liability to different rates of vat. There are various ways of tackling this issue, but all keep to the basic principle that the usual sale on which the purchaser can claim the trading stamp is taxed under VAT in the normal way. The redemption centers themselves must pay vat on the value of the implied sales from the centers. This can involve taking their purchase prices of items and using markups to achieve the implied selling price of the goods claimed by coupon redemption.

It should be noted that when a retailer, for instance, purchases trading stamps from a stamp promoter, there is no tax liability. However, any charge made by the company promoting the stamps to the retailer for his services is taxable. The charge will be shown on the promoter’s sales invoice, and this can be recouped by including it in the retailer’s input vat deductions.

Small Retailers’ Alternative Methods for Calculating Sales

The usual vat liability is determined by the issuance of a tax invoice. However, in most developed countries, for small retailers and indeed for most retailers, invoices for sales are not issued or are only issued as a till slip. Moreover, the numerous discounts and promotional schemes can make the assessment of gross takings difficult. Some countries have offered small retailers two options. In the first, they can use a cash basis for calculating their sales. Under this, all payments are recorded as they are received. Credit sales are not recorded until payment is received. The advantage of this, as used in New Zealand, for instance, is that no vat is payable on bad debts. An alternative is to use the more normal vat liability on the amount that is charged (but not necessarily received at the time of supply).

The second option is practiced throughout Latin America, where retail traders must complete a “simplified invoice”; this invoice includes the seller’s name and registration number and specifies, in summary terms, the goods sold. Frequently, such invoices are provided by the government in books and are marked with special watermarks or stamps to prevent forgery. Sometimes the consecutive numbers on the invoices are used for public lotteries to encourage purchasers to ask for and keep the retail invoice. Indeed, it is these invoices that can be used as an administrative check on retailers; inspectors check on the issuance of invoices and, if they find they are not given, and if this happens three times in the same establishment, then the trader’s shop is closed automatically, at once, for two or three weeks. The police check on restaurant invoices in Italy as described in Chapter 14 is similar. Technically, patrons themselves could be guilty of a vat transgression, as the law required them to request a bill showing the vat paid.

The choice of an appropriate system depends largely on the retailers’ methods of trading and accounting.

Supply of Goods

It is generally agreed that neutrality and resource allocation are least jeopardized by a broad-based sales tax taxing most goods with few exemptions (see Chapters 1-5). It is better to start by including everything, and then define those items not taxed, than to try to itemize each commodity to be taxed—that way lies madness (though some countries have pursued this latter option).

In practice, the actual definition of “supply” needs some elaboration. Buying and selling goods clearly involve a transfer for a consideration. However, the development of leasing has meant that almost any good can be hired, so the supply of goods must include the letting of goods on hire, the loan of goods, and lease-sale contracts (where the final transfer of ownership is optional).

Most legislation holds that goods are “supplied” when:

  • Exclusive ownership is passed to another person.

  • The transfer takes place over time under an agreement such as a lease or hire purchase.

  • Goods are produced from someone else’s materials.

  • A major interest in land is provided, that is, the use of land for a long period of time.

  • Goods are taken from a company for private use.

  • A business asset is transferred.

Such transfers should be a taxable supply undertaken in the course of a business and should be subject to vat on the invoice price in the same manner as the usual supply of trading stock. If a business is sold as a going concern, vat liability arises on the payment for the capital (and trading) assets of the business. A deduction of the vat paid against vat liability will then be allowed to the new owner.

There are two more activities usually mentioned. Many countries define the provision of electricity, heat, refrigeration, ventilation, power, or gas as a supply of goods. This is simply a linguistic problem. If these items are not included as goods, they will certainly be included under services, so the only question is where they should be mentioned. Some prefer to think of electricity and gas as services, but more usually they are defined as goods.

The second point, which needs to be mentioned, is that goods given free to employees (within some defined maximum amount) solely in the course of employment are not usually taxable.

Supply of Services

Services are intrinsically less easy to identify than goods. They are best defined as a residual rather than through individual itemization. In this way, any transfer or provision for a consideration that is not the supply of a good is automatically the supply of a service. This is a particularly useful method in countries (such as those in the Middle East or the Far East) that have, typically, expanded their taxes on goods and services by adding individual items to an ever lengthening list. This residual solution breaks that approach (which lends itself to exemption and special pleading).

So services include:

  • Any supply for a consideration that is not a good.

  • Lending goods.

  • Hiring goods.

  • Agreeing not to do something for a consideration.

  • Surrendering a right for a consideration.

Basically, it is simpler to remember that any item that is not a good is a supply of services, so that nothing escapes. For instance, the sale of a racehorse is a supply of a taxable good, but the sale of a share in a syndicated racehorse would be the supply of a service. If all the shares were sold then, in essence, the horse is sold and that becomes a supply of goods. Either way, vat is payable.7

Some countries have preferred to introduce a vat on goods and leave the extension of the tax to services until later (for example, Brazil, Ecuador, and Indonesia). There are at least four powerful reasons to ensure that the vat includes services from the start. First, the contribution of the sector to gross national product is sizable and grows as the economy grows. Consequently, it may have a fairly large revenue potential. Second, failure to tax services distorts consumer choices, encouraging spending on services at the expense of goods and saving. Third, untaxed services mean traders are unable to claim vat on their service inputs. This causes cascading, distorts choice, and encourages businesses to develop in-house services, creating further distortions. Fourth, as most of the services that are likely to become taxable are positively correlated with the expenditure of high-income households, subjecting them to taxation may improve equity.

The question remains, however, whether it is better to include services under a vat or to use selective taxation (special excises) instead. Both approaches have been used. It has been argued that inclusion of services under the vat is greatly preferable to the use of a separate tax or taxes on services to avoid multiple taxation, which arises from the nondeductibility of service taxes on purchases by business firms and, at the same time, the application of vat to purchases by service firms. Although true, the importance of the argument needs to be qualified. If the service is one that by its own nature is usually rendered to a final consumer, application of a selective tax at the time the service is rendered gives rise to multiple taxation only to the extent that its price includes elements of vat paid by the service firm on its purchases. If, on the other hand, the service is normally rendered to a business, the argument carries more weight. The solution is not easy, however, because many of the services rendered to businesses are in the hands of hard-to-reach taxpayers—commercial transport may be a good example—and to include them in the vat net would greatly complicate the task of administration. Perhaps, one option would be to allow them to register if they wished to do so.

There seems to be a case, therefore, to approach the question of the taxation of services on the basis of who the main users are. If the main users are final consumers, it makes little difference whether the government taxes services under the VAT or by selective taxes. The decision will probably have to be taken on the basis of the adequacy of the rate structure of the VAT vis-à-vis each particular service. If the main users are business firms, it might be best not to subject the service to any tax.8 The value added by the service firm will eventually be taxable when it becomes part of the price of the goods produced by the user of the service.

An excellent presentation of examples of supply, value, and consideration in New Zealand is shown as Table 17-1.

Imports and Exports

The valuation treatment of the sale or purchase of goods across international boundaries is fairly straightforward and is dealt with below. This is followed by a rather longer discussion on the treatment of internationally provided services. Finally, a few special cases are mentioned, such as purchases by tourists, goods imported by a final consumer, and free zones.

The Valuation of Imports and Exports

The vat is levied on imported goods at a value including:

  • The customs value of the goods.

  • Customs duty and any other tax payable at import.

  • The cost of transport and insurance to the country.

  • Any fees or levies on imports.

  • Any excise duty levied.

The customs value is usually based on a price that should reflect an arm’s length transaction. Where the relation between the seller and the importer creates doubt about the value placed on the goods, the customs use a valuation code to establish a value that reflects an arm’s length value.

Some countries levy export taxes and, reflecting the treatment of imports, the value for zero rating should include the value of the goods f.o.b. and any export taxes or fees.

Treatment of Goods

The country of origin, under all existing vats, treats exports as zero-rated supplies so that the goods are exported free of vat. The destination country charges the goods at the vat rate appropriate to similar domestic goods, so that equal treatment with internal trade is assured.

This simple statement is open to some caveats. Not all vat is necessarily refunded on the zero-rated export; if some of the inputs are produced by exempt suppliers (for example, financial institutions, agriculture), then the vat charge on the inputs of those exempt suppliers is not recovered by the vat refund on export.

Again, when the good is imported, the vat levied is not necessarily levied at a point of sale. The charge is not a vat payment in the usual way, but is a charge on the physical importation of the goods. Many developed countries use a “postponed accounting system,” whereby importers do not pay the charge on the physical importation, but only when they make their first vat return following the importation. This, of course, has important implications for company liquidity. When the United Kingdom abolished the postponed accounting system in October 1984, firms that had enjoyed up to 11 weeks tax-free inventories suddenly found themselves liable for a payment that netted the authorities some £1.2 billion in a once and for all windfall. Of course, this revenue gain can only be enjoyed by countries that have initially decided not to levy vat when the goods physically enter the country.

In developing countries, sometimes over 50 percent of the total vat revenue is derived from imports. Control is better at the ports, customs officials levy the vat at the same time as other formalities are completed, and goods are not physically released until the tax is paid. There is little that concentrates the trader’s mind on settling his obligations promptly as much as the knowledge that his goods are in bond (and liable to penal storage charges if left there unduly long).

It is possible to abolish the frontier vat on transactions within a customs union. After all, if a customs union succeeds in abolishing customs frontiers, it seems rather redundant to keep the customs officials purely for the sake of vat. It would be much better to allow goods to be imported and for the accounts of the importer and the exporter to be settled through a central clearing agency. This is theoretically feasible and is indeed EC policy to be introduced by 1992 (see Chapter 8).

Treatment of Internationally Provided Services

The intention is to treat internationally provided services in such a way so that the end result is the same as that achieved for the taxation of internationally traded goods. However, there are difficulties.9

If it is difficult to define the place of supply of a service domestically (see the earlier discussion), it is even more difficult internationally. Basically, there are two options; first, where the supply is received and, second, where the supply is performed.

Under the first category, the treatment is parallel to that of the supply of goods. It is a commonsense view that it is the trader enjoying the use of the service that pays the vat at the rate appropriate to his own country. The supplier of the service (the exporter) is allowed to claim as an offset to his zero tax liability on his export service earning any vat paid on his inputs (providing his service would have been taxable if supplied domestically). If the service performed is exempt in the exporting country, no vat can be recovered on inputs. However, there is an important exception to this in the EC when financial and insurance services are provided to those outside the EC; to prevent these important EC services being at an international disadvantage, they are allowed to claim vat paid on inputs needed to provide the overseas service. As might be imagined, this can be a tricky calculation for a large financial center.

The other option is to tax services where they are performed. This is different from the previous category because a banker, an architect, or a consultant might well perform the services sitting in his home country, but it is the customer that enjoys them. That is, the supply of the service and the enjoyment of it can be separated. Where this is not necessarily possible, for example, with actors, sports players, lectures, and transport, then the vat is levied wherever the service is performed (and their agents are usually liable for the vat payment, as is the case in New Zealand). The reasoning is that such a service is likely to be in direct competition with locally provided services and should be taxed the same way.

All services are expected to fall into one or the other category, but an underlying rule that ought to be covered by legislation is that any service that is not covered by these two categories is still taxable in the suppliers’ country.

Internationally, it is difficult to identify the trader responsible for payment of the vat. In both the import and export of goods and services, it is important to define the taxable person and this often revolves around the definition of permanent residence.10 Some countries (for example, the Federal Republic of Germany) deem a foreign taxable person to be established if traders have a residence, a registered office, a place of effective management, a branch registered with the trade registry, or an affiliated company forming part of a group; on the other hand, France uses no concept of a permanent residence for vat. The foreign taxable person in France is considered to be liable to vat when he sells goods in France or performs a service in France.

Under the “reverse charging rule,” some vat systems require the customer enjoying the service supplied by a foreign trader to pay the vat. As the vat paid in this way can be used as a credit against any vat liability, the tax actually falls on only unregistered persons, and on partly and wholly exempt traders. It would seem preferable to cut out the reverse charging rule (and all the paperwork created by it) and simply require only exempt, partly exempt, or unregistered persons liable to pay the tax.

Possible Distortions

As services are flexible, transitory, and difficult to record or check, distortions are bound to occur. Some examples might show this.

(1) An international telephone link allows a customer in the “importing country” to enjoy the information services of a computer data bank in another country. The fee for the service might be collected by a subsidiary in a third, non-vat country (for example, an offshore tax haven). In this case the supplier has operated a passive deal in accessing the data bank and unless the telephone calls are checked, the accounts will show the charge as an export service to the tax haven. The customer will have enjoyed the services in another vat-liable country, but there will be no payment to levy VAT on as the parent company is debited through the tax haven. There is no doubt that the service has been provided and enjoyed in two vat-liable countries, but no tax is collected.

(2) A lawyer sells advice to a client abroad, who is not registered for VAT. The VAT is not collected under the category of supplied where received (because it would be too difficult to tax the final customer), but the lawyer pays VAT on his inputs and is unable to zero rate his fee for advice made abroad. This could distort trade because “exporters” of legal advice are not competing on a level field; the purchaser could choose to buy advice from the country with the lowest VAT or from a country with no sales tax on legal advice at all.

(3) A bank lends money to a customer in another vat-liable country. The service is exempt in both countries. However, a distortion is possible because it would be even more advantageous for the bank to lend to a non-vat country and obtain the advantage of being able to offset some of the VAT on bank supplies (purchase of capital, equipment, office supplies, and so on) against the zero-rated service. As one commentator noted, “It is a deliberate feature of the system that it should encourage the ‘export’ of services from the EC, but when the ‘service’ in question is the provision of capital, the desirability of this policy may be debatable.”11

Some Special Cases

Treatment of Tourists

Sales to tourists of goods they do not consume in the country, but actually take out of the country, are clearly exports. When the tourist returns home, if his country uses a vat, he should have to pay VAT on his foreign purchase at the rate appropriate to the similar domestic good. Most VAT systems legislate for some treatment to reflect this. In theory, any purchase that can be produced at the point of exit and can be proved to have been bought domestically should be allowed a refund. The crucial requirements are, first, that there should be documentary proof of purchase and tax payment and, second, proof that the good has been exported.

In some more cumbersome schemes, retailers must fill out special invoices showing the tax paid and the passport number (and probable date of exit) of the purchaser. The purchaser must physically present the goods to customs officials when leaving the country. These officials then tell the retailer the good has been exported and the retailer refunds the tax to the foreign (home) address of the purchaser. Clearly, for small sales, the cost of compliance is simply not worth it. Some countries specify a minimum amount the purchase must exceed before refunds will be given, but most accept a simpler method or, indeed, accept that there will be substantial evasion.

A simpler method is for the customs officials to accept a foreign credit card receipt as proof of purchase and tax liability, or to allow the repayment to be made by a credit to the customer’s foreign credit card account. This reduces the amount of unnecessary paperwork and uses the credit card electronic network to achieve the refunds. What happens in some countries is that retailers simply sell the goods VAT free, make no return, and claim the input credit. This is a perfectly efficient way to achieve informally the same end as zero rating; what it does create is the temptation to make nontourist sales VAT free as well. In other countries, selected stores are designated as “mini duty-free zones” and sales to foreigners are VAT free. Of course, policing such stores is really impractical.

Indeed, it is the problem of policing the tourist purchases that leads to the cumbersome method described above. Basically, it seems desirable to encourage tourists to buy goods for export and, if at all possible, to use the credit card mechanism. It is also reasonable to allow verification that goods have been exported to be performed by customs officials at the point of importation; this gets around the trouble of carrying purchases instead of putting them in with the baggage.

Temporary Importation

Tourists often move from country to country accumulating purchases as they go. They are a casual example of temporary importation, because, of course, their accumulated purchases are all expected to be, finally, exported to their home country.

However, there are more important temporary imports.12 Suppliers of services may need to import equipment to carry out their professional duties, salesmen import samples, traders import goods that they hope to sell (for example, aircraft), but must re-export when disappointed. People running conventions and international fairs import large quantities of specialized display equipment, and so on. Of course, much temporary importation involves transport—trucks, automobiles, ships, and buses.

Whatever legislation is crafted,13 it should be “uniform and wide-ranging” and allow goods to be temporarily imported “without undue formality.”14 While those sentiments refer to the EC, they seem sensible for a wider application. The important points are that the goods should be identifiable and their use verified, security (in cash, guarantees, or securities) may be called for, and should the goods be directed for use in the owner’s own country, the appropriate tax will be levied.

Another example of temporary importation is where a special dispensation is made for large and regular imports of raw materials for inclusion in the manufacture of exports. Rather than charge vat on the imports and refund the vat on export (in effect requiring an interest-free loan to the government), the legislation allows traders, on proof that they conduct a regular and substantial export trade, to import goods charged to VAT in the usual way, but with the payment of VAT suspended for, say, three months (as in Korea). Taxpayers must keep full records of quantities and values of goods imported, purchased on the home market, factory production, and export sales. Strict control should be exercised by frequent inspections of records and factory premises. Within a specific time after importation, the trader must deliver a return showing how the raw materials were used. If, in practice, it turns out that the value of export trade is too small or irregular, the license or permission to run a system of suspension can be revoked.

International Passenger Transport

The purchase of a ticket to leave the country constitutes the purchase of a service and should be liable to vat. Unfortunately, this causes distortions as clearly it pays to buy a (taxed) one-way ticket out and buy the return ticket in some untaxed country visited during the trip. Such potential distortions have persuaded many countries to exempt international transport from vat. Some countries, such as the United Kingdom, have zero rated international passenger and freight transport, thereby putting the provision of these services in a favorable position vis-à-vis others that levy VAT. Nevertheless, it still is reasonable to tax such services and it is difficult to argue that persons able to travel internationally should be favored compared to those traveling domestically or, indeed, to those enjoying other services such as hotels and restaurants.

Free Zones

Many countries establish free zones in which goods may be imported or exported without payment of customs duties or VAT. Such zones are supposed to be enclosed areas that can be patrolled and where all goods and persons pass through frontier posts to get into the normal domestic market. Such zones are not confined to developing countries. One of the earliest is in Ireland (Shannon), and in 1984 the United Kingdom established six such free zones. However, the danger is that the goods in the free zones may get sold on the domestic market without bearing domestic taxes, either customs duties or VAT. Basically, the VAT is levied at the “frontier” of the zone exactly as would occur on a usual international frontier. The problem is to police such flows and the more numerous such zones, the more difficult it is to prevent the erosion of revenue.

Free zones are popular in many developing countries. One of the main problems is the proliferation of such zones, often to the point where single factories or even shops are given free-zone status. Of course, it is impossible to police such single establishments and reliance has to be put on the integrity of the traders and their record keeping. Many countries find it difficult to police their free zones for customs duties, let alone the VAT. The real message is to restrict such zones to areas that have boundaries that can be patrolled and frontier ports that can be manned in the normal way.

Table 17-1 also includes other special cases, for instance, hotels and rest houses (examples 18 and 19), progress payments (example 23), government grants and subsidies (example 24), and insurance (example 28, a special case unique to New Zealand; see Chapter 5, section on “Financial Services”).

See Price Waterhouse (1986, pp. 308–309).

Buckett (1986, pp. 63–64).

See, for instance, Bertram and Edwards (1984, p. 611).

Bertram and Edwards (1984, p. 611).

See Wheatcroft and Avery Jones (Vol. 2, p. 5731, Sect. 5-786).

See “Exemption of Welfare Supplies by Charities and Public Bodies,” Accountancy (1986, p. 35).

The actual time when VAT becomes payable can allow for some discretion on the part of both trader and customer. See Bragg and Williams (1984, pp. 218–25).

The exemption may not be advisable, however, for services that contain substantial elements of taxed inputs. It would be unfair to the services vendor and would encourage its substitution by the user. For instance, advertising pays VAT on its purchases of materials. If these were sufficiently substantial, it might pay clients to produce their own advertising in-house and claim the credit for the VAT paid on the advertising inputs.

For an interesting discussion, see Campbell (1986, pp. 4–10).

For a detailed consideration of this subject, see Chesnais (1984, pp. 3–4).

Campbell (1986, p. 10).

And some, perhaps, not important commercially, but crucial to the individual; provision has been made specifically in some European vats that the tax paid on an engagement ring sent by a person resident abroad to his fiancee may be refunded if the ring is re-exported when the owner can prove movement to a residence abroad. See “Value Added Tax,” Accountancy (1985, p. 32).

In the EC, it is the Seventeenth Council Directive.

European Community, “Draft VAT Directive on Temporary Importation of Goods,” reproduced in Intertax (March 1985, pp. 74–75).

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