In Germany the value added tax replaced the gross receipts tax in the 1960s. The latter taxed the gross revenue of a company at every intermediate stage, which is why the tax discriminated against smaller companies with longer intermediate chains, while larger intragroup intermediate chains were taxed less heavily.
The reformed value added tax (VAT) of 1968 taxes the “added value” of a company, i.e., the difference between sales and intermediate inputs. Intermediate inputs of other companies are taxed at the same rate as self-provided intermediate inputs. This is ensured by means of the input tax deduction of the VAT already contained in the intermediate inputs. As a result, only the transactions are taxed that are not provided as inputs to other companies. These are primarily the revenues that are used for consumption purposes. Insofar, VAT is often viewed as purely a “consumption tax”. Delimitation difficulties arise, however, by the many special circumstances in the VAT law, particularly for tax exemptions that are generally associated with an exclusion of the input tax deductions.
Compared to a gross receipts tax and also in comparison to income tax, VAT has many advantages. However, the practical problems in VAT collection are not insignificant. In particular, the current practice of input tax refund is problematic because it opens up opportunities for fraud. According to calculations by the Ifo Institute, the German government loses more than 10 billion euros a year, partially due to fraud, since revenue from the sales tax lags significantly behind what would be expected from the macroeconomic assessment bases. Even though this revenue shortfall has declined in recent years, there still remains a need for reform.
The most common fraud cases consist in someone submitting an invoice containing VAT in order to obtain a refund of the input tax without the tax on this stage having been paid, and often even without the bill having been paid. In many cases, these were genuine or fictitious import goods (carousels) at whose sale the importer invoiced for the VAT without having paid it himself. By the time the tax office has detected the fraud, the owner of the import company has usually already vanished.
In 2004, as a solution to this problem, the Ifo Institute proposed a modified sales tax procedure that in legal terms is as similar as possible to the current system but which effectively prevents fraud. Under this procedure, VAT, unlike the current practice and legal situation, is only refunded if the submitters can prove that they have paid tax on the previous stage. If bills are paid by bank transfer, the associated VAT is already transferred by the bank to the tax office and registered under a number that must be specified when requesting the refund. Likewise if invoices are paid in cash, when the cash receipt is printed the receipt machine transfers the VAT to the tax office.
Sinn, Hans-Werner, Ifo Viewpoint No. 66: Some Facts on VAT, 21 July 2005 Text
Tables, charts and reports provided by Ifo's Database for Institutional Comparisons in Europe DICE
VAT Revenue Ratio, 2005 (Chart | 01.07.2010 | Details | Download)
Ifo Policy Issues Ifo publications and media coverage
RSS