Imposing Value Added Tax on Interest-Bearing Instruments and Life Insurance
Victoria University of Wellington - Faculty of Law; Institut für Österreichisches und Internationales Steuerrecht, Wirtschaftsuniversität Wien; University of Notre Dame Australia - School of Law
Sybrand Van Schalkwyk
Asia-Pacific Tax Bulletin, Vol. 10, pp. 471-468, 2004
Victoria University of Wellington Legal Research Paper No. 31/2013
Exemption of financial services from Value Added Tax (VAT) is commonly accepted as being an anomaly in the New Zealand goods and services tax legislation. While exempting financial services from VAT is attractive to the legislature because it is a simple way of addressing the difficulties of applying VAT to financial services, it causes significant distortions, for instance tax cascading, which in turn causes price distortions. The application of VAT to interest-bearing financial instruments and life insurance is complicated by the way in which financial intermediaries charge for these services.
The first part of this article investigates how interest-bearing instruments can be taxed under VAT, and the second part how life insurance can be taxed under VAT. There are several options for the treatment of interest-bearing instruments. They can be exempted, zero-rated, or included in the tax base. In this last category, there are three possible methods of including interest-bearing instruments: the invoice, cash flow, and truncated tax flow systems. The last is recommended because policy makers have come to realize that the cash flow system cannot be applied without significant modification.
Number of Pages in PDF File: 19
Keywords: Income Tax, Value Added Tax, Financial Services, Goods and Services Tax, Non-Discrimination Principle
JEL Classification: K34
Date posted: May 15, 2010 ; Last revised: June 19, 2013
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