A New Approach to Taxing Financial Intermediation Services Under a Value-Added Tax
19 Pages Posted: 15 Feb 2006
Date Written: July 2004
Abstract
This paper contains a proposal (referred to as the "modified reverse-charging" approach) to tax financial intermediation services under a VAT. At the heart of the proposal is the application of a reverse charge that shifts the collection of the VAT on deposit interest from depositors to banks, in conjunction with the establishment of a franking mechanism managed by banks that effectively transfers the VAT so collected to borrowers as credits against the VAT on their loan interest on a transaction-by-transaction basis. The proposal is fully compatible with an invoice-credit VAT and is capable of delivering the correct theoretical result at minimal administrative costs.
Keywords: VAT, financial services
JEL Classification: H2
Suggested Citation: Suggested Citation
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