VAT and Tax Credits: A Way to Eliminate Tax-Evasive Use of Transfer Prices?

European Financial and Accounting Journal, Vol. 5, No. 1, pp. 28-50, 2010

23 Pages Posted: 17 Dec 2010

See all articles by Tomas Buus

Tomas Buus

University of Economics, Prague

Jaroslav Brada

University of Economics, Prague

Date Written: December 17, 2009

Abstract

In this paper we compare income taxes to VAT and tax credits to tax deductions in terms of their ability to distort factor prices, provide fair taxation, avoid tax-evasive transfer pricing and induce Pareto improvement of tax policies. On the base of theoretical discussion and thought experiments we conclude that VAT is due to its nature superior regarding these requirements. We also have found out that a wider use of tax credits within VAT would be usable to prevent profit shifting. Some adjustments of VAT compared to current practice are needed to achieve the best results. More rigorous proofs, both theoretical and empirical are needed.

Keywords: Tax Credits, VAT, Transfer Prices, Multinational Enterprises, Pareto Optimum

JEL Classification: D21, D29, G39

Suggested Citation

Buus, Tomas and Brada, Jaroslav, VAT and Tax Credits: A Way to Eliminate Tax-Evasive Use of Transfer Prices? (December 17, 2009). European Financial and Accounting Journal, Vol. 5, No. 1, pp. 28-50, 2010. Available at SSRN: https://ssrn.com/abstract=1726144

Tomas Buus (Contact Author)

University of Economics, Prague ( email )

Nam. W. Churchilla 4
Praha, 130 67
Czech Republic

Jaroslav Brada

University of Economics, Prague ( email )

nam. W.Churchilla 4
Prague 3, 130 67
Czech Republic

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