‘Hybrid’ forms of taxing consumption: A viable alternative to EU VAT?

Abstract

In the last decades, VAT/GST systems have proliferated across the globe and have usually replaced any eventual cumulative turnover taxes or retail sales taxes (RST) previously operated in the respective country of adoption. However, the input VAT credit inherent to a VAT/GST facilitates some particular types of tax fraud which are absent in a turnover tax or RST system, especially because the entitlement of the business customer to the tax credit is normally not contingent upon the prior payment of the corresponding VAT/GST liability by the supplier. The ensuing ‘VAT gap’ has fueled the debate in the EU whether VAT should be transformed into a so-called ‘general reverse charge regime’ that would be equivalent to a RST while maintaining the invoice and audit trail of a VAT system . The reform project has gained momentum recently due to a proposal by the Commission which would allow the temporary application of a generalised reverse charge mechanism by Member States that so desire. This article discusses the pros and cons of such a hybrid system.