Paul L. Caron

Monday, November 24, 2008

De la Feria on VAT at UCONN

Rita_de_la_Feria Posted by Ruth Mason

Last Tuesday, Rita de la Feria (Centre for Business Taxation, Oxford) presented The Pitfalls of Accepted VAT Wisdom: Lessons from the EU Experience at Connecticut as part of its Tax Lecture Series.  Rather than addressing whether the United States should adopt a value-added tax, de la Feria focused on what the United States could learn from the European experience. 

VAT is the world’s fastest growing tax, with 130 countries applying it in some form.  De la Feria noted the irony that although the United States is the only major industrialized country without a VAT, Michigan was the first jurisdiction to apply a VAT.  While de la Feria noted that the allures of VAT include simplicity, ease of assessment and collection, and effectiveness in raising revenue, she cautioned that certain aspects of the European implementation of VAT have reduced these benefits.  Among other recommendations, de la Feria warned that VAT exemptions and rate differentials designed to achieve progressivity or encourage consumption of merit goods have lead to extensive tax planning and difficult line-drawing problems in Europe. 

Two cases decided in the British courts illustrate her point.  In Jaffa Cakes, the court had to decide whether the popular British confection was a cookie or a cake.  If a cake, it would fall under the VAT exemption for food, whereas cookies were subject to the standard rate of 17.5%.  With a healthy dose of humor, de la Feria described the case as well as the court’s standard of review.  The court declared that the distinction between cookies and cakes could be drawn by reference to what happens when they go stale:  cakes go hard; cookies go soft.   In another case, relying in part on the fact that Pringles only contain 40% potato, a court found that Pringles should not be subject to the higher rate of VAT applicable to (unhealthy) “potato crisps.”  De la Feria noted the perverse effect of the Pringles ruling:  the more filler in the chip, the more likely the exemption!

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