TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, March 22, 2018

Satterthwaite Presents Electing Into A Value-Added Tax Today At Indiana

SatterthwaiteEmily Satterthwaite (Toronto) presents Electing into a Value-Added Tax: Evidence from Ontario Micro-Entrepreneurs at Indiana today as part of its Tax Policy Colloquium Series hosted by Leandra Lederman:

Across countries, value-added tax (VAT) statutes typically recognize the disproportionate burden of VAT compliance for smaller firms by exempting “small suppliers” (defined as businesses with annual revenues less than a specified registration threshold) from the obligation to register for, collect, and remit VAT on their sales.  But most input-credit-style VATs also offer small suppliers a curious choice: they can elect into the VAT by voluntarily registering.  Because VAT paid on inputs is refundable for registered firms, small suppliers have stronger incentives to voluntarily register as they (1) purchase more of their inputs from registered firms (the “input channel”) or (2) sell more of their output to registered firms (the “customer channel”).  In theory, these “formality chain effects” can improve the efficiency of a VAT.  In practice, however, many VATs feature registration thresholds that are far lower in dollar terms than recommended by economists.  Where a registration threshold is very low, might microenterprises’ high VAT compliance costs weaken their incentives to voluntarily register, thereby undermining the policy rationale for offering the election?  This paper uses qualitative and quantitative research methods to explore the relevance of the formality chain effect theory in the context of a low registration threshold.

It presents results from a survey of ninety-eight Ontario-based small suppliers (defined, under Canada’s federal Goods and Services Tax statute, as businesses with annual revenues less than CAD $30,000).  It finds that registration status is broadly consistent with customer-channel formality chain effects (voluntary registration is associated with high ratios of sales to registered firms) but inconsistent with input-channel formality chain effects (voluntary registration is not associated with high taxable input ratios).  Qualitative responses indicate that, among the unregistered, VAT compliance costs are perceived to be onerous and may trade off against the value of refundable input credits.  Respondents also suggested that voluntary registration may help resolve information asymmetries within a supply chain by signalling a small supplier’s quality or future growth prospects.  The study provides qualified support for retaining supplier elections even when thresholds are low and highlights the need for further research on the interplay between voluntary registration and optimal VAT thresholds.

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