This chapter describes a selection of key features of VAT regimes in OECD countries, i.e. tax rates, exemptions, specific restrictions to input tax credit, registration and collection thresholds and the application of margin schemes. It is complemented with a technical discussion of the rationale and impact of reduced VAT rates.

2.1. Introduction

Although most VAT systems are built on the same core VAT principles (see Chapter 1), there is considerable diversity in the structure of VAT systems in OECD countries. This is notably illustrated by the variety of reduced rates, exemptions and other preferential treatments and special regimes that are widely used in OECD countries, often for equity or social objectives or for practical or historical reasons.

This chapter presents an overview of the VAT rate structures in OECD countries and their evolution between 1975 and 2016 (Section 2.2) and looks in some detail at the VAT exemptions that exist in these countries (Section 2.3). This is followed by an overview and analysis of the wide variety of special regimes used in OECD countries in the following areas: specific restrictions on the right to deduct VAT on specific inputs (Section 2.4), registration and collection thresholds (Section 2.5), and the application of margin schemes (Section 2.6). The last section (Section 2.7) presents a further detailed technical discussion of the rationale and impact of reduced VAT rates based on OECD research.

2.2. The evolution of standard rates and reduced rates

The evolution of VAT rates can be divided into four periods. During the first period between 1975 and 2000, when many countries first implemented their VAT system, many countries progressively raised their standard rates. Out of the 31 OECD countries that had a VAT in 1995, 20 had raised their standard rate at least once since implementation. Between 1975 and 2000, the OECD average standard rate rose from 15.6% to 18%.

During a second period, between 2000 and 2009, the standard rate of VAT remained stable in most countries, with 23 out of 34 countries maintaining a rate between 15% and 22%. As of 1 January 2009, only 5 countries had a standard rate above 22% (Denmark, Finland, Iceland, Norway and Sweden). Between 2000 and 2009, the OECD average standard rate declined slightly from 18% to 17.7% (see Table 2.A2.1).

The third period, between 2009 and 2014, was marked by a considerable increase in the standard VAT rate in many countries, often in response to financial consolidation pressures caused by the economic and financial crisis. VAT standard rate increases have played a key role in many countries’ consolidation strategies, since raising additional revenue from VAT rather than from other taxes (such as income taxes) is often considered more effective (it generates immediate additional revenue) and less detrimental to economic growth and competitiveness than income taxes (OECD, 2010). Between 2009 and 2014, 22 countries raised their standard VAT rate at least once. These changes occurred principally in European Union (EU) countries (Czech Republic, Estonia, Finland, France, Greece, Hungary, Ireland, Italy, Latvia, the Netherlands, Poland, Portugal, Slovak Republic, Slovenia, Spain and United Kingdom) but also in some non-EU countries (Iceland, Israel, Japan, Mexico, New Zealand, and Switzerland). Two OECD countries lowered their standard VAT rate temporarily and then raised it again (Ireland and the United Kingdom). This evolution resulted in a hike of the unweighted OECD average standard VAT rate from 17.7% in January 2009 to an all-time record level of 19.2% on 1 January 2015. Ten OECD countries now operate a standard rate above 22% against only four in 2009.

The increases in standard VAT rates observed until the end of 2014 have not continued into 2015 and it would appear that OECD countries have entered a new period of relatively stable standard VAT rates. Only two OECD countries increased their standard VAT rate between 2014 and 2016, i.e. Japan (from 5% to 8% as of 1 April 2014) and Luxemburg (15% to 17% as of 1 January 2015). Two OECD countries reduced their standard VAT rate, i.e. Iceland (from 25.5% to 24% as of as of 1 January 2015) and Israel (from 18% to 17% as of 1 October 2015). The unweighted OECD average standard VAT rate has remained stable at 19.2% since 1 January 2015.

Major differences in standard rates can still be observed among the OECD countries, with rates ranging from 5% in Canada (although most Canadian provinces levy sales taxes or Harmonised Sales Taxes alongside the Federal 5%) and 8% in Japan and Switzerland to 25% in Denmark, Norway and Sweden and 27% in Hungary (see Figure 2.1).

The average standard rate of the 22 OECD countries that are members of the EU (21.7%) is significantly above the OECD average (19.2%). EU Member States are bound by common rules regarding VAT rates (VAT Directive 2006/112/EC), which set the minimum level of the standard rate at 15%. Two reduced rates of not less than 5% may be applied to a restricted list of goods and services as well as to certain labour intensive services, and no rate can be higher than the standard rate. A multitude of derogations have however been granted to many EU countries, which has resulted in more than 40 different standard and reduced VAT rates being applied in the EU.

OECD countries have relied primarily on increases of the standard rate to raise additional VAT revenue, rather than on reform to broaden the tax base by removing or limiting the scope of reduced VAT rates or VAT exemptions. Most OECD countries continue to apply a wide variety of reduced VAT rates and exemptions (see Tables 2.A2.2 and 2.A2.4). A recent OECD survey (Brys et al. 2016a) suggests, however, that countries may increasingly look at base broadening measures to raise additional revenue from VAT, notably by increasing reduced VAT rates and/or narrowing their scope, by bringing inbound supplies of services and digital products into the scope of the VAT (in line with the recommendations included in the OECD’s International VAT/GST Guidelines) and by abolishing or limiting the VAT exemption for the importation of low-value goods. In addition, many OECD countries continue to consider the implementation of new strategies to counter VAT fraud.

Since 2014, a significant number of OECD countries have raised their reduced VAT rates and/or have reduced their scope, as is outlined below. These reforms were often in line with the findings and recommendations of the OECD study on the distributional effects of consumption taxes (OECD/KIPF, 2014 – see also Section 2.7 of this Chapter) as they focused on scaling back reduced rates that are inefficient and, in some cases, regressive in the sense that they provide greater benefits to richer households in both aggregate and relative terms. Austria increased its reduced VAT rate for notably hotel accommodation, entrance to cultural and sporting events and to cinemas, and pet food from 10% to 13%. Belgium narrowed the scope of its 6% reduced rate for renovation of private homes (by increasing the age requirement of the private homes from 5 to 10 years), shifted supplies of electricity for household use from the 6% reduced rate to the 21% standard rate, and abolished the VAT exemption for plastic surgery. Estonia will increase its reduced rate for accommodation services from 9% to 14% as of 1 January 2017. Iceland increased its reduced rate from 7 to 11% and narrowed the scope of the exemption for passenger transport to public transport services. France made tickets for admission to sporting events subject to VAT at a reduced rate of 5.5% (no VAT was applied previously), and excluded certain agricultural products from the scope of the 10% reduced rate. In addition to increasing it standard rate (from 15% to 17% – see above), Luxemburg increased its reduced rate from 12% to 14%; and its super reduced rate from 6% to 8%; it also excluded e-books from the scope of the super reduced rate. The Netherlands abolished the application of the reduced VAT rate of 6% for rebuilding, renovation and repair of dwellings older than 2 years. In Norway, the reduced VAT rate for transport services and entertainment was raised from 8% to 10%. In Greece, scope of the 13% reduced VAT rate was significantly narrowed: many types of goods including sugar, coffee, spices, oil for cooking (except olive oil) and salt, became subject to the standard rate of 23% (24% as of 1 June 2016). The standard rate also became applicable...