VAT Neutrality

By André Prüm, Charlène Adline Herbain and Jean-Claude Bouchard

Most major economies use a value added tax (VAT) which is a derivation of the French 1954 taxe sur la valeur ajoutée. The initial imposition of VAT in France and its spread around the world have been driven by economic reasons. This book focuses on one of these economic triggers: the neutrality of VAT as regards the functioning of the economy. It demonstrates that the reason VAT was chosen in France and why thereafter it spread around the world was because it offered the possibility to collect governmental revenue while allowing the economic forces of the market to interplay without being adversely affected.
The prerequisite conditions for the existence of VAT neutrality are therefore identified herein along with an overview of the VAT mechanism, demonstrating that the concept of neutrality is built into the VAT system in a manner that allows for the preservation of the natural functioning of the market. After the definition of VAT neutrality is set forth, the elements that comprise VAT neutrality are tested against the realities on the ground and the issues that infringe the neutrality of VAT are identified and analysed. In conclusion, remedies for these issues are being sought by a review of the causes of infringement of VAT neutrality in the perspective of selected proposals for modified VAT systems. These proposals include redesignating the place where VAT is levied and improving VAT collection. Ultimately, the proposed solution has recourse to the roots of VAT together with the most advanced technological tools available to give back to VAT the power to levy revenue while letting the economic forces of the market interplay without instigating any adverse influence.

• Language: English
• Publisher: Éditions Larcier
• Release date: May 4, 2015
• ISBN: 9782879747880

Book preview

couverturepagetitre

Reproductions may be authorized by luxorr (Luxembourg Organisation for Reproduction Rights) – www.luxorr.lu

For further information about our editorial fund and news in your area of expertise, visit our website: www.promoculture-larcier.com

© DBIT s.a. Promoculture-Larcier 2015 Member of Group Larcier 7, rue des 3 Cantons L-8399 Windhof

EAN 978-2-87974-788-0

Cette version numérique de l’ouvrage a été réalisée par Nord Compo pour le Groupe Larcier. Nous vous remercions de respecter la propriété littéraire et artistique. Le « photoco-pillage » menace l’avenir du livre.

Acknowledgements

It is a pleasure to convey my gratitude to the persons from whom I have received inspiration, help and support and who made this book possible.

I would like to express my sincere gratitude to both my promotor and co-promotor. I am very grateful to Professor Alexander Rust for allowing me to conduct my doctoral research under his auspices and for providing me with skilled guidance. I am truly thankful for his flawless confidence and selfless dedication to my academic development. I am also deeply grateful to Professor Daniel Gutmann for accepting to supervise my research in an international setting. Despite the geographical distance, he gave me constant support and advice. The support, patience and guidance of Professor Alexander Rust and Professor Daniel Gutmann, have been an immense part of the completion of this research.

I extend my appreciation to the members of the defense committee, Me Jean-Claude Bouchard, Professor Joachim Englisch, Professor Werner Haslehner and Professor Oskar Henkow for their time, dedication and for their thoughts and genuine interest. To Professor Joachim Englisch and Professor Oskar Henkow, for adapting to French University rules and traditions. To Me Jean-Claude Bouchard, for generously offering me valuable ideas and recommendations and for his unflagging support and mentorship.

My sincere thanks to all those who contributed directly, or indirectly to my dissertation. In particular, I wish to thank Professor Werner Haslehner and Professor André Prüm for their support and guidance in my academic career, and Professor Rita de la Feria and Professor Edoardo Traversa for offering thorough and excellent feedback on an earlier version of this thesis. I am also indebted to Karine Bellony, Daphné and Arnaud Bon, Clémentine Boulanger, Heleen de Geest, Anne Gérard, Matthieu Heitz, Dr Katarina Koszeghy, Me Dirk Leermakers, Roseline Loutsch, Professor Xavier Prevost, Me Elisabeth Relave-Svendsen, Florine Richter, Nadja Risch, Loic Roussel, Dr Jean Schaffner, Paloma Schwarz, and Professor Laurence Usunier. Also I want to thank with all my heart my family, BeCo in particular for their encouragement and patience. Without their support, I would never have finished this thesis and I would never have found the courage to overcome the difficulties during this work.

Words are inadequate to express my heartfelt thanks to Ayzo van Eysinga to whom this book is dedicated. You have been a solid rock of support for me over the years. I couldn’t have done it without you and Forever. This book is dedicated to you.

A very special thanks to Nathalie Flohimont, Rui Henriques and generally to Promoculture-Larcier for publishing this book and to the Fonds National de la Recherche Luxembourg for its support.

Charlène Adline Herbain

Supported by the Fonds National de la Recherche, Luxembourg

Foreword

In times where State budgets are increasingly under pressure, levying of taxes becomes paramount. Invented by the French after World War I, VAT has rapidly spread throughout the world as an effective way of taxing consumption. For many Member States of the European Union, it has become a major if not the biggest source of tax revenue with a trend of steady increase of its share.

While adding a tax on prices appears at first sight as a simple solution, the design of an efficient yet fair VAT system entails in reality quite some complexities. VAT neutrality in business-to-business situations is a key feature of any such system and in particular of the European VAT regime.

Mrs. Charlène Herbain has dedicated her PhD in tax law at the Universities of Luxembourg and Paris 1 Panthéon-Sorbonne to this challenging topic. The publication through the present book of her work offers the broader public an access to the enlightening results of her in-depth research and innovative proposals.

After a historical introduction to the VAT system, the author sketches the defining features of the neutrality principle and its implications. She shows how this principle entails that VAT must not constitute a charge on businesses, that is must no result in any distortions of competition and that the burden borne by the final consumers should be equal in all circumstances, regardless the Member state of production.

In practice, these imperatives raise in fact many questions and concerns as neutrality is restricted in many ways, notably through imperfections or limitations of the European regime, compliance costs, divergences between Member States, for instance regarding VAT rates and the scope of reduced rates, special treatments like the flat rate schemes existing in the UK or Belgium, and derogations, exemptions and various options tolerated by an incompletely harmonized system.

Notwithstanding that neutrality is a clear policy guideline in the design of VAT for the EU, the principle is far from being always guaranteed in business-to-business situations and gives thus rise to numerous court cases. Indeed, the imperative of neutrality is most frequently referred to by the Court of Justice of the European Union in its purposive approach towards the construction of the EU VAT system.

Mrs. Herbain explores the various limitations and flaws of the regime both at EU level and in various domestic laws of the Member states, mostly in Luxembourg, France and Belgium. Her systematic and subtle analysis leads her to shape an innovative alternative to the current design based mainly on a redefinition of the origin principle and a way of levying the tax directly on the end-consumer, which would, as a side effect, allow to reduce tax fraud. Her proposal constitutes a precious contribution to the current debate on a reform of EU VAT.

Comprehensible and readable even for non-VAT experts, Mrs Herbain’s work, while rich in details, always tend to assess technicalities against fundamental features of the VAT regime.

Practitioners will find in this book a precious source of detailed information. Students and non-VAT experts will be guided through the presentation of many cases and the conceptualization of the defining features of the neutrality principle. Scholars and legislatures will gain from the inspiring proposals for a simplified and possibly even more effective VAT regime assuring full neutrality in business-to-business relationships. For all Mrs Herbain’s work offers definitively a way toward a finer understanding of EU VAT and its underlying imperative of tax neutrality.

Professor André Prüm

University of Luxembourg

List of abbreviations,

acronyms and references

Introduction

Nearly every major economy around the world has in its tax portfolio a tax on consumption. Most use a Value Added Tax (hereafter referred to as VAT) which is an offspring of the French 1954 taxe sur la valeur ajoutée. ¹ Intriguing worldwide dominance of VAT; what had caused so many governments to be devoted to it? This question undoubtedly requires some economical background analysis. After 1945 and until 1973, world trading growth increased by almost 8% annually and the volume of international trade increased sevenfold. ² These developments led to profound changes in the economic relationships between Member States. Protectionism and economic nationalism proved self-defeating, while free trade on the other hand appeared to be conducive to national development. In this context, the ideal scenario appeared to be letting the economic forces of the market, based on objective elements such as quality of economic infrastructures or availability of qualified workforce, determine the location of investment and factors of production where they would be most efficient. In order to realise this objective, any intervention that could modify the market allocation of investments, means of production or, as a necessary consequence, flows of trade, had to be banished. However, non-intervention by state governments was particularly complex. In fact the need to raise revenue for their overall functioning has led for a long time already to a levy on the wealth created in their territory. This levy, commonly know as tax, was prone to generating distortions in the aforementioned market allocation and flow of trade. This is in this context of wake of market liberalisation that the concept of VAT neutrality was created and VAT spread throughout the world.

The current importance of VAT neutrality for businesses, and the related and underlying problems associated with it, are underlined by the various references to neutrality made over the years by the Court of Justice of the European Union (hereafter referred to as CJEU or Court) in its judgments. In many instances, the CJEU has referred to the wording of the EU law which formulates the framework definition of VAT neutrality:

The principle of the common system of VAT entails the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, however many transactions take place in the production and distribution process before the stage at which the tax is charged. On each transaction, VAT, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of VAT borne directly by the various cost components. ³

Perusing further through the judgments of the CJEU is revealing and informative but also to a certain extent disconcerting, as VAT neutrality is given other meanings than initially set out in the legislation. In that respect it can be noted that the Court held on occasion that VAT neutrality reflects in secondary EU law the constitutional principle of equal treatment and that it extended the equal treatment feature of VAT neutrality as far as to apply it to lawful and unlawful transactions. The Court also mentioned VAT neutrality in relation to goods, services and economic operators and other times, it associated neutrality with the avoidance of double taxation and with the elimination of distortion of competition. The central aim of this work finds its roots on the basis of these observations; it is to delineate this concept of neutrality in VAT matters and to evaluate its efficiency in fulfilling its objective – to leave the market free to function as it sees fit. This objective itself is not evaluated.

The tripartite structure of this work starts with the historical bias towards VAT and its link with the concept of neutrality. It shows that VAT is the result of a progressive construction which is aimed at permitting the levy of governmental revenue while maximising economic efficiency by avoiding the impediment of the natural functioning of the market. This demonstration is undertaken in Part 1 and starts in the birthplace of VAT, France, where the implementation of VAT in 1954 was the culmination of empirical fiscal experiences started after the First World War. Afterwards, the demonstration highlights how neutrality, by promising the elimination of distortion in cross-border competition, played a role in the spread of VAT in the European Community and around the whole world while carrying on its own conceptualization and notably so through its processing into a general tax applied across the entire economic sector, and to the entire taxable substance.

After having identified in Part 1 the role of the concept of neutrality in the establishment of VAT, Part 2 analyses and systematises the content of that concept. The conditions for the existence of VAT neutrality are therefore identified along an overview of the VAT mechanism, and these data are classified into three categories to create a systematic definition of VAT neutrality. It is shown that the concept of neutrality is built into VAT in a very complete manner which allows the fulfillment of the aim of preserving the natural functioning of the market. Such discussion requires an in depth analysis of the mechanism of VAT.

In Part 3 the definition of VAT neutrality that has been construed further to the analysis of the concept is tested against the practicalities of the Common VAT system. It is shown that despite a very well built principle, VAT neutrality is compromised by the realities on the ground in each of the three categories previously identified. The identification of the issues is accompanied and supported by their related causes. As such there is the fact that the principle of VAT neutrality is not a rule of primary law but a principle of interpretation applying concurrently to other principles, the fact that because of politics essentially, imperfect solutions have been progressively implemented by way of legislation or via jurisprudence as permanent-temporary measures, and last but not least, the freedom of interpretation of Member States derived from the VAT legislation. This third part demonstrates that VAT is like nature; on its own the mechanism works like a well-oiled machine but as soon as humanity gets involved, it falls apart.

In conclusion, remedies for the issues identified are being sought through a review of the identified causes.

On another note, the below exclusions from the scope of the work should be pinpointed. First and while acknowledging that the generalisation of the VAT implies its exclusivity and is consequently a guarantee of neutrality as it avoids the imposition of other turnover taxes susceptible to generate tax cascading or other non-neutral elements, it should be noted that no in-depth study is carried on in regard of this aspect of neutrality. In fact the topic of this work does not extend to the neutrality of VAT in the perspective of other taxes. Following, no in-depth review of the VAT concepts of economic activities or of taxable person is performed either. ⁴ It should also be noted that the analysis performed in the context of this work is set within a limited framework which mostly revolves around the European Union. In that context, the first limitation relates to the kind of VAT under review which exclusively concerns the VAT as designed by the European rules. This VAT type known as the invoice-credit materialises as a levy on the value a business adds with its machinery, workforce and capital to goods and services created or previously acquired. The levy is collected by the so-called invoice-credit method (also known as the staged-collection process with deduction of input VAT) through which each business participating in the life-cycle of a taxable supply applies VAT to its output and, as a balance, credit the VAT paid on its input acquired for business purposes against the output VAT. Therefore, at each stage of the life-cycle of a supply the only VAT to be remitted to the treasury is that on the value added between the input and the output. The second limitation concerns the geographical scope of the analysis which also stops, except for few exceptions, at the European borders, therefore focusing only on intra-Community transactions.

1. It is interesting to note that the international spread of VAT has been accompanied by the French language has its language of choice. See Pasquale Pistone, Soft Tax Coordination: A Suitable Path for the OECD and the European Union to Address the Challenges of International Double (Non-)Taxation in VAT/GST Systems in Michael Lang, Peter Melz et al (eds), Value Added Tax and Direct Taxation, similarities and differences (IBFD 2009) 1161 and 1162 (1161-1170).

2. Serge d’Agostino, Marc Montoussé, Alain Chaffel, Jean-Marc Huart, 100 fiches pour comprendre la mondialisation (Editions Bréal 2006) 12; Emmanuel Combe, Précis d’économie (Presses Universitaires de France 2011) 370.

3. Article 2 First Council Directive 67/227/EEC of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes [1967] OJ 71/1301; transposed in article 1(2) Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax [2006] OJ L347/1.

4. See the thesis of Michel Roques which focuses in its first part on the generalisation of VAT in the perspective of its neutrality. Michel Roques, La Cour de Justice des Communautés Européennes et le principe de neutralité de la TVA (Doctoral thesis, Université de Nice-Sophia Antipolis, Faculté de Droit, de Sciences Politiques, Economiques et de Gestion 2002) 23 et sqq.

PART 1

THE INITIAL IMPETUS FOR NEUTRALITY

He’s building another wolf machine.

He must be crazy in the beans. ¹

I. Introduction

Governmental raising of taxes funds the operation of government itself and also welfare and public services such as education and healthcare. However, in some cases, the levying of taxes can cause overall welfare to decline. When the levying of 1€ of tax incurs a cost to society above that of the 1€ collected the levying of tax creates a burden, a deadweight loss. This burden may arise for various reasons, such as an inefficient system of collection coupled with too low a return on the tax. Depending on the elasticity of supply and/or the elasticity of demand, it can also be the case that because the imposition of a tax – in most cases – increases the price paid by a purchaser and/or reduces the amount received by the seller, the levying of tax triggers a change in the purchaser’s behaviour or in that of the seller. Such change modifies the overall equilibrium between supply and demand and thus hinders the optimal allocation of resources, eventually creating a burden on society.

At the time of the implementation of VAT in France and Europe, these implications were particularly evident. It had become clear that a good tax would be economically efficient, produce a high return and create the fewest distorting effects and would thus be the least burdensome. In short, that a good tax would have the most neutral effect on society.

The first part of the present work considers how the search for neutrality played a role in the implementation of VAT in France, Europe and in other specific countries. VAT, in its contemporary European form, appeared for the first time in France on 10 April 1954. Its mechanism had, though, already emerged in 1948 and it was only in 1964, with the repeal of restrictions on deductions, that the necessary conclusions were drawn from the doctrine of neutrality. Leaving aside the doctrinal arguments about the origins of the tax, the grounds for and the process of its adoption in France are of great interest when it comes to an understanding of the role of the concept of neutrality in the implementation of VAT (chapter II below). Seemingly, the stages of implementation of VAT within the Common Market, in Brazil and in New Zealand reveal a great deal about the function played by the concept of neutrality in the choice of VAT (chapter III below).

II. France

Alain Frenkel was one of the first to point out that VAT is a means of providing a technique, the deduction mechanism, to a doctrine, tax neutrality. ² He also interestingly noted, though this point was raised first by Marcel Pellenc in the report of the bill generalising VAT in France, that the VAT mechanism, and consequently its inherent neutrality, is the product of historical development. He stated that VAT was the result of practical research, that is the various and continuous evolution of the tax system conducted in France. ³ In fact, between 1917 and 1954, five legal texts marked out the history of tax in France. Various turnover and purchase taxes were tried until 1936 (section 1) below) and it was then that the direct forerunner of VAT appeared (section 2) below). The final part of the puzzle fell into place in 1954 with the intervention of Maurice Lauré (section 3) below). This chapter, while respecting the continuum of events, shows how the concept of neutrality contributed to the introduction of VAT in France. It will be demonstrated that the concept of neutrality was however not the initial goal of the successive reforms.

1) T

RY

-

OUTS

France took the path that would lead to the worldwide VAT when it implemented a tax on payments (subsection a. below) followed by a gross turnover tax (subsection b. below) and one-off taxes (subsection c. below) after the First World War.

a. Taxe sur les paiements

⁴

With the First World War getting bogged down, the French financial needs grew and spurred to comprehensive tax reform. In 1917 the tax on payments made a "timide apparition". ⁵ If the appearance of the tax can be so qualified, it is because the administration had insufficient means of control and as a consequence the tax was almost fruitless: "sur le plan budgétaire, cet impôt avait un rendement très faible, nettement inférieur aux prévisions … et en tout état de cause, hors de proportion avec les nécessités budgétaires de l’époque". ⁶ This shy attempt nevertheless opened the path to consumption tax that was destined to end with VAT.

Created by the law dated 31 December 1917, the tax on payments was levied on payments that were set out in writing and made to non-merchants (like rent or private lessons) or to merchants but outside the scope of their commercial activity. ⁷ The tax was levied through stamps and, with an option for merchants, in monthly payments. ⁸ In case of payments to merchants in the scope of their commercial activity, the levy was performed at the time of the final sale to the consumer on payments above Fr.150. ⁹ The regular rate was fixed at 0.20% and the rate for luxury goods at 10%.

As noted above, the success of the tax was limited by fault of lack of governments’ means of control. There are two additional main shortcomings that explain this lack of success. First, the tax created accounting complexity for merchants who had to organise their sales so as to ensure that the tax was applied correctly – on the one hand that the correct rate was applied (0.20% or 10%) and, on the other hand, that only sales to consumers were being taxed. Second, merchants had a strong interest in circumventing the tax as it both decreased the taxable basis of the tax on revenue by under-declaring the profit realised and rendered their products economically more competitive. ¹⁰

b. Taxe sur le chiffre d’affaires

¹¹

In 1920, drawing its inspiration from the Umsatzsteuer instituted four years earlier in Germany, ¹² France introduced a low rated gross turnover tax on businesses.

…il est institué un impôt sur le chiffre des affaires faites en France par les personnes qui, habituellement ou occasionnellement, achètent pour revendre, ou accomplissent des actes relevant des professions assujetties à l’impôt sur les bénéfices industriels et commerciaux…, ainsi-que par les exploitants d’entreprises assujetties à la redevance proportionnelle …. ¹³

The purpose of the tax was to terminate the state budget deficit generated by the increased spending on reconstruction after the First World War without triggering distortion. ¹⁴ The picture drawn by the general rapporteur for the 1921 budget was gloomy:

Un budget en déficit de 2 milliards 800 millions en 1921; une trésorerie qui réclame pour l’exercice en cours 36 milliards de ressources d’emprunt; la perspective de 6 à 8 milliards de ressources annuelles et permanentes à créer pour assurer l’équilibre du budget ordinaire dans les années qui viennent; la question des pensions et dommages non résolue pour l’avenir. ¹⁵

In respect of the aim to avoid distortion, we can quote Pierre Mendès France who, together with Gabriel Ardant, explained that it was impossible to avail old taxes to raise new resources without distorting both production and consumption: "il parut impossible de [demander de nouvelles ressources] aux impôts classiques … parce qu’ils désorienteraient, déformeraient à la fois la production et la consummation". ¹⁶ Despite this noble aim, the new tax distorted both production and consumption.

In practice, gross turnover tax was a tax on gross income based on all the amounts collected by businesses against their sales whether a profit was realised or not. The tax which was levied at 1% initially (plus 0.10% for departments and municipalities) went up in 1926 to 2%. ¹⁷ It was remitted on a monthly basis. ¹⁸ Levied on all transactions, it was leading to higher taxation of longer economic cycles as compared to the taxation of shorter ones. The tax consequently encouraged producers to shorten the circuit of production and favoured vertical trusts (namely businesses that perform all the operations necessary for the manufacturing of products on their own). In reaction, businesses organised themselves in tax efficient manner that is: "vertical and horizontal integration of production and distribution. ¹⁹ The aim being to eliminate as many intermediaries as possible to reach a reduction of taxes under the cumulative cascade system". ²⁰ In certain circumstances these reorganisations may have been economically favorable. But in most situations it was not the case, especially as the nature of the production often required the simultaneous action of different branches of industry whose integration into one business was economically unviable.

These characteristics were well known but in that post-war period they were accepted if not embraced ²¹ mainly because public opinion was strongly opposed to the merchants who were blamed for having exploited the misery of the war to enrich themselves. The tax was also supported politically despite its imperfection in terms of its impact on business organisation. Edgard Allix notably said: "[la taxe sur le chiffre d’affaire est] loin sans doute d’être un impôt idéal, … mais [elle est] un merveilleux pourvoyeur des budgets en détresse. ²² We find the same state of mind in the report of Charles Dumont, then general budget rapporteur for the Chamber of Deputies: cet impôt comporte des inconvénients certains et graves, mais c’est le seul qui puisse nous donner aujourd’hui, immédiatement [le rendement nécessaire]". ²³ All in all, whether motivated by demagoguism, group selfishness or even pragmatism, the flaws of the tax were not at first condemned. However, as underlined by the Directorate-General for Research of the European Parliament as the years passed, the rate of the tax increased ²⁴ and its side effects became problematic:

As long as the rates were at a very low level the economic effects were small. As rates rose, however, it became clear that the system created certain undesirable distortion. ²⁵

As it happens, by its very nature, this tax was both cascading and compounding and thus the amount of tax levied on the final product varied with the length of the economic cycle being taken by the merchandise. In relation to businesses in the economic cycle, on the one hand, they were differentiated depending on the production cycle they were part of. Integrated businesses could realise bigger margins or increase their sales by being competitive in prices and in any event could make more profit. Products sold via non-integrated businesses had to bear a heavier tax burden and thus the non-integrated businesses had to reduce their margins to align their prices with those of integrated businesses to remain competitive.

On the other hand, the distortion was causing the same products to be taxed differently and consequently the amount of tax payable differed for the consumer depending on the level of integration of the whole production cycle rather than on the intrinsic value of the product. The figure below schematically represents a case where the amount of tax is fixed and businesses impose an overall margin of 20.

Figure 1: the operation of gross turnover tax

This view on the distorting effect has recently been upheld in a VAT guide in the following terms:

In cumulative cascade tax systems legal neutrality can never be guaranteed. … At each stage the tax is cumulated or "pyramided". … The tax burden on a given product cannot be determined exactly because a product may have different producers with varying levels of integration and therefore carries different tax burdens. As a result cumulative cascade systems do not offer legal neutrality. ²⁶

In addition, because of its characteristics the tax was a restraint on foreign trade. ²⁷ The then applicable principle in international taxation was that of destination. As such, the tax was being levied by the country where the product was being sold. It meant that taxes were collected on imports and rebated on exports. However, in France the gross turnover tax could not be rebated completely since only the exporter could sell his merchandise without tax. It was not sufficient to not tax the final step of production to completely relieve the merchandise from the burden of the tax, as the tax that had been borne in the previous transactions remained integrated into the selling price at the time of the export, rendering the local merchandise less competitive abroad. Also, in the case where no such tax existed in the country of origin of the merchandise, merchandise imported in France was more competitive than local merchandise as the imported merchandise would be taxed upon import, thus reaching France having been taxed only once, where local merchandise at the same stage of the production cycle could have already been taxed many times. These impediments revealed that the taxation system was a restraint on foreign trade. The only solution under this regime would have been to reimburse the exporting businesses with the amounts of tax paid by their suppliers but this would have been seen as a dumping measure that could have hindered the commercial relationship of France:

Pour assurer la neutralité de l’imposition il était nécessaire … de rembourser l’exportateur des sommes payées par ses fournisseurs au tire de l’impôt sur le chiffre d’affaires. Or pareille mesure risquait d’être considérée à l’étranger, comme une mesure de dumping justifiant des mesures de rétorsions. ²⁸

A tax protest movement ²⁹ brandished those distortion effects and the inquisitorial administrative controls as arguments to have the tax removed. ³⁰ As a result taxpayers with an annual turnover below 120.000 francs for products or 30.000 francs for services were authorised to conclude lump-sum contracts with the Administration which would exonerate them from any control. In parallel, an exemption for artisan was voted. All in all, the scope of the gross turnover tax decreased considerably. ³¹

The legislative election was held on 11 and 25 May 1924 and the Cartel des Gauches was elected, notably on the promise to repeal the tax. However, for budgetary requirements, the promise was not ratified by the Finance Minister ³² in the 1925 budget. ³³ Instead, to partly satisfy the claim of the protesters, one-off taxes were created to replace the gross turnover tax on some products.

c. Taxes uniques

³⁴

With the one-off taxes, the levy was performed at only one stage (the production stage). The determination of the rate was of utmost importance since it was necessary to establish the tax at a rate where, in one levy, the same amount of tax would be levied as with the gross turnover tax. In order to find out the rate, the number of stages that each kind of product was going through had to be calculated. With this number, an estimation of the yield of the cascading gross turnover tax could be obtained and a rate for the one-off tax could be determined:

…il était nécessaire pour chaque variété de produits, de prendre en considération le nombre de transactions auxquelles ce produit donnait normalement lieu dans le circuit économique et qui allaient échapper à la taxe à cascade. ³⁵

The one-off taxes succeeded in suppressing most of the fiscal distortions caused by the gross turnover tax. Essentially, the one-off taxes were not privileging vertical trusts and were more neutral towards exports. Between 1925 and 1936, more than 30 one-off taxes were created, the first two were for coal and meat. ³⁶ However, the lack of coordination of the gross turnover tax with the one-off taxes led to numerous cases of double taxation. It happened that ingredients subject to the gross turnover tax were part of a product that would itself be subject to a one-off tax, so there was an overlapping of the gross turnover tax with the one-off tax. Reform was again necessary but progress had been made. The notions raised in the 1920s with the experience of gross turnover tax ³⁷ and one-off taxes are that a consumption tax should neither impede the market by confusing or distorting production or consumption, nor should it deter businesses from the territory by hindering trade at both national and cross-border levels. These principles would at a later stage be included into the neutrality concept of VAT.

2) F

ORERUNNER

The April-May 1936 legislative election brought the Front populaire ³⁸ to power and then the taxation system was reformed. The law of 31 December 1936 abolished the gross turnover tax and most of the one-off taxes. The taxe unique à la production ³⁹ was implemented as a replacement with the aim to tax the products and services at only one point of their life cycle so that a great number of businesses would be freed from any tax liability. ⁴⁰ Three years later, in 1939 ⁴¹ a taxe d’armement ⁴² – in reality a gross turnover tax similar to that of 1920 – was created. In 1940 it was renamed taxe sur les transactions ⁴³ and, in 1941, an additional local tax was added to the tax structure.

In this context, the focus is brought to the single production tax (subsection a. below) together with its fractioned payment scheme (subsection b. below) for these are the precursor elements of VAT neutrality.

a. Taxe unique à la production

In 1936, the Popular Front government abolished the gross turnover tax and most of the one-off taxes to introduce the single production tax. ⁴⁴ The single production tax was a combination of two taxes: the so-called "taxe unique globaleThree years late ⁴⁵ and a tax on the supply of services which was the perpetuation of the 1920 tax regime. The change to a single global tax was intended to remedy the previously mentioned flaws existing under the 1920s system.

The purpose of the tax was clearly revealed in a report preceding the application decree of the 1936 reform where the reporter explained that the new tax was meant to restore tax equality between small and big businesses: "l’institution de la taxe unique … a visé à rétablir l’égalité des conditions fiscales entre la grande et la petite entreprise". ⁴⁶

Levied at the end of the production cycle of the merchandise, the tax was a one-off tax and as such all but one of the stages of the production and commercial cycles were suspended from tax. ⁴⁷ The tax was imposed upon so-called sales-for-sales-for-use and on transactions performed by producers deemed similar to sales-for-sales-for-use, like self-delivery. ⁴⁸ Schematically, this means that if the sale to the consumer was the final sale, the tax was imposed upon the penultimate sale. Thus the sales made between merchants prior to the sales-for-sales-for-use were not subject to tax which means that producers active in those prior stages were allowed to receive the materials needed for the fabrication of the products tax free. The suspension was granted upon presentation to the vendor of a certificate attesting to the buyer’s registration with the administration. The attestation was to be renewed every year. ⁴⁹

Figure 2: the operation of the single production tax (suspension)

As a consequence of this suspension system, and as opposed to gross turnover tax, the single global tax was neither of a cascading nature nor of a compounding nature. The distortions existing under the 1920 system could no longer impede the equality of taxation of similar products or the equality of businesses notably in terms of margin capacity. As underlined by the Parliament in the preparatory discussions to the vote of the single production tax, the restraint on foreign trade seemed sidestepped as it was sufficient to not tax the final step of production to avoid the imposition of the tax upon the merchandise or the service:

Tout d’abord, en ce qui concerne les exportations, l’article 10 du projet de loi exonère les produits exportés de la nouvelle taxe de 6 p. 100: mesure excellente, qui aura d’heureux effets sur nos ventes a l’extérieur. Sous l’empire de la législation actuelle, l’article 15 du décret de codification de la taxe sur le chiffre d’affaires exonère