The Non-discrimination Principle and VAT: Rules of Thumb for Trade and Tax Policy-Makers

Abstract

The form of Value-Added Tax (VAT) most commonly imposed by World Trade Organisation (WTO) Members is the consumption-based form. As regards the main features of VAT, this indirect tax is broadly based (unlike excise taxes), imposed at multiple stages (unlike a retail sales tax), usually involves the credit-invoice method of assessment (rather than the subtraction method), and distinguishes between zero-rating (of exports, for example, which is consistent with the destination principle) and so-called exemptions. Likewise, this kind of VAT is neutral with respect to international trade. This article analyzes how the VAT system might violate the National Treatment Principle under Article III of the General Agreement on Tariffs and Trade (GATT). A violation of the National Treatment Principle could be most obviously caused by the application of different VAT rates (or exemptions) to imported and domestic like products, so that an imported product is subject to a 19% VAT, for example, while a lower rate is levied on the sale of the like domestically produced product. Violation of the National Treatment Principle might be less obvious where it involves, for example, partial VAT refunds, VAT payment modalities, or highly burdensome procedures to recover paid VAT or to apply for VAT refunds. For example, importers must pay import VAT immediately during the customs clearance process, while the payment of VAT by domestic producers can be deferred according to the VAT legislation.