Key Questions in Considering a Value-Added Tax for Central and Eastern European Countries

Abstract

The transition from a planned economy to a market-oriented one in Central and Eastern European nations requires a nearly complete overhaul of the tax system. In most countries, the introduction of a value-added tax (VAT) is regarded as a cornerstone of the necessary tax reform. Of the 24 member countries of the Organization for Economic Cooperation and Development, 21 have accepted the VAT as their main consumption tax. The VAT that most Central and Eastern European countries are considering is a multistage, destination-based, net consumption VAT. Under a VAT, the sum of purchases and the value added by the firm itself equals, by definition, the value of the inputs of the next firm in the production-distribution process. As a result, the same value added is never taxed twice. Once it has been decided to introduce a VAT, 3 major structural issues must be addressed: 1. the coverage of the tax, 2. the base of the VAT, and 3. the rate structure of the tax.