Efficient treatment of banking services under VAT

Abstract

The efficiency of tax systems is an important topic for policy makers and academics. We focus on the efficiency of applying VAT to traditional banking services, a significant issue where a consensus has yet to be reached since the first debates more than two decades ago. This paper discusses one of the most relevant models of tax efficiency on banking services under VAT, the model developed by Jack (2000). This author shows that explicit fees and commissions should be taxable under VAT, while implicit fees covered by banking spreads should be zero-rated. An alternative theoretical approach is developed in this paper, proposing the taxation of both explicit and implicit fees of financial services under VAT at the same tax rate, which should also be the same rate applied to all other goods and services.