Value added tax and financial services

Abstract

Financial services are normally excluded from the ambit of VAT. This exemption represents a deviation from the aim of VAT in general and causes distortions to arise in the economy. The difficulty lies in applying VAT to situations where financial institutions are remunerated for services through a spread between buy and sell prices. Various agencies have undertaken significant research to establish whether financial services can be included in the VAT base. The thesis examines how these methods apply to the New Zealand categories of financial service. Three categories are analysed: interest bearing financial services, exchange of currency, and life insurance services. The thesis concludes that there may be a different way for dealing with each type of transaction and that no single solution will be suitable for each kind of transaction. A specific conclusion is that life insurance and interest bearing services should be taxed in the same way. The thesis suggests that the method known as the "reduced input tax credit method" will give the best balance between equity and compliance costs where services that bring about interest bearing instruments and life insurance are concerned. The thesis suggests a new solution for the taxation of services which bring about the exchange of currency. This method is known as the modified invoice based method and caters specifically for transactions which bring about the exchange of currency.