Border Taxes Fair or Unfair?
West German tax expert Hans Flick explains the mysteries of West Germany's switch this month to tax-on-value-added that's enlivening the old controversy on border tax adjustments for exports and imports
66 C&EN JAN. 22, 1968
A C&EN Feature Earl V. Anderson Senior Editor, New York City
H
ans Flick packed them into New York City's Downtown Athletic Club at a recent luncheon gathering. This wouldn't be too surprising if he were a Heisman Trophy winner, baseball's most-valuable-player, or the heavyweight champion of the world. He is none of these. Mr. Flick, an expert on West German taxes, was brought to this country by the German-American Chamber of Commerce to explain the mysteries of Germany's new tax-on-value-added (TVA), which became a commercial reality—some say nightmare—the first of this month. Of more direct concern to a concerned American audience, he came all the way from Germany to tell them what effects the new TVA system might have on U.S. exports to Germany and on imports from Germany. And his words were a reflection of what has become, along with trade of the less-developed countries, the most important trade problem of the postKennedy round era: the border tax problem. The border tax problem is extremely complex; but its underlying cause is amazingly simple. It stems from GATT (General Agreement on Tariffs and Trade), which sets the rules for most of the world's major trading nations. The GATT rules on border taxes allow a country to set an equalization tax on imports, equal to the indirect tax burden borne by a similar domestic product and to rebate the indirect tax load to exporters. Although these border tax adjustments are allowed for indirect taxes, such as turnover taxes, excise taxes, and sales taxes, they are forbidden for direct taxes, such as income and corporate profits taxes. It is no secret that most European countries rely far more heavily on indirect taxes than does the U.S. If Mr. Flick's audience thought it would get some clear-cut answers to its questions, it was disappointed. Mr. Flick is not at fault. There just are
none to be had. Germany's TVA has been controversial throughout its conception and it remains controversial. The German-American Chamber of Commerce, in one of a series of articles on the German TVA that it published in its monthly, German-American Trade News, said that the new tax system has been playing to mixed reviews in Germany. Internationally, it adds, "it is playing to a house full. . . of critics." The German-American Chamber is close to right, but not completely. Most international businessmen in the U.S., it seems, are indeed crying foul about Germany's new TVA. Too many others seem so confused about, or unaware of, TVA that they don't know how to evaluate its effect on their trade with Germany. A distinct minority believe that it will have no ill effects whatever. In fact, say a few dissidents, it may even sharpen their competitive edge, vis-a-vis domestic German industries. Most U.S. exporters, told of this opinion, smile and say that these companies probably don't have any competition at all. The turbulence generated by Germany's TVA extends beyond the borders of the U.S. Some countries say Germany's new tax structure is tantamount to a mini-devaluation of the Deutschemark. Others say their exports will take a beating in Germany or that German imports will grab an edge on their own industries. The irony of all this anxiety over Germany's TVA is that it is nothing more than the tip of an iceberg showing above the surface. Germany's stint in the spotlight of international trade stems from the fact that it just happens to be the first of the EEC (European Economic Community) countries to join France in using the TVA system of turnover taxes. The four other E E C countries—Belgium, Italy, Luxembourg, and the Netherlands—will have to convert from their present systems of gross turnover taxes
(called the cascade, waterfall, or cumulative system) to TVA ( a net turnover tax) by Jan. 1, 1970, according to a directive adopted by the E E C Council of Ministers last year. France has used the TVA system for its turnover taxes since 1954. In addition, non-EEC countries are turning to TVA. Denmark adopted it last year and Austria is working toward it. Germany's basic tax rate under TVA will be 10% ( 1 1 % after July 1), compared to a basic rate of 4 % under the old cascade turnover tax. Far too many economic considerations make a simple, direct comparison of these two rates meaningless, however. When the other E E C countries switch to TVA, as they must by 1970, they too will set their own rates. Only after the uniform TVA system has been established will EEC attempt to set a single, standard rate for all six member countries. Nevertheless, installing a uniform system of turnover taxes based on TVA in all member countries represents a significant milestone in EEC's long, slow trek toward complete economic integration. Another will come this July when tariffs on intra-EEC trade are removed completely. Despite the genuine significance of a uniform TVA system to the Common Market, for non-EEC countries it merely reflects the German problem on a broader, multinational scale. And it poses this question: Will the switch from the cascade to the TVA tax system alter (meaning improve) the competitive position of EEC countries in international trade? An even more crucial question, one which goes right to the core of the border tax problem, is this: Does the present system of border tax adjustments—allowing adjustments on indirect taxes but forbidding them on direct taxes—give an unfair competitive edge to some countries and penalize others just because they happen to rely more on direct taxes rather than indiJAN.
22, 1968 C&EN 67
The total tax burden differs little from country to country... Total tax receipts as a percentage of gross national product"
rect taxes? This question holds the key to understanding the border tax controversy and, again, there exists no single, definitive answer. It is lost in a labyrinth of old and new theories, conflicting and unproved, on the intricacies of tax shifting. The labyrinth begins at GATT's doorstep.
Common Market countries Belgium France Germany Italy Luxembourg Netherlands
21.2% 24.3 24.5 19.2 24.4 22.9
U.S.
Good intentions,
bad
23.1
hypothesis ° Excluding social security.
The GATT rules concerning border tax adjustments allow such adjustments only for indirect taxes. Countries using these taxes normally assess imports with a border tax, or equalization tax, designed to impose the same indirect tax burden on the imported product as a similar domestic product bears. Conversely, exports in such countries receive an export tax rebate, or exemption, equal to the indirect tax accumulated in the price of the exported product. Nobody can argue with the intentions of these regulations. They are supposed to protect products in international trade from a double dose of indirect taxes. By rebating indirect taxes in the exporting country and charging them at the border of the importing country, the price of the imported product reflects only the indirect taxes levied in the country that will use the product. This is the destination principle of taxation. In official jargon, the border tax mechanism neutralizes tax effects in international trade. The GATT provisions don't say specifically that indirect taxes are eligible for border tax adjustments. They mention "taxes on products'* which, through amendments to the provisions and interpretation over the years, has come to mean indirect taxes. There is one major flaw in the GATT regulations, however, and it is responsible for the controversy. The rules specifically exclude direct taxes from the border tax system. Adjusting for direct taxes at the border would be considered a subsidy and contrary to the GATT provisions. Why allow indirect taxes and prohibit direct taxes? According to an old, well-entrenched theory on tax shifting, indirect taxes are completely shifted forward or upward in price. They affect the price itself and are ultimately paid by the consumer. By the same token, goes the theory, direct taxes are fully shifted backward. They don't influence the price at all, and are borne completely by the producer. 68 C&EN JAN. 22, 1968
but, Common Market countries stress indirect taxes in their tax structure; the U.S. does n o t . . . . Indirect taxes, as a percentage of total taxes0
Common Market countries Belgium France Germany Italy Luxembourg^ Netherlands U.S.
57.5% 72.5 58 66 41 44 40
a b
Excluding social security. 1963 data, latest available. Source: calculated from data for 1965 in Organization for Economic Cooperation and Development, National Account Statistics, Nov. 7, 1967
Consequently, the U.S. can do little in the way of border tax adjustments for its exports and imports Indirect taxes, subject to border tax adjustment, percentage of total taxes
Common Market
countries
Belgium France Germany Italy Luxembourg Netherlands U.S.
43.4% 51.2 34.3 51.5 22.7 31.2 19.5
Source: Organization for Economic Cooperation and Development, Fact-Finding Report on Border Tax Adjustments, October 1964 (Data are averages for the 1960-62 tax years)
The GATT rules are predicated on this theory and, if it is correct, border tax adjustments would indeed neutralize the effects of taxes upon international trade. There is just one hitch. Most economists today don't completely buy this old tax-shifting theory. The consensus is that direct taxes are not shifted only backward; they can and are shifted forward as well, at least partially. They can and do affect price. Conversely, indirect taxes aren't shifted completely forward all the time.
If they are shifted backward toward the producer, even partially, they are not borne entirely by the ultimate consumer. What does this mean? It means that, to the extent that direct taxes do affect price and to the extent that indirect taxes do not, the GATT border tax rules are anything but neutral. Instead, they favor countries that rely heavily on indirect taxation and penalize those, such as the U.S., that depend primarily on direct taxes. U.S.
excise taxes, on tobacco and liquor, for instance, are a form of indirect taxation and are eligible for border tax adjustments, but these are negligible. The mistake that the U.S. made was that it agreed to the GATT rules when they were drawn up. Now the U.S. is stuck with them, unless it can influence its trading partners to agree to a change. It is tough enough to convince them that they indeed have an advantage; it's even tougher to change the rules. A new look By today's standards, the old taxshifting theory is an oversimplification of what actually occurs in commerce. This oversimplification, however, simplifies the border tax issue. It avoids the complications of estimating partial shifting or of untangling the portions of direct and indirect taxes reflected in a product's price. In his background paper for the National Association of Manufacturers ("The Logic of Border Taxes"), Milton Leontiades says, "such reliance on classical tax theory owes more to convenience than to research." The classical tax-shifting argument is based on the Marshallian price theory that marginal producers determine price. Because marginal producers have no net profit, profit taxes can not affect price. On the other hand, an indirect tax such as an excise tax is a cost which the marginal producer must pass on if he is to stay out of the red. Any businessman worth the name knows that marginal producers aren't price leaders. Says Mr. Leontiades, "The fact that marginal firms are the result of existing price structure rather than the cause of it seems so obvious an observation that one wonders at the reluctance to cut the tether with this outmoded concept." The classical theory was developed in the uncomplicated days of individual effort and small business, long before income taxes became the force that they are today. The theory may be fine for classroom demonstrations of perfect competition and pure monopoly, but these conditions don't exist in today's world of international competition. Most experts today agree that direct and indirect taxes can be shifted both backward and forward. Which way and how far they are shifted depends upon elasticity of supply and demand, today's abundance of substitute products, degree of market
control, government policies, rate of tax increase, and many other economic variables. Today's businessman, motivated as he is by profit, will pass along in price as much of his tax burden as he can, whether it is a direct or indirect tax burden. This doesn't mean he can pass them all forward; nor does it mean that he will swallow them all. It does mean, however, that most economists today won't make the black-and-white distinction between direct and indirect taxes implied in the GATT rules. What happens in practice lies somewhere in between. The trouble is that this common-sense feel cannot be proved, any more than the old classical theory can be proved. The usual sta-
pact of a particular tax change, says Mr. Leontiades, is "like searching in a dark room for a black cat that isn't there." In fact, even the distinction between what is a direct tax and what is an indirect tax is becoming hazier all the time. An indirect tax usually is defined as a tax on consumption; a direct tax is a tax on income. But what happens when these hard and fast definitions are applied to, say, France's TVA? According to GATT, France's TVA is an indirect tax and qualifies for border tax adjustments. However, TVA taxes fall on the value added by a producer to a product; that is, the difference between his purchases and sales, which includes his profits as well
Almost $900 million in U.S. chemical trade may be affected by the Common Market's switch to TVA U.S. chemical trade with ECC, 1967a BelgiumLuxembourg
France
M M M^
Germany
^^^^
^^M
Italy
Netherlands
0
25
50
75
Total EEC $610 Exports $272 Imports
100 125 150 Millions of dollars
175
U.S. imports
200
225
U.S. exports
•C&EN estimates based on seven-month data of the Bureau of Census.
tistical approach—isolate one variable from all others—can't be used to study tax shifting. Tax changes, Mr. Leontiades points out, occur in a dynamic economy. Conditions in this dynamic economy blend together the impact of both tax and nontax variables. Where does a tax increase go? It may be paid by a producer; it may be passed forward in price to the consumer; increased productivity may absorb it; or curtailed production may offset it, among other things. Tracing the im-
as costs. If TVA falls at least partially on profits, how is it so much different than a corporate profits tax, which is considered a direct tax, and not eligible for border tax adjustment? Both are taxes on businesses, not products as the GATT rules stipulate. And everyday pressure of the market place may force the French businessman to absorb a portion of his TVA load, contrary to the old theory, just as an American businessman might have to absorb part of his corporate profits tax. JAN. 22, 1968 C&EN 69
The fact that EEC is altering its tax structure to correct inequities is prima facie evidence that inequities exist Those who defend the present border tax system argue that, if there were any inequities in the system, they have already been equalized by variations in exchange rates, changes in tariff levels, or by price adjustments. Few on the other side of the fence concede the point, but even those who do ask, what about the next time? How does a country such as the U.S., with little recourse to border tax adjustments, compensate for still further changes in the system, such as Germany just made and other EEC countries will? Tariff changes won't be that prevalent in the post-Kennedy round era, nor will adjustments in exchange rates, Britain's devaluation notwithstanding. Probably the strongest single argument against any change in the present border tax system is that other countries, those which benefit from the present system, will not grant the U.S. any tax concessions without giving something in return. U.S. representatives to OECD (Organization for Economic Cooperation and Development), however, are seeing what can be done about the problem. Border taxes had been discussed in the Kennedy round along with other nontariff barriers. No agreement was reached, but the U.S. did reaffirm its rights under GATT's nullification and impairment procedure. That is, we reaffirmed our right to seek compensation if the proposed border tax changes in the Common Market impair the value of the tariff concessions we received in the Kennedy round. This compensation could come in the form of additional tariff cuts, for instance. The Treasury Department's Murray Ryss emphasizes that the U.S. is concerned that it may be injured; we do not say that we will be. More data are necessary, he says. The U.S. has asked Germany for data to back up its view that the new German TVA will not hurt the U.S. trade position. Mr. Ryss also would like to receive good, hard data ("specifics, we have enough generalities") from U.S. companies. Ted Gates, chief economist for the Special Trade Representative, concurs. "We have heard the allegations," he says, "now we want the proof." Several chemical company executives contend that this information may be difficult to obtain, especially foreign price information. Besides, 70 C&EN JAN. 22, 1968
the fact that EEC is altering its tax structure to correct inequities is prima facie evidence that inequities exist, they say. Data from both sides of the ocean are needed to get to the heart of the border tax problem in OECD discussions. OECD committee reports are confidential and it is difficult to determine just how much progress the talks have made. What is known is that the U.S. has been able to establish a notification and consultation procedure within OECD. Also known is the fact that the OECD parleys will drag on for some time. EEC goes TVA While the theoretical economists search for models to prove their arguments and country representatives discuss the border tax problem in OECD committees, the Common Market is doing something about border taxes. Last February the EEC Council of Ministers adopted two directives that will put TVA into the tax structure of all member countries by January 1970. Some of the countries already have it; others are planning for it. This is a truly significant step for EEC. Converting to TVA will mean substantial changes in the economic and fiscal structure of member countries. And, although a common TVA system (EEC officials call it a harmonized system) still leaves the Common Market a long way from being a true economic union with characteristics of one, vast domestic market, it is an important step toward that goal. Just getting six countries to surrender their national sovereignty in one area of financial policy is no small achievement. Also, the common TVA gives EEC a strong psychological boost toward coordinating the other tax policies that eventually have to be coordinated. What's more, if the cumulative tax system causes the inequality in trade that most experts now believe it does, adopting a common TVA will remove a massive distorting influence on intra-EEC trade. EEC took its first step toward a uniform system of turnover taxes in 1960, when the Fiscal and Financial Committee was set up to study the various tax systems in E E C countries. The committee became known as the Neumark Committee, after the well-
known German financial specialist, Prof. Fritz Neumark, who headed it. An American, Prof. Carl Shoup of Columbia University, also served on the committee. Based on the Neumark Committee report, the EEC Commission recommended in 1962 that the cumulative system of turnover taxes be abolished. Several years and several modifications went by before the two directives were issued last year. The first directive stipulates TVA as the common system that must become effective by January 1970. In theory, TVA will apply to all stages of business, including the retail level. In practice, however, member countries will have the power to restrict TVA to the wholesale level, at least during a transitional period. During this period, which will not last beyond the time when all fiscal frontiers are abolished among EEC countries, each member can apply an additional, independent tax on its retail trade. If they do this, however, they must notify the commission and submit to a consultation procedure with their fellow member countries. These provisions are a concession to Italy, which felt that it couldn't apply TVA to its retail businesses immediately. The second directive, issued last year, fixes the structure and details of the common TVA. For instance, it allows countries to exclude banking operations from TVA taxation if they choose and it establishes a method for deduction of capital goods. EEC has accomplished much, but there still remains much ahead of it as far as taxes are concerned. Pushing TVA up to the retail level is only one problem. Another is agriculture, which has always been a problem area for the Common Market. By the end of this year, however, the EEC Commission should submit its proposals for applying TVA to agricultural products. Uniform rates have yet to be established for the common TVA and it will be a long time before they are. Another task of the commission will be to submit rate proposals by the end of the year and, hopefully, the Council of Ministers will decide on the proposal by 1970. Even if these deadlines are met, though, the earliest estimate for a uniform TVA tax rate in EEC is the mid-70's. Nobody knows what these final rates will be.
but most of the guessing places them in the 14 to 16% range. In addition to TVA, the Common Market wants to harmonize other indirect taxes. Then there are direct taxes. Schemes for harmonizing direct taxes are already being explored and the problems involved are enough to frustrate the most patient practitioner of compromise. While all of this work is going on at the EEC level, member countries are pushing plans to get into step with the common TVA by 1970. France already uses the TVA system, but is making some changes nonetheless. It plans to drop its basic TVA rate from 20 to 16.3% this year and, starting January 1969, France will make additional revisions to bring its system into line with the common TVA. Germany, of course, started on TVA this month. Last year, legislation was
This fertilizer silo, one of eight that Badische Anilin- & Soda-Fabrik has at Ludwigshafen, can store 80,000 tons of fertilizer. Under the old cumulative tax system large German companies, such as BASF, enjoyed a tax advantage, but now they will have to carry their full share, and this puts them at a relative disadvantage
JAN. 22, 1968 C&EN
71
With turnover taxes the total tax collected can vary considerably Under the cumulative, or gross, turnover tax system that EEC countries are discarding, the tax is assessed on the gross value of the product at each manufacturing or turnover stage. The total tax collected will vary, depending upon the number of stages through which a product passes. Under the TVA (tax-on-value-added), or net turnover, system that all EEC countries will use after 1970, tax is paid at each stage, but
only on the value added to the product during that particular stage. Total tax collected remains the same, regardless of the number of processing steps. Compare what happens to taxes paid on raw materials worh $100, which sell eventually to a consumer as a $1000 product, if the materials go through three stages and six stages: Amount of tax collected, dollars TV A, rate: 15%
Cumulative turnover tax, rate: 5%
Three stages 1. Purchase raw materials at $100 2. Process and sell at $500 3. Sell to consumer at $1000
$15.00 (15% of $100) 60.00 (15% of $400) 75.00 (15% of $500) 150.00 (15% of final selling price)
$ 5.00 (5% of $100) 25.00 (5% of $500) 50.00 (5% of $1000) 80.00 (8% of final selling price)
Six stages 1. 2. 3. 4. 5. 6.
Purchase raw materials at $100 Process and sell at $200 Process and sell at $400 Process and sell at $650 Process and sell at $800 Sell to consumer at $1000
introduced in the Netherlands Parliament that will shift that country into TVA by January 1969. At the same time, Dutch income taxes will go down. The Dutch have set 12% as the standard TVA rate for most products, but some essentials, such as food, will be taxed at 4 % . The Dutch have fought against a common TVA for years, arguing that it would be meaningless unless all other taxes were made uniform throughout EEC. When Germany adopted TVA, however, fear of losing a trade advantage probably spurred the Dutch into early action toward its own TVA system. Last year, too, Italy's Council of Ministers approved a TVA plan as part of a sweeping fiscal reform policy. The new package will replace Italy's present, unbelievably complicated tax structure; for instance, six new taxes will replace 33 major old ones. If Parliament approves the reform plan as expected this spring, Italy will be on TVA by the 1970 deadline set by EEC. Belgium, whose tax structure is almost as complex as Italy's, may have trouble meeting the 1970 deadline for TVA. But the Federation of Belgian Industry favors an early switch to TVA, by 1969 at the latest. It points to Germany with its new TVA system, and to the Netherlands, which this year increased rates on border tax adjustments as reasons why Belgium 72 C&EN JAN. 22, 1968
$15.00 (15% of $100) 15.00 (15% of $100) 30.00 (15% of $200) 37.50 (15% of $250) 22.50 (15% of $150) 30.00 (15% of $200)
$ 5.00 (5% of $100) 10.00 (5% of $200) 20.00 (5% of $400) 32.50 (5% of $650) 40.00 (5% of $800) 50.00 (5% of $1000)
150.00
158.50
(15% of final selling price)
(16% of final selling price)
needs TVA to protect its trade position. Infra-EEC
squabble
Adopting the common TVA will put an end to a border tax squabble that EEC countries have been having among themselves for some years. Article 97 of the Rome Treaty, like the GATT rules, prohibits member countries from establishing border tax adjustments higher than their domestic tax burden. It doesn't prohibit frequent changes in the rates, however, and it doesn't spell out how these rates should be calculated. Rate changes—to higher levels, of course—have been cropping up frequently in the past several years, and EEC countries have been accusing each other of establishing rates so high that they are tantamount to an export subsidy. Belgium and the Netherlands, for instance, are raising border tax rates on some products this year. These charges are difficult to prove because the internal tax burden is almost impossible to pinpoint under the cascade or cumulative tax system. Countries that increase their rates counter that they had been undercompensating at the border and merely are bringing their rates more into line with their true domestic tax load, as allowed under Article 97. These rate increases have been oc-
curring despite a "standstill agreement" reached by the E E C countries in 1960. According to the agreement, one EEC country must consult with its fellow members before it changes border tax rates. The discussions are held, but the rate increases invariably follow. Besides, the "standstill agreement" is a gentleman's agreement that probably wouldn't stand up in EEC's Court of Justice. France, stuck with its TVA and forced to sit back and watch while the other EEC countries with cascade systems raise their border tax rates, has been pushing the EEC Commission to come up with a solution to the problem. France feels that, between the time internal tariffs are eliminated this July and the time the common TVA becomes effective in 1970, rate changes by EEC countries still using the cumulative tax system will seriously distort intra-EEC trade. France's complaint, in fact, sounds like an echo of U.S. outcries against border taxes in general. The commission already has made three suggestions for ending the intraE E C border tax argument: • Establish a common, uniform method for determining border tax rates under the cascade system. • Strengthen the 1960 "standstill agreement" to guarantee that further rate revisions will not occur. • Establish a procedure under Arti-
cle 101 of the Rome Treaty to prevent unfair competition as a result of unreasonably high border tax rates. Member countries other than France have little enthusiasm for adopting any of them. Some E E C countries argue that they must be able to raise their rates gradually over the next two years (to approach the limit allowed under Article 97) in order to avoid sudden, disruptive changes in their competitive trade position when they convert to the common TVA. The commission's first two proposals, they say, prevent them from doing this. The third suggestion is significant because it is the first time a proposal has been made on the basis of Article 101. This article says that, if intraE E C competition is distorted by national policies established in a member country, E E C can issue a directive designed to end the distortion. Member countries must comply. Article 101 is strong medicine. The EEC Council has said that it can be applied to any sector of the economy, at any time. But it is a delicate instrument to handle, which perhaps explains why this is the first time it has been suggested. Germany, however, argues that Article 97 amounts to a special set of rules, and problems encountered under Article 97 shouldn't be resolved by resorting to Article 101.
Desiring as they do to make some rate increases themselves before 1970, other E E C countries will be content to let the problem run its course. After 1970, it will disappear. Focus on Germany While the E E C hierarchy concerns itself with what these rate changes by cascade-tax countries might do to alter intra-EEC trade patterns, nonmember countries haven't overlooked the fact that they might have a negative effect on their own trade relations with these E E C countries. There is nothing they can do about it, however; the increases in border tax rates are consistent with both E E C and the GATT regulations, as long as they don't exceed the domestic tax burden. Meanwhile, non-EEC countries, the U.S. included, are more concerned with the possible effect of EEC's complete conversion to TVA. They will be following developments in Germany for clues to what lies ahead. Predictions run the gamut, from no effect to major changes. Opinions differ on who will be hurt and who will benefit by the changeover. And, when the truth finally becomes apparent, it may well be that the effects will vary from company to company, even from product to product.
Under Germany's old, cumulative turnover tax system, the basic equalization tax rate on imports was 4 % , but there were some exceptions. Rates on agricultural and food products ranged from 1.5 to 3 % ; wood imports were taxed only 1%; rates on leather, yarn, aircraft, metals, and paper varied from 6 to 10%. Rebates to German exporters came in two steps. They were relieved of the final tax burden at the point of sale (that is, the border). In addition, they were compensated for previously paid turnover taxes by a set of six flat rates, ranging from 0.5 to 7%. When an independent broker and not a manufacturer handled the export sales, he was granted a special 4 % compensation. Germany's new tax rates under TVA will be a basic 10% on the value added during each manufacturing step and 5% for some services and foodstuffs. However, these rates will increase to 1 1 % and 5.5%, respectively, on July 1. Import equalization taxes and export rebates will be at these same rates. A few imported raw materials, previously exempted from border taxes, no longer will be. German authorities insist that the new rates were established to guarantee the same total tax receipts under TVA as Germany collected under its old system. The burden that each
Tax terminology There are taxes and there are taxes, and a country's balance sheet in international trade depends, in part at least, upon what type of taxes it has. There are direct taxes, which are generally defined as taxes on income. Corporate profits taxes and personal income taxes, for instance, are direct taxes. Indirect taxes are generally considered consumption taxes, even though the tax isn't assessed on the actual process of consumption. Indirect taxes achieve their purpose by indirectly shifting the tax burden forward in price to the consumer. A turnover tax is an indirect or general consumption tax in the form of a transaction tax on production (manufacturer's tax), movements of goods (transportation tax), or a legal transfer (sales tax). To complicate things, there can be several different kinds of turnover taxes. There can be single-stage (retail sales tax), multistage (all stages except retail sales), or alt-stage turnover taxes. In addition, there can be gross turnover taxes and net turnover taxes. The gross turnover tax, as the name implies, is assessed on the gross value of the product or service, including all previously paid taxes. The rate usually is low but the yield is high and becomes higher as the number of stages through which a product passes
increases. Over the years, the gross turnover tax has picked up many pet names, among them cascade tax, cumulative tax, snowball tax, waterfall tax. It is also called imposta generate sull entrate (Italy), omzetbelasting (Netherlands), taxe de transmission (Belgium), impot sur le chiffre d'affaires (Luxembourg). It is, or was, called umsatzsteuer in Germany. The center of the present border tax controversy is the tax-on-value-added, or TVA, which is a multistage, net turnover tax. Like the gross turnover tax, it is applied at each stage of production or distribution, but it is assessed only upon the value added during that particular stage. Another way of looking at the same thing is to consider TVA a gross turnover tax with deductions allowed for all previously paid taxes. The sum of the valuesadded through all stages is equal to the final selling price of the product; therefore, the sum of the tax collected equals the tax that would have been collected had it been assessed as a single payment on the final sale. Thus, TVA is a multistage tax in the way it is collected and a single-stage tax in the amount collected. France, which has used TVA since 1954, calls its system taxe sur la valeur ajoutee. Germany calls its TyA system mehrwertsteur.
JAN. 22, 1968 C&EN 73
German company must bear can, and probably will, change, however. Aside from the rates, the big difference in the two systems is that, under the new TVA, import equalization and export rebates will completely and exactly equal the tax burden shouldered by a similar domestic product. Border tax adjustments made under the old system were only estimates, or averages, of the true internal tax burden because the true internal tax load was difficult, if not impossible, to determine exactly. Another inequality of the old cascade system used in Germany until this year was that it favored large, integrated companies. Although large companies are looked upon with favor throughout the entire Common Market, a tax incentive isn't considered the puoper way to encourage them. Under the cascade, or cumulative, system, the tax levied at each manufacturing step was based on the gross value of the product, including previously paid taxes. Thus, the more stages a product went through, the
by TVA. The reason, of course, is that under TVA, the tax burden borne by both German domestic and imported products will be equal, but the tax increase on imports will be relatively greater to bring this equality about. It is possible, too, that some imports were overassessed under the old system, which means that they will enjoy a tax advantage under TVA. There probably aren't many cases like this, however. The competitive edge for U.S. exporters also will vary under the new system, depending upon whether their German competition comes from a large or small company. Large German companies, which enjoyed a tax advantage under the old system, now will have to carry their full share and this puts them at a relative disadvantage. For small German enterprises, TVA could mean a smaller tax load. The same thinking can be applied to German exports to the U.S. Mr. Flick estimated that export rebates under the old system were one to three percentage points less than they
more tax burden it accumulated. Consequently, many German companies formed "organschaften," which are economic, financial, or administrative arrangements among companies. Under the old tax system, transactions within an organschaft were taxfree; they will not be under the new TVA. These characteristics of the old system—hard-to-determine tax load and its benefit to large German companies —are what makes a company-by-company, product-by-product study necessary to determine who gets hurt and who benefits by TVA. There are some very broad, general guidelines, however. Mr. Flick told his Downtown Athletic Club audience that, under the discarded cascade system, the equalization tax on German imports was only 20 to 80% of the actual domestic tax burden. If this is true—if U.S. exports to Germany were underassessed—and if this inequity has been compensated for by exchange rates, tariffs, and prices, then U.S. exporters will be hurt
Cost-of-entry studies may not pinpoint the true competitive effects of border taxes, but they do show how border taxes may affect tariff concessions A typical cost-of-entry study on vinyl acetate trade between the U.S. and Germany®... Situation 2C
Situation 1 U.S. to Germany
Domestic selling price Freight and insurance Duty (tariffs) Border tax Export tax rebate
11.5 1.1 2.5 0.9
12.5 1.1 2.0
U.S.to Germany
11.5 1.1 2.0 2.1
16.0 6
15.1
Situation 3
