European Financial and Accounting Journal 2010, 5(1):28-50 | DOI: 10.18267/j.efaj.43

VAT and Tax Credits: A Way to Eliminate Tax-Evasive Use of Transfer Prices?

Tomáš Buus1, Jaroslav Brada2
1 Ing. Tomáš Buus, Ph.D. - assistant professor; Department of Corporate Finance and Valuation, Faculty of Finance and Accounting, University of Economics, Prague, W. Churchill sq. 4, 130 67 Prague, Czech Republic; <buust@vse.cz>.
2 Doc. Ing. Jaroslav Brada, Ph.D. - associate professor; Department of Monetary Theory and Policy, Faculty of Finance and Accounting, University of Economics, Prague, W. Churchill sq. 4, 130 67 Prague, Czech Republic; <brada@vse.cz>.

In this paper we compare income taxes to VAT and tax credits to tax deductions in terms of their ability to distort factor prices, provide fair taxation, avoid tax-evasive transfer pricing and induce Pareto improvement of tax policies. On the base of theoretical discussion and thought experiments we conclude that VAT is due to its nature superior regarding these requirements. We also have found out that a wider use of tax credits within VAT would be useable to prevent profit shifting. Some adjustments of VAT compared to current practice are needed to achieve the best results. More rigorous proofs, both theoretical and empirical are needed.

Keywords: Multinational enterprises, Pareto optimum, Tax credits, Transfer prices, VAT
JEL classification: D21, D29, G39

Published: March 1, 2010  Show citation

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Buus, T., & Brada, J. (2010). VAT and Tax Credits: A Way to Eliminate Tax-Evasive Use of Transfer Prices? European Financial and Accounting Journal, 5(1), 28-50. doi: 10.18267/j.efaj.43
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