TAXATION OF FINANCIAL SERVICES UNDER A VALUE-ADDED TAX - APPLYING THECASH-FLOW APPROACH

Financial services have generally been exempt under value-added tax (V AT) systems due to the inability to identify the appropriate tax base, which is hidden in the financial margin. A cash-flow VAT approach rep resents one means of defining this fax base in a way that is compatibl e with credit-invoice VATs. This paper describes the use of a cash-flo w VAT for a banking deposit/loan operation and indicates the practical difficulties blocking use of the full cash-flow method. It then descr ibes a variant of the cash-flow system referred to as the ''Truncated Cash-Flow Method with Tax Calculation Account,'' which is designed to overcome these difficulties.